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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required).
For the fiscal year ended May 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required).
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 (IRS Employer Identification Number)
incorporation or organization)
400 KATO TERRACE, FREMONT, CA 94539
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-9400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock, par value
$.01 per share, held by non-affiliates of the Registrant, based upon the
closing price of $7.125 on July 31, 2000, as reported on the Nasdaq National
Market, was approximately $41,630,000. For purposes of this disclosure,
shares of Common Stock held by persons who hold more than 5% of the
outstanding shares of Common Stock (other than such persons of whom the
Registrant became aware only through the filing of a Schedule 13G filed with
the Securities and Exchange Commission) and shares held by officers and
directors of the Registrant have been excluded because such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purposes.
The number of shares of Registrant's Common Stock, par value $.01 per
share, outstanding at July 31, 2000 was 7,008,072.
Documents Incorporated By Reference
Certain information required by Items 10, 11, 12 and 13 of this report on
Form 10-K is incorporated by reference from the Registrant's proxy statement
for the Annual Meeting of Shareholders to be held on October 24, 2000 (the
"Proxy Statement"), which will be filed with the Securities and Exchange
Commission within 120 days after the close of the Registrant's fiscal year
ended May 31, 2000.
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AEHR TEST SYSTEMS
FORM 10-K
FISCAL YEAR ENDED MAY 31, 2000
TABLE OF CONTENTS
PART I
Item 1. Business ............................................... 3
Item 2. Properties ............................................ 10
Item 3. Legal Proceedings ...................................... 10
Item 4. Submission of Matters to a Vote of Security Holders .... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters .................................. 11
Item 6. Selected Financial Data ................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................ 13
Item 7a. Quantitative and Qualitative Disclosures about
Market Risks ......................................... 25
Item 8. Financial Statements and Supplementary Data ............ 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .................. 43
PART III
Item 10. Directors and Executive Officers of the Registrant ..... 43
Item 11. Executive Compensation ................................. 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management ........................................... 43
Item 13. Certain Relationships and Related Transactions ......... 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ............................................. 44
Signatures ............................................. 47
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This Annual Report on Form 10-K contains forward-looking statements with
respect to Aehr Test Systems ("Aehr Test" or the "Company") which involve
risks and uncertainties. The Company's actual results may differ materially
from the results discussed in the forward-looking statements due to a number
of factors, including those described herein and the documents incorporated
herein by reference, and those factors described in Part II, Item 7 under
"Factors that May Affect Future Results of Operations."
PART I
Item 1. Business
THE COMPANY
Aehr Test Systems develops, manufactures and sells systems which are
designed to reduce the cost of testing DRAMs and other memory devices,
perform reliability screening or burn-in of complex logic and memory devices,
and enable integrated circuit (IC) manufacturers to perform test and burn-in
of bare die. Leveraging its expertise as a long-time leading provider of
burn-in equipment, with over 2,000 systems installed worldwide, the Company
has developed and introduced two innovative product families, the MTX system
and the DiePakr carrier. The MTX is a massively parallel test system capable
of processing thousands of memory devices simultaneously. The MTX system
performs not only burn-in but also many of the tests traditionally performed
in final test by lower-throughput, higher-cost memory testers. The DiePak
carrier is a reusable, temporary package that enables IC manufacturers to
perform cost-effective final test and burn-in of bare die.
INDUSTRY BACKGROUND
Semiconductor manufacturing is a complex, multi-step process and defects
or weaknesses that may result in the failure of an IC may be introduced at
any process step. Failures may occur immediately or at any time during the
operating life of an IC, sometimes after several months of normal use.
Semiconductor manufacturers rely on testing and reliability screening to
detect failures that occur during the manufacturing process.
Testing and reliability screening involves multiple steps. The first set
of tests is typically performed before the processed semiconductor wafer is
cut into individual die, in order to avoid the cost of packaging defective
die into their plastic or ceramic packages. After the die are packaged and
before they undergo reliability screening, a short test is typically
performed in order to detect packaging defects. Most leading-edge
microprocessors, microcontrollers, digital signal processors, and memory ICs
then undergo an extensive reliability screening and stress testing procedure
known as "burn-in." The burn-in process screens for early failures by
operating the IC at elevated voltages and temperatures, usually at 125
degrees Celsius (257 degrees Fahrenheit), for periods typically ranging from
12 to 48 hours. A burn-in system can process thousands of ICs
simultaneously. After burn-in, the ICs undergo a final test process using
automatic test equipment ("testers"). Traditional memory testers can test up
to 64 ICs simultaneously and perform a variety of tests at multiple
temperatures.
PRODUCTS
The Company manufactures and markets massively parallel test systems,
burn-in systems, die carriers, test fixtures and related accessories.
All of the Company's systems are modular, allowing them to be configured
with optional features to meet customer requirements. Systems can be
configured for use in production applications, where capacity, throughput and
price are most important, or for reliability engineering and quality
assurance applications, where performance and flexibility, such as extended
temperature ranges, are essential.
MASSIVELY PARALLEL TEST SYSTEM
The MTX massively parallel test system is designed to reduce the cost of
memory test by processing thousands of memory devices simultaneously,
including DRAMs, SDRAMs, Rambus DRAMs, SRAMs and most application-specific
memories. The MTX system can perform a significant number of tests usually
performed by traditional memory testers, including pattern sensitivity tests,
functional tests, data retention tests and refresh tests. The Company
estimates that transferring these tests from traditional memory testers to
the MTX system can reduce by up to 70% the time that a memory device must be
tested by a traditional memory tester, thereby reducing the required number
of memory testers and, consequently, reducing capital and operating costs.
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The MTX system consists of several subsystems: pattern generation and
test electronics, control software, network interface, environmental chamber
and automation. The MTX system has an algorithmic test pattern generator
which allows it to duplicate most of the tests performed by a traditional
memory tester. Pin electronics at each performance test board ("PTB")
position are designed to provide accurate signals to the memory ICs being
tested and detect whether a device is failing the test. An optional enhanced
fault collection capability allows the MTX to identify which cells in a
memory IC are failing, resulting in information which can be used to sort
partially good devices, and for engineering characterization of new device
types.
Devices being tested are placed on PTBs and loaded into environmental
chambers which typically operate at temperatures from 25 degrees Celsius (77
degrees Fahrenheit) up to 150 degrees Celsius (302 degrees Fahrenheit)
(optional chambers can produce temperatures as low as -55 degrees Celsius (-
67 degrees Fahrenheit)). A single PTB can hold up to 336 64 megabit ("Mb")
Rambus DRAMs, and a production chamber holds 30 PTBs, resulting in up to
10,080 devices being tested in a single system. For production environments,
the system may include an automatic PTB insertion/ejection mechanism for more
efficient handling of production quantities of PTBs.
BURN-IN SYSTEMS
The MAX system is designed for dynamic burn-in of memory and logic
devices. The production version holds 64 burn-in boards ("BIBs"), each of
which may hold 350 or more devices, resulting in a system capacity of 22,400
or more memory devices. The MAX system's 48-channel pin electronics and
ability to run stored test patterns also allow it to be used for application-
specific memory devices and many logic devices. The pin electronics are
designed to provide precisely-controlled voltages and signals to the devices
on the BIBs and to protect them from damage during the burn-in process. The
MAX system features multi-tasking Windows NT-based software which includes
lot tracking and reporting software that are needed for production and
military applications. The MAX3 system, introduced in fiscal 1999, increases
the pin electronics to 96 channels, and handles the latest low voltage ICs.
The MAX3 also has extended stored test program capability for more complete
exercise and output monitoring of complex logic devices such as digital
signal processors.
The ATX system is designed for dynamic and monitored burn-in of high pin-
count VLSI devices, including microprocessors, microcontrollers, application-
specific ICs ("ASICs"), and certain memory devices. The ATX system uses much
of the same software as the MAX system and contains additional features such
as an interface to CAE systems for program development and output monitoring
to ensure that the devices receive the specified voltages and signals. Its
256-channel pin electronics configuration allows it to handle complex logic
devices, and its ability to burn-in different device types in each of the
system's 32 BIB positions is useful for quality assurance applications. The
Windows NT-based ATX2, introduced in fiscal 1999, includes a high current
feature to allow the system to burn-in more devices, plus an extended pattern
generation capability.
DIEPAK CARRIERS
The Company's DiePak product line includes a family of reusable,
temporary die carriers and associated sockets which enable the test and burn-
in of bare die using the same test and burn-in systems used for packaged ICs.
DiePak carriers offer cost-effective solutions for providing known good die
for most types of ICs, including memory, microcontroller and microprocessor
devices. The DiePak carrier was introduced in fiscal 1995 following a
development effort that included the Company and Nitto Denko Corporation, the
manufacturer of the interconnect substrate.
The DiePak carrier consists of an interconnect substrate, which provides
electrical connection between the die pads and the socket contacts, and a
mechanical support system. The substrate is customized for each IC product.
The DiePak carrier comes in 108, 172 and 320 pin versions to handle ICs
ranging from low pin-count memories to high pin-count microprocessors. The
DiePak carrier and socket feature a small footprint which reduces test and
burn-in cost because more devices may be processed simultaneously on a test
fixture.
TEST FIXTURES
The Company manufactures and sells custom designed test fixtures
including performance test boards for use with the MTX massively parallel
test system and burn-in boards for its burn-in systems. PTBs and BIBs hold
the devices undergoing test or burn-in and electrically connect the devices
under test to the system electronics. The capacity of each PTB or BIB
depends on the type of device being tested or burned-in, ranging from several
hundred in memory production to as few as eight for high pin-count complex
ASIC devices. PTBs and BIBs are sold both with new Aehr Test systems and for
use with the Company's installed base of systems. Due to the advanced test
requirements of the MTX system, PTBs are substantially more complex than
BIBs. The Company has patented certain features of the PTB and to date has
licensed one other company to supply PTBs.
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CUSTOMERS
The Company markets and sells its products throughout the world to
semiconductor manufacturers, semiconductor contract assemblers, electronics
manufacturers and burn-in and test service companies.
Sales to the Company's five largest customers accounted for approximately
64.3%, 62.7% and 75.2% of its net sales in fiscal 2000, 1999 and 1998,
respectively. During fiscal 2000, Texas Instruments, Formosa Advanced
Technologies Co. Ltd. and First International Computer Inc. accounted for
22.8%, 19.2% and 13.5% of the Company's net sales, respectively. During
fiscal 1999, Infineon (formerly the semiconductor group of Siemens), Texas
Instruments and Motorola accounted for 21.9%, 18.1% and 11.9% of the
Company's net sales, respectively. During fiscal 1998, Infineon and Motorola
accounted for 47.0% and 12.8% of the Company's net sales, respectively. No
other customers represented more than 10% of the Company's net sales for any
of such periods. The Company expects that sales of its products to a limited
number of customers will continue to account for a high percentage of net
sales for the foreseeable future. In addition, sales to particular customers
may fluctuate significantly from quarter to quarter. The loss of or
reduction or delay in orders from a significant customer, or a delay in
collecting or failure to collect accounts receivable from a significant
customer could adversely affect the Company's business, financial condition
and operating results.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company has sales and service operations in the United States, Japan
and Germany and has established a network of distributors and sales
representatives in other key parts of the world.
The Company's customer service and support program includes system
installation, system repair, applications engineering support, spare parts
inventories, customer training, and documentation. The Company has both
applications engineering and field service personnel located at the corporate
headquarters in Fremont, California and at the Company's subsidiaries in
Japan and Germany . The Company's distributors provide applications and
field service support in other parts of the world. The Company customarily
provides a warranty on its products. The Company offers service contracts on
its systems directly and through its subsidiaries, distributors, and
representatives.
BACKLOG
As of May 31, 2000 and 1999, the Company's backlog was $9.7 million and
$1.8 million, respectively. The significant increase in backlog was
primarily the result of strong demand for the Company's MAX3 dynamic burn-in
systems coupled with the upturn of the semiconductor industry. The Company's
backlog consists of product orders for which confirmed purchase orders have
been received and which are scheduled for shipment within 12 months. Most
orders are subject to rescheduling or cancellation by the customer with
limited penalties. Because of the possibility of customer changes in
delivery schedules or cancellations and potential delays in product
shipments, the Company's backlog as of a particular date may not be
indicative of net sales for any succeeding period.
RESEARCH AND PRODUCT DEVELOPMENT
The Company historically has devoted a significant portion of its
financial resources to research and development programs and expects to
continue to allocate significant resources to these efforts. The Company's
research and development expenses during fiscal 2000, 1999 and 1998 were
approximately $5.4 million, $4.9 million and $4.5 million, respectively.
The Company conducts ongoing research and development to develop new
products and to support and enhance existing product lines. The Company is
currently developing capability and performance enhancements to the MTX, MAX
and ATX systems for future generation ICs. The Company is also developing
DiePak carriers to accommodate additional types of devices.
Building upon the expertise gained in the development of its existing
products, the Company is developing a system for performing test and burn-in
of entire processed wafers, rather than individual die or packaged parts.
This wafer-level burn-in and test project is being financed by the Company
and the Defense Advanced Research Projects Agency ("DARPA") under a cost-
sharing agreement entered into in 1994. The Company has received $5.9
million from DARPA through May 31, 2000, representing less than 50% of total
project spending to date. The Company has demonstrated certain key
technologies required for the wafer-level burn-in and test system, and
expects to demonstrate feasibility of the system design in fiscal 2001.
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MANUFACTURING
The Company assembles its products from components and parts manufactured
by others, including environmental chambers, power supplies, metal
fabrications, printed circuit assemblies, integrated circuits, burn-in
sockets and interconnect substrates. Final assembly and test are performed
within the Company's facilities. The Company's strategy is to use in-house
manufacturing only when necessary to protect a proprietary process or if a
significant improvement in quality, cost or lead time can be achieved. The
Company's principal manufacturing facility is located in Fremont, California.
The Company's Tokyo, Japan facility provides final test, limited
manufacturing and product customization.
The Company relies on subcontractors to manufacture many of the
components or subassemblies used in its products. The Company's MTX, MAX and
ATX systems contain several components, including environmental chambers,
power supplies and certain ICs, which are currently supplied by only one or a
limited number of suppliers. The DiePak products include an interconnect
substrate which has primarily been supplied by Nitto Denko Corporation.
Nitto Denko is continuing to manufacture DiePak substrates, but the Company
is also qualifying an alternate supplier for the DiePak substrate. The
Company's reliance on subcontractors and single source suppliers involves a
number of significant risks, including the loss of control over the
manufacturing process, the potential absence of adequate capacity and reduced
control over delivery schedules, manufacturing yields, quality and costs. In
the event that any significant subcontractor or single source supplier was to
become unable or unwilling to continue to manufacture subassemblies,
components or parts in required volumes, the Company would have to identify
and qualify acceptable replacements. The process of qualifying
subcontractors and suppliers could be lengthy, and no assurance can be given
that any additional sources would be available to the Company on a timely
basis. Any delay, interruption or termination of a supplier relationship
could have a material adverse effect on the Company's business, financial
condition and operating results.
COMPETITION
The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, flexibility, automation, cost of
ownership, reliability, throughput, product availability and customer
service. In each of the markets it serves, the Company faces competition
from established competitors and potential new entrants, many of which have
greater financial, engineering, manufacturing and marketing resources than
the Company.
Because the Company's MTX system performs burn-in and many of the
functional tests performed by memory testers, the Company expects that the
MTX system will face intense competition from burn-in system suppliers and
traditional memory tester suppliers. The market for burn-in systems is
highly fragmented, with many domestic and international suppliers. Some
users, such as independent test labs, build their own burn-in systems, and
some other users, particularly large Japanese IC manufacturers, acquire burn-
in systems from captive or affiliated suppliers. Competing suppliers of
burn-in 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 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.
The Company's DiePak products face significant competition. Texas
Instruments Incorporated sells a temporary, reusable bare die carrier which
is intended to enable burn-in and test of bare die, and the Company believes
that several other companies have developed or are developing other such
products. As the bare die market develops, the Company expects that other
competitors will emerge. The DiePak products also face severe competition
from other alternative test solutions. The Company expects that the primary
competitive factors in this market will be cost, performance, reliability and
assured supply.
The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many
companies design and manufacture BIBs, including BIBs for use with the
Company's MAX and ATX systems. The Company's strategy is to provide higher
performance BIBs, and the Company generally does not compete to supply lower
cost, low performance BIBs. The Company has granted a royalty-bearing
license to one company to make PTBs for use with its MTX systems, in order to
assure customers of a second source of supply, and the Company may license
others as well. Sales of PTBs by licensees result in royalties to the
Company but reduce the Company's own sales of PTBs.
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The Company expects its competitors to continue to improve the
performance of their current products and to introduce new products with
improved price and performance characteristics. New product introductions by
the Company's competitors or by new market entrants could cause a decline in
sales or loss of market acceptance of the Company's products. Increased
competitive pressure could also lead to intensified price-based competition,
resulting in lower prices which could adversely affect the Company's
business, financial condition and operating results. The Company believes
that to remain competitive it must invest significant financial resources in
new product development and expand its customer service and support
worldwide. There can be no assurance that the Company will be able to
compete successfully in the future.
PROPRIETARY RIGHTS
The Company relies primarily on the technical and creative ability of its
personnel, its proprietary software, and trade secret and copyright
protection, rather than on patents, to maintain its competitive position.
The Company's proprietary software is copyrighted and licensed to the
Company's customers. The Company currently holds five issued United States
patents and has several additional United States patent applications and
foreign patent applications pending. The Company has one United States
trademark registration. One issued patent covers the method used to connect
the PTBs with the MTX system. Another issued patent relating to the MTX
includes claims covering certain details of the electronic implementation
used to obtain high performance in the MTX system and also covering certain
testing methods.
The Company's ability to compete successfully is dependent in part upon
its ability to protect its proprietary technology and information. Although
the Company attempts to protect its proprietary technology through patents,
copyrights, trade secrets and other measures, there can be no assurance that
these measures will be adequate or that competitors will not be able to
develop similar technology independently. Further, there can be no assurance
that claims allowed on any patent issued to the Company will be sufficiently
broad to protect the Company's technology, that any patent will issue from
any pending application or that foreign intellectual property laws will
protect the Company's intellectual property. Litigation may be necessary to
enforce or determine the validity and scope of the Company's proprietary
rights, and there can be no assurance that the Company's intellectual
property rights, if challenged, will be upheld as valid. Such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
operating results, regardless of the outcome of the litigation. In addition,
there can be no assurance that any of the patents issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. Such claims
could include assertions that the Company's products infringe, or may
infringe, the proprietary rights of third parties, requests for
indemnification against such infringement or suggest the Company may be
interested in acquiring a license from such third parties. There can be no
assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
EMPLOYEES
As of July 31, 2000, the Company and its two foreign subsidiaries
employed 128 persons full-time, of whom 27 were engaged in research,
development, and related engineering, 46 in manufacturing, 41 in marketing,
sales, and customer support, and 14 in general administration and finance.
The Company's subsidiary in Japan employs 25 people. In addition, the
Company from time to time employs a number of part-time employees and
contractors, particularly in manufacturing. The Company's success is in part
dependent on its ability to attract and retain highly skilled workers, who
are in high demand. None of the Company's employees is represented by a
union and the Company has never experienced a work stoppage. Management
considers its relations with its employees to be good.
GEOGRAPHIC AREAS
The Company operates in several geographic areas. Selected financial
information is included in Part II, Item 8, Note 11 "Segment Information,
Foreign Operations" and certain risks related to such operations are
discussed in Part II, Item 7, under the heading "Dependence on International
Sales and Operations."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors of the Company are elected annually. The executive
officers of the Company serve with no specific term of office. The executive
officers and directors of the Company are as follows:
Name of Executive Officer Age Positions with the Company
-------------------------- ---- -----------------------------------
Rhea J. Posedel............ 58 Chief Executive Officer and
Chairman of the Board of Directors
Carl J. Meurell ........... 40 President and Chief Operating Officer
Gary L. Larson............. 50 Vice President of Finance and Chief
Financial Officer
William D. Barraclough..... 56 Vice President of Test Systems
Engineering
Carl N. Buck............... 48 Vice President of Marketing
Richard F. Sette........... 62 Vice President of Operations
Yasushi Naitoh............. 47 President, Aehr Test Systems Japan
William W. R. Elder (1)(2). 60 Director
Mukesh Patel (2)........... 42 Director
Mario M. Rosati (1)........ 54 Director and Secretary
------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
RHEA J. POSEDEL is a founder of the Company and has served as Chief
Executive Officer and Chairman of the Board of Directors since its inception
in 1977. From the Company's inception through May 2000, Mr. Posedel also
served as President. Prior to founding the Company, Mr. Posedel held various
project engineering and engineering managerial positions at Lockheed Martin
Corporation (formerly "Lockheed Missile & Space Corporation"), Ampex
Corporation, and Cohu, Inc. He received a B.S. in Electrical Engineering
from the University of California, Berkeley, an M.S. in Electrical
Engineering from San Jose State University and an M.B.A. from Golden Gate
University.
CARL J. MEURELL joined the Company as Vice President of Worldwide Sales
in March 1999 and was elected President and Chief Operating Officer in June
2000. From May 1996 to March 1999, Mr. Meurell served as Vice President and
General Manager of the test and repair division of Photon Dynamics, a
supplier of test inspection and repair systems for the flat panel display
industry. From April 1995 to May 1996, he served as a director at Megatest,
a division of Teradyne, Inc. From October 1993 to April 1995, he served as
Vice President and General Manager of Catapult Software Training, an IBM
company. From December 1980 to October 1993, he held various sales
management positions at Megatest. Mr. Meurell received an A.S. in Electrical
Engineering Technology, with distinction, from Pennsylvania State University,
a B.S. in Electronic Engineering, magna cum laude, from the University of
Massachusetts and an M.B.A. from Union College.
GARY L. LARSON joined the Company in April 1991 as Chief Financial
Officer and was elected Vice President of Finance in February 1992. From
1986 to 1990, he served as Chief Financial Officer, and from 1988 to 1990
also as President and Chief Operating Officer, of Nanometrics Incorporated, a
manufacturer of measurement and inspection equipment for the semiconductor
industry. Mr. Larson received a B.S. in Mathematics/Finance from Harvey Mudd
College.
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WILLIAM D. BARRACLOUGH joined the Company as an Account Manager in
February 1989 and held various positions until he was elected Vice President
of Test Systems Engineering in August 1996. From 1984 to 1989, Mr.
Barraclough served as Vice President of Marketing at Thermonics, Inc., a
manufacturer of temperature control equipment for electronics devices. Mr.
Barraclough received a B.S.E.E. from the University of Southern California.
CARL N. BUCK joined the Company as a Product Marketing Manager in 1983
and held various positions until he was elected Vice President of Engineering
in November 1992, Vice President of Research and Development Engineering in
November 1996, and Vice President of Marketing in September 1997. From 1978
to 1983, Mr. Buck served as Product Marketing Manager at Intel Corporation,
an integrated circuit and microprocessor company. Mr. Buck received a
B.S.E.E. from Princeton University, an M.S. in Electrical Engineering from
the University of Maryland and an M.B.A. from Stanford University.
RICHARD F. SETTE rejoined the Company as Vice President of Operations in
January 1996, after serving in that same position from 1984 to 1987. He
served as Senior Director of Operations of Northrop Grumman Corp., a
manufacturer of aircraft and aircraft subsystems, from 1987 to 1993, as Vice
President of Operations of Symtek, Inc., which manufactures handling
equipment for the semiconductor industry, from 1993 to 1994 and as Director
of Engineering at SatCom Technologies Corp., a developer of energy storage
systems, from 1994 to 1995. Mr. Sette received a B.S.E.E. and an M.S.E.E.
from Northeastern University.
YASUSHI NAITOH joined the Company as President, Aehr Test Systems Japan
K.K., the Company's Japanese subsidiary, in October 1997. He was employed at
Tokyo Electron Limited, a leading worldwide semiconductor equipment
manufacturer from 1983 to 1997, during which time he held various positions,
including serving as Senior Department Manager of Test Systems and Senior
Department Manager of Automation Systems. Mr. Naitoh graduated from Kanagawa
University in Kanagawa, Japan where he majored in Mechanical Engineering.
WILLIAM W. R. ELDER has been a director of the Company since 1989. Dr.
Elder was the Chief Executive Officer of Genus, Inc. ("Genus"), a
semiconductor company, from his founding of Genus in 1981 to September 1996,
and has been serving in that same position again since April 1998. Dr. Elder
has been a director of Genus since its inception. Dr. Elder holds a B.S.I.E.
and an honorary Doctorate Degree from the University of Paisley in Scotland.
MUKESH PATEL was appointed to the Company's Board of Directors in June
1999. Mr. Patel co-founded SMART Modular Technologies, Inc., where he served
on its Board of Directors since its inception and he acted in various
executive capacities from 1989 to 1999. Mr. Patel holds a B.S. degree in
Engineering with emphasis on digital electronics from Bombay University,
India. Mr. Patel is a director of Krypton Isolation, Inc., Jedi
Technologies, Inc., and Yatra Corporation.
MARIO M. ROSATI has been a director of the Company since 1977. He is a
member of the law firm Wilson Sonsini Goodrich & Rosati, Professional
Corporation which he joined in 1971. Mr. Rosati is a graduate of Boalt Hall,
University of California at Berkeley. Mr. Rosati is a director of Genus,
Inc., Sanmina Corporation, Ross Systems, Inc., MyPoints.com, Symyx
Technologies, Inc., The Management Network Group, Inc., and Vivus, as well as
several privately-held companies.
DIRECTORS' COMPENSATION AND OTHER ARRANGEMENTS
Rhea J. Posedel, the only inside director of the Company, does not
receive any cash compensation for his services as a member of the Board of
Directors. Each outside director receives (1) an annual retainer of $5,000,
(2) $1,000 for each regular board meeting he attends, and (3) $500 for each
committee meeting he attends if not held in conjunction with a regular board
meeting, in addition to being reimbursed for certain expenses incurred in
attending Board and committee meetings. An inside director is a director who
is a regular employee of the Company, whereas an outside director is not an
employee of the Company. Directors are eligible to participate in the
Company's stock option plans. Outside directors were granted no options in
fiscal 1998. Outside directors William Elder, Mario Rosati and David
Torresdal were each granted options to purchase 5000 shares at $4.25 per
share in fiscal 1999, and 5,000 shares at $5.06 per share in fiscal 2000.
Outside director Mukesh Patel was granted options to purchase 15,000 shares
at $3.88 per share and 5,000 shares at $5.06 per share in fiscal 2000. Mr.
Torresdal, a long-term director of the Company, passed away during fiscal
2000.
The Board of Directors has a Compensation Committee and an Audit
Committee. The Compensation Committee makes recommendations to the Board of
Directors regarding executive compensation matters, including decisions
relating to salary and bonus and grants of stock options. The Audit
Committee approves the appointment of the Company's independent auditors,
reviews the results and scope of annual audits and other accounting related
services, and reviews and evaluates the Company's internal control functions.
9
<PAGE>
Item 2. Properties
The Company's principal administrative and production facilities are
located in Fremont, California, in a 51,289 square foot building. The lease
on this building expires in December 2009; the Company has an option to
extend the lease of its headquarters building for an additional five years
period at rates to be determined. The Company's Japan facility is located in
Tokyo in an 11,029 square foot building under a lease which expires in 2004.
The Company leases a sales and support office on a month-to-month basis in
Utting, Germany. The Company's and its subsidiaries' annual rental payments
currently aggregate approximately $1.3 million. The Company believes that
alternate facilities would be available if needed.
Item 3. Legal Proceedings
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. Such claims
could include assertions that the Company's products infringe, or may
infringe, the proprietary rights of third parties, requests for
indemnification against such infringement or suggestions that the Company may
be interested in acquiring a license from such third parties. There can be
no assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
The Company is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to the business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
(a) The Company's Common Stock has been publicly traded on the Nasdaq
National Market under the symbol "AEHR" since the Company's initial public
offering ("IPO") on August 15, 1997. The initial public offering price was
$12.00 per share. The following table sets forth, for the periods indicated,
the high and low sale prices for the Common Stock on such market.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
Fiscal 1999:
First quarter ended August 31, 1998................ $ 6.44 $ 4.13
Second quarter ended November 30, 1998............. 5.50 3.19
Third quarter ended February 28, 1999.............. 7.38 4.13
Fourth quarter ended May 31, 1999.................. 6.38 3.75
Fiscal 2000:
First quarter ended August 31, 1999................ $ 5.06 $ 3.63
Second quarter ended November 30, 1999............. 5.63 4.38
Third quarter ended February 29, 2000.............. 7.25 4.00
Fourth quarter ended May 31, 2000.................. 10.00 4.88
</TABLE>
At August 7, 2000, the Company had 131 holders of record of its
Common Stock. The Company estimates the number of beneficial owners of the
Company's Common Stock at August 7, 2000 to be 784.
The market price of the Company's Common Stock has been volatile.
For a discussion of the factors affecting the Company's stock price, see
"Factors that may affect future results of operations -- possible volatility
of stock price."
The Company has not paid cash dividends on its Common Stock or other
securities. The Company currently anticipates that it will retain all of its
future earnings for use in the expansion and operation of its business and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future.
(b) Use of Proceeds from the IPO:
On August 18, 1997, the Company's Registration Statement on Form S-1
covering the IPO of 3,600,000 shares of the Company's Common Stock,
Commission file number 333-28987, was declared effective. The net proceeds
of the IPO to the Company (after deducting expenses in connection with the
IPO) were $26,832,297. 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 $ 2,439,274
Repayment of indebtedness 4,455,179
Working capital 5,956,000
Temporary investments, including cash and cash equivalents 13,981,844
------------
Total $26,832,297
============
11
<PAGE>
Item 6. Selected Financial Data (in thousands except per share data):
<TABLE>
<CAPTION>
Fiscal Year Ended May 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $24,505 $18,146 $40,805 $42,020 $33,234
Cost of sales................................. 17,267 12,201 24,359 25,715 19,942
---------- ---------- ---------- ---------- ----------
Gross profit.................................. 7,238 5,945 16,446 16,305 13,292
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 7,930 6,892 8,618 8,878 7,534
Research and development.................... 5,367 4,918 4,529 4,536 4,113
Research and development cost
reimbursement--DARPA ..................... (866) (1,233) (900) (793) (891)
---------- ---------- ---------- ---------- ----------
Total operating expenses.................. 12,431 10,577 12,247 12,621 10,756
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................. (5,193) (4,632) 4,199 3,684 2,536
Interest income............................... 985 1,199 1,048 - -
Interest expense.............................. (11) (15) (144) (577) (446)
Other income (expense), net................... 498 441 (364) (565) (559)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interest in subsidiary............. (3,721) (3,007) 4,739 2,542 1,531
Income tax expense (benefit).................. (1,116) (677) 2,334 (773) 130
Minority interest in subsidiary............... - - - - (1)
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $(2,605) $(2,330) $2,405 $3,315 $1,400
========== =========== ========= ========== =========
Net income (loss) per share (basic)........... $ (0.38) $ (0.34) $ 0.38 $ 0.77 $ 0.33
Net income (loss) per share (diluted)......... $ (0.38) $ (0.34) $ 0.36 $ 0.74 $ 0.32
Shares used in per share calculation
Basic....................................... 6,813 6,854 6,327 4,297 4,303
Diluted..................................... 6,813 6,854 6,761 4,500 4,364
</TABLE>
<TABLE>
<CAPTION>
May 31,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents..................... $ 8,323 $ 5,336 $ 6,748 $ 1,176 $ 535
Working capital............................... 30,400 31,016 36,885 7,895 4,799
Total assets.................................. 40,729 41,187 47,105 24,389 23,749
Long-term obligations, less current portion... 382 391 168 356 533
Total shareholders' equity.................... 34,305 36,678 39,964 10,070 6,789
</TABLE>
12
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Management's Discussion and Analysis section and other parts of this
Annual Report on Form 10-K contain forward-looking statements within the
meaning of the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, that involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed below and in
"Business." The forward-looking statements contained herein are made as of
the date hereof, and the Company assumes no obligation to update such
forward-looking statements or to update reasons actual results could differ
materially from those anticipated in such forward-looking statements.
OVERVIEW
The Company was founded in 1977 to develop and manufacture burn-in and
test equipment for the semiconductor industry. Since its inception, the
Company has sold more than 2,000 systems to semiconductor manufacturers,
semiconductor contract assemblers and burn- in and test service companies
worldwide. The Company's principal products currently are the MTX massively
parallel test system, the MAX and ATX burn-in systems, the DiePak carrier and
test fixtures.
Prior to fiscal 1995, the Company primarily sold burn-in systems and
related products. The Company experienced significant operating losses in
fiscal 1993 through fiscal 1995 due to a decline in net sales of burn-in
systems and significant investment in the development of new products. In
fiscal 1993, the Company initiated development of the MTX massively parallel
test system and the DiePak carrier. The Company began shipping the MTX in
March 1995 and DiePak carriers in volume in fiscal 1997.
In 1994, the Company entered into a cost-sharing agreement with DARPA, a
U.S. government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides
for potential payments by DARPA totaling up to $6.5 million. The agreement
provides that (i) the Company shall retain title to all co-funded inventions,
(ii) DARPA will receive a paid-up license to use the inventions for
government purposes and (iii) DARPA can require the Company to license the
inventions to third parties on reasonable terms if the Company fails to
adequately commercialize the inventions. Payments by DARPA depend on
satisfaction of development milestones, and DARPA has the right to terminate
project funding at any time. The level of payments may vary significantly
from quarter to quarter. There can be no assurance that the Company will meet
the development milestones or that DARPA will continue funding the project.
DARPA payments are reflected as credits to research and development expenses.
There also can be no assurance that the development project will result in
any marketable products. The Company has completed certain development
milestones and received DARPA payments of $5.9 million through May 31, 2000.
The remaining funding is subject to milestones scheduled to be completed
through September 2000, although the Company believes that completion of
certain milestones will be delayed beyond that date.
The Company has a wholly-owned subsidiary in Germany which performs sales
and service and a 94.8% owned subsidiary in Japan, which performs sales,
service and limited product engineering and manufacturing. The Company's
consolidated financial statements combine the subsidiaries' financial results
with those of the Company and account for the minority shareholders' interest
in the Japanese subsidiary. There was no minority interest recorded in the
financial statements at May 31, 2000, May 31, 1999 and May 31, 1998 due to
the subsidiary's cumulative losses and shareholder deficit.
The Company's 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 provided
no significant obligations remain and collectability is probable. Provision
for estimated future warranty costs is recorded at the time the products are
shipped.
A substantial portion of the Company's net sales is derived from the sale
of products for overseas markets. Consequently, an increase in the value of
the U.S. Dollar relative to foreign currencies would increase the cost of the
Company's products compared to products sold by local companies in such
markets. Although most sales to German customers are denominated in dollars,
substantially all sales to Japanese customers are denominated in yen. Since
the price is determined at the time a purchase order is accepted, the Company
is exposed to the risks of fluctuations in the yen-dollar exchange rate
during the lengthy period from purchase order to ultimate payment. The
length of time between receipt of order and ultimate payment typically ranges
from six to twelve months. The exchange rate risk is partially offset to the
extent the Company's Japanese subsidiary incurs yen-denominated expenses. To
date, the Company has not invested in instruments designed to hedge currency
risks, but it may do so in the future. The Company's Japanese subsidiary
typically carries debt or other obligations due to the Company that may be
denominated in either yen or dollars. Since the financial statements of the
Japanese subsidiary are based in yen and the Company's
13
<PAGE>
financial statements are based in dollars, the Japanese subsidiary and the
Company recognize income or loss in any period in which the value of the yen
rises or falls in relation to the dollar.
In accordance with SFAS 86, the Company capitalizes its systems software
development costs incurred after a system achieves technological feasibility
and before first commercial shipment. Such costs typically represent a small
portion of total research and development costs. Capitalized cost, net of
accumulated amortization, of approximately $57,000 was included as of May 31,
1997. System software development costs were fully amortized as of May 31,
1998, and no new system software development costs were capitalized in fiscal
1999 and 2000. .
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Net sales ................................ 100.0% 100.0% 100.0%
Cost of sales ............................ 70.5 67.2 59.7
--------- --------- --------
Gross profit ............................. 29.5 32.8 40.3
Operating expenses:
Selling, general and administrative .... 32.3 38.0 21.1
Research and development ............... 21.9 27.1 11.1
Research and development cost
reimbursement--DARPA ................. (3.5) (6.8) (2.2)
--------- --------- --------
Total operating expenses ............. 50.7 58.3 30.0
--------- --------- --------
Income (loss) from operations ........ (21.2) (25.5) 10.3
Interest income .......................... 4.0 6.6 2.6
Interest expense ......................... (0.0) (0.1) (0.4)
Other income (expense), net .............. 2.0 2.4 (0.9)
--------- --------- --------
Income (loss) before income taxes .... (15.2) (16.6) 11.6
Income tax expense (benefit) ............. (4.6) (3.8) 5.7
--------- --------- --------
Net income (loss) ........................ (10.6)% (12.8)% 5.9%
========= ========= ========
</TABLE>
FISCAL YEAR ENDED MAY 31, 2000 COMPARED TO FISCAL YEAR ENDED MAY 31, 1999
NET SALES. Net sales consist primarily of sales of systems, die
carriers, test fixtures, upgrades and spare parts and revenues from service
contracts. Net sales increased to $24.5 million in the fiscal year ended May
31, 2000 from $18.1 million in the fiscal year ended May 31, 1999, an
increase of 35.0%. The increase in net sales in fiscal 2000 resulted
primarily from increased shipments of MTX products. The Company anticipates
that net sales in the first quarter of fiscal 2001 will increase compared to
net sales in the fourth quarter of fiscal 2000.
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit increased to $7.2 million
in the fiscal year ended May 31, 2000 from $5.9 million in the fiscal year
ended May 31, 1999, an increase of 21.7%. The increase in gross profit was
primarily due to the increase in net sales. Gross profit margin decreased to
29.5% in the fiscal year ended May 31, 2000 from 32.8% in the fiscal year
ended May 31, 1999. The decrease in gross profit margin was primarily the
result of a higher proportion of sales of lower margin MTX products and an
increase in provision for inventory reserves, partially offset by
manufacturing overhead expenses spreading over higher shipment levels and
margin increases of most other products of the Company. The Company
anticipates that gross profit margin in the first quarter of fiscal 2001 will
increase compared to gross profit margin in the fourth quarter of fiscal
2000.
14
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of
employees, customer support costs, commission expenses to independent sales
representatives, product promotion and other professional services. SG&A
expenses increased to $7.9 million in the fiscal year ended May 31, 2000 from
$6.9 million in the fiscal year ended May 31, 1999, an increase of 15.1%.
The increase in SG&A expenses was primarily due to increases in employment
related expenses, commissions paid to outside sales representatives relating
to higher levels of shipments and product support expenses. As a percentage
of net sales, SG&A expenses decreased to 32.3% in the fiscal year ended May
31, 2000 from 38.0% in the fiscal year ended May 31, 1999, reflecting higher
net sales.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses
consist primarily of salaries and related costs of employees engaged in
ongoing research, design and development activities, costs of engineering
materials and supplies, and professional consulting expenses. R&D expenses
increased to $5.4 million in the fiscal year ended May 31, 2000 from $4.9
million in the fiscal year ended May 31, 1999, an increase of 9.1%. The
increase in R&D expenses was primarily due to increases in engineering
project material expenses. As a percentage of net sales, R&D expenses
decreased to 21.9% in the fiscal year ended May 31, 2000 from 27.1% in the
fiscal year ended May 31, 1999, reflecting higher net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and
development cost reimbursement - DARPA ("R&D - DARPA") is a credit
representing reimbursements by DARPA of costs incurred in the Company's
wafer-level burn-in development project. R&D - DARPA decreased to $866,000
in the fiscal year ended May 31, 2000 from $1.2 million in the fiscal year
ended May 31, 1999, a decrease of 29.8%. Payments by DARPA depend on
satisfaction of development milestones, and the level of payments may vary
significantly from fiscal year to fiscal year. As of May 31, 2000, there
were no outstanding payments due from DARPA. The Company anticipates that
there will not be any DARPA credit reported in the first quarter of fiscal
2001.
INTEREST INCOME. Interest income decreased to $985,000 in the fiscal
year ended May 31, 2000 from $1.2 million in the fiscal year ended May 31,
1999, a decrease of 17.8%. The decrease in interest income was primarily the
result of a lower level of cash and investments in fiscal 2000 than in fiscal
1999.
INTEREST EXPENSE. Interest expense decreased to $11,000 in the fiscal
year ended May 31, 2000 from $15,000 in the fiscal year ended May 31, 1999, a
decrease of 26.7%. The decrease in interest expense was primarily the result
of a lower long-term debt outstanding in fiscal 2000.
OTHER INCOME (EXPENSE), NET. Other income, net increased to $498,000 in
the fiscal year ended May 31, 2000, from $441,000 in the fiscal year ended
May 31, 1999 an increase of 12.9%. The increase in other income, net was
primarily due to currency exchange gains recorded in the fiscal year ended
May 31, 2000.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $1.1 million in the
fiscal year ended May 31, 2000, compared with income tax benefit of $677,000
in the fiscal year ended May 31, 1999. The income tax benefit in the fiscal
year ended May 31, 2000 was primarily due to the tax benefit recorded as a
result of losses incurred in the Company's U.S. operations. Such tax benefit
will be carried back to previous fiscal years in which the Company paid taxes
when its U.S. operations were profitable. The Company's Japanese subsidiary
has experienced significant cumulative losses since fiscal 1993, and thus
generated certain net operating losses available to offset future taxes
payable in Japan. 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. The income tax rate did not
approximate the statutory tax rates of the jurisdictions in which the Company
operates because no tax benefit was recorded for losses in the Company's
Japanese subsidiary.
FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO FISCAL YEAR ENDED MAY 31, 1998
NET SALES. Net sales decreased to $18.1 million in the fiscal year ended
May 31, 1999 from $40.8 million in the fiscal year ended May 31, 1998, a
decrease of 55.5%. The decrease in net sales in fiscal 1999 resulted
primarily from reduced shipments of MTX products.
GROSS PROFIT. Gross profit decreased to $5.9 million in the fiscal year
ended May 31, 1999 from $16.4 million in the fiscal year ended May 31, 1998,
a decrease of 63.9%. The decrease in gross profit was primarily due to the
decrease in net sales. Gross profit margin decreased to 32.8% in the fiscal
year ended May 31, 1999 from 40.3% in the fiscal year ended May 31, 1998.
The decrease in gross profit margin was primarily due to excess production
capacity and manufacturing overhead expenses spreading over lower shipment
levels and a change in product mix toward products with somewhat higher
material costs, partially offset by reductions in provisions for warranty and
inventory reserves.
15
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased to $6.9 million in the fiscal year ended May 31, 1999 from
$8.6 million in the fiscal year ended May 31, 1998, a decrease of 20.0%. The
decrease in SG&A expenses was primarily due to decreases in employment
related expenses, commissions paid to outside sales representatives, and a
reduction in provision for doubtful accounts. As a percentage of net sales,
SG&A expenses increased to 38.0% in the fiscal year ended May 31, 1999 from
21.1% in the fiscal year ended May 31, 1998, reflecting lower net sales.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$4.9 million in the fiscal year ended May 31, 1999 from $4.5 million in the
fiscal year ended May 31, 1998, an increase of 8.6%. The increase in R&D
expenses was primarily due to increases in professional consulting and
employment related expenses. As a percentage of net sales, R&D expenses
increased to 27.1% in the fiscal year ended May 31, 1999 from 11.1% in the
fiscal year ended May 31, 1998, reflecting lower net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - Research and development
cost reimbursement - DARPA increased to $1.2 million in the fiscal year ended
May 31, 1999 from $900,000 in the fiscal year ended May 31, 1998, an increase
of 37.0%.
INTEREST INCOME. Interest income increased to $1.2 million in the fiscal
year ended May 31, 1999 from $1.0 million in the fiscal year ended May 31,
1998, an increase of 14.5%. Interest income in both fiscal years was
primarily due to investment income from the proceeds obtained from the
initial public offering in August 1997.
INTEREST EXPENSE. Interest expense decreased to $15,000 in the fiscal
year ended May 31, 1999 from $144,000 in the fiscal year ended May 31, 1998,
a decrease of 89.6%. Interest expense in the fiscal year ended May 31, 1998
was primarily due to the short-term domestic debt which was subsequently
repaid whereas interest expense in the fiscal year ended May 31, 1999 was
primarily due to the Company's Japanese subsidiary's long-term borrowings in
Japan.
OTHER INCOME (EXPENSE), NET. Other income, net was $441,000 in the
fiscal year ended May 31, 1999, compared with other expense, net of $364,000
in the fiscal year ended May 31, 1998. The increase in other income, net was
primarily due to currency exchange gains recorded in the fiscal year ended
May 31, 1999 compared with currency exchange losses recorded in the fiscal
year ended May 31, 1998.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $677,000 in the
fiscal year ended May 31, 1999, compared with income tax expense of $2.3
million in the fiscal year ended May 31, 1998. The income tax benefit in the
fiscal year ended May 31, 1999 was primarily due to the tax benefit recorded
as a result of losses incurred in the Company's U.S. operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been generated from the
Company's August 1997 initial public offering, which resulted in net proceeds
to the Company of approximately $26.8 million. As of May 31, 2000, the
Company had $15.7 million in cash and short-term investments.
Net cash used in operating activities was approximately $6.0 million for
the fiscal year ended May 31, 2000, and net cash provided by operating
activities was $342,000 for the fiscal year ended May 31, 1999. For the
fiscal year ended May 31, 2000, net cash used in operating activities was due
primarily to net loss of $2.6 million, increase in accounts receivable of
$2.8 million, increase in inventory of $1.9 million and increase in other
current assets of $1.0 million, partially offset by increase in accounts
payable of $1.6 million. For the fiscal year ended May 31, 1999, net cash
provided by operating activities was due primarily to decrease in accounts
receivable of $3.8 million and decrease in inventories of $2.7 million,
partially offset by net loss of $2.3 million, decrease in accrued expenses
and deferred revenue of $1.9 million and decrease in accounts payable of $1.4
million.
Net cash provided by investing activities was approximately $8.5 million
for the fiscal year ended May 31, 2000 and net cash used in investing
activities was $1.4 million for the fiscal year ended May 31, 1999. Net cash
provided by investing activities for the fiscal year ended May 31, 2000 was
primarily due to sale of short-term and long-term investments, partially
offset by the acquisition of property and equipment. Net cash used in
investing activities during the fiscal year ended May 31, 1999 was primarily
due to purchase of long-term investments and acquisition of property and
equipment, partially offset by sale of short-term investments.
16
<PAGE>
Financing activities provided cash of approximately $356,000 in the
fiscal year ended May 31, 2000 and used cash of $356,000 in the fiscal year
ended May 31, 1999. Net cash provided by financing activities for the fiscal
year ended May 31, 2000 was primarily due to proceeds from exercise of stock
options, partially offset by principal repayments of the Company's long-term
debt and capital lease obligation and the Company's repurchase of 28,200 of
its outstanding common shares at an average price of $4.80 . Net cash used
in financing activities for the fiscal year ended May 31, 1999 was primarily
attributable to the Company's repurchase of 283,500 of its outstanding common
shares at an average price of $4.03, partially offset by proceeds from
exercise of stock options and increase in long-term debt of the Company's
subsidiary in Japan.
As of May 31, 2000, the Company had working capital of $30.4 million,
compared with $31.0 million as of May 31, 1999. Working capital consists of
cash and cash equivalents, short-term investments, accounts receivable,
inventory and other current assets, less current liabilities.
The Company announced in August 1998 that its board of directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
shares. The Company may repurchase the shares in the open market or in
privately negotiated transactions, from time to time, subject to market
conditions. The number of shares of common stock actually acquired by the
Company will depend on subsequent developments and corporate needs, and the
repurchase program may be interrupted or discontinued at any time. Any such
repurchase of shares, if consummated, may use a portion of the Company's
working capital. As of May 31, 2000, the Company had repurchased 311,700
shares at an average price of $4.10. Shares repurchased by the Company are
cancelled.
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 cash
provided by operations, if any, are adequate to meet its working capital and
capital equipment requirements through fiscal 2001. After fiscal 2001,
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 amends Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," to defer its effective date to all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments
including standalone instruments, as forward currency exchange contracts and
interest rate swaps or embedded derivatives and requires that these
instruments be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in the income statement or
stockholders' equity, depending on the nature of the transaction. We are
required to adopt SFAS 133 in the first quarter of our fiscal year 2001. We
are in process of evaluating the effect of SFAS 133 on our financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Securities and
Exchange Commission. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Staff Accounting Bulletin was amended in June 2000
to delay the implementation date to the fourth quarter of fiscal year 2001.
We are currently evaluating SAB 101 and its effects on the Company's revenue
recognition policies and practices.
In April 2000, the Financial Accounting Standards Board ("FASB") issued
FASB interpretation of No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of Accounting Principles Board ("APB")
Opinion No. 25. Among other issues, this interpretation clarifies the
definition of employees for purposes of applying APB Opinion No. 25, the
criteria for determining whether a plan qualifies as a non-compensatory plan,
the accounting consequence of various modifications to the terms of a
previously fixed stock option or award and the accounting for an exchange of
stock compensation awards in a business combination. This interpretation is
effective July 1, 2000, but certain conclusions in the interpretation cover
specific events that occur after either December 15, 1998 or January 12,
2000. To the extent that this interpretation covers events occurring during
the period after December 15,
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1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effect of applying this interpretation is recognized on a prospective basis
from July 1, 2000. We are currently reviewing stock grants to determine the
impact, if any, that may arise from implementation of this interpretation,
although we do not expect the impact, if any, to be material to our financial
statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This report on Form 10-K 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 annual report on Form 10-K.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. During fiscal 2000 and 1999, quarterly net
sales have been as low as $3.1 million and as high as $7.2 million, and gross
margins for quarterly sales have fluctuated between 21.2% and 39.5%. The
Company's future operating results will depend upon a variety of factors,
including the timing of significant orders, the mix of products sold, changes
in pricing by the Company, its competitors, customers or suppliers, the
length of sales cycles for the Company's products, timing of new product
announcements and releases by the Company and its competitors, market
acceptance of new products and enhanced versions of the Company's products,
capital spending patterns by customers, timing of completion and approval of
DARPA development milestones, manufacturing inefficiencies associated with
new product introductions by the Company, the Company's ability to produce
systems and products in volume and meet customer requirements, product
returns and customer acceptance of product shipments, volatility in the
Company's targeted markets, political and economic instability, natural
disasters, regulatory changes, possible disruptions caused by expanding
existing facilities or moving into new facilities, expenses associated with
acquisitions and alliances, and various competitive factors, including price-
based competition and competition from vendors employing other technologies.
The Company's gross margins have varied and will continue to vary based on a
variety of factors, including the mix of products sold, sales volume, and the
amount of products sold under volume purchase arrangements, which tend to
have lower selling prices. Accordingly, past performance may not be
indicative of future performance.
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. All customer purchase orders are subject to cancellation or
rescheduling by the customer with limited penalties, and, therefore, backlog
at any particular date is not necessarily indicative of actual sales for any
succeeding period. From time to time, cancellations and rescheduling of
customer orders have occurred, and delays by the Company's suppliers in
providing components or subassemblies to the Company have caused delays in
the Company's shipments of its own products. There can be no assurance that
the Company will not be materially adversely affected by future cancellations
and rescheduling. A substantial portion of net sales typically are realized
near the end of each quarter. A delay or reduction in shipments near the end
of a particular quarter, due, for example, to unanticipated shipment
rescheduling, cancellations or deferrals by customers, customer credit
issues, unexpected manufacturing difficulties experienced by the Company, or
delays in deliveries by suppliers, could cause net sales in a particular
quarter to fall significantly below the Company's expectations. As the
Company incurs expenses in anticipation of future sales levels, the Company's
results of operations may be adversely affected if such sales levels are not
achieved.
RECENT OPERATING LOSSES. The Company incurred an operating loss of $5.2
million and $4.6 million in fiscal 2000 and 1999, respectively. The Company
also incurred operating losses of $2.1, $4.2 and $2.4 million in fiscal 1995,
1994 and 1993, respectively. The Company operated profitably from fiscal
1996 to 1998, due to increased net sales that were substantially the result
of sales of new products, particularly sales of MTX systems. 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 and recorded
operating losses in fiscal 1999 and 2000. Although the Company anticipates
it will return to profitability within the first two quarters of fiscal 2001,
there can be no assurance that the Company's net sales will continue to
rebound or that the Company will remain profitable in fiscal 2001 or later
years.
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DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. A principal element of
the Company's strategy is to capture an increasing share of the memory test
equipment market through sales of the MTX massively parallel test system.
The MTX is designed to perform both burn-in and many of the final test
functions currently performed by high-cost memory testers and the market for
MTX systems is still in the early stages of development. The Company's
strategy depends, in part, upon its ability to persuade potential customers
that the MTX system can successfully perform a significant portion of such
final test functions and that transferring such tests to MTX systems will
reduce their overall capital and test costs. Although the Company expects an
increase in quote activity for MTX systems in the first half of fiscal 2001
there can be no assurance that the Company's strategy will be successful.
The failure of the MTX system to achieve market acceptance would have a
material adverse effect on the Company's business, financial condition and
operating results.
Market acceptance of the MTX system is subject to a number of risks.
Through the end of fiscal 2000, several companies purchased evaluation units
of the MTX system, but only three customers have purchased production
quantities. There are no long-term volume purchase commitments with any of
these customers. There can be no assurance that these customers will
continue to purchase MTX systems for their production facilities. Since most
potential customers have successfully relied on memory testers for many years
and their personnel understand the use and maintenance of such systems, the
Company anticipates that they may be reluctant to change their procedures in
order to transfer test functions to the MTX system. Before a customer will
transfer test functions to the MTX, the test programs must be translated for
use with the MTX and lengthy correlation tests must be performed.
Correlation testing may take up to six months or more. Furthermore, MTX
system sales are expected to be primarily limited to new facilities and to
existing facilities being upgraded to accommodate new product generations,
such as the transition to new memory technologies, such as Rambus or Double
Data Rate DRAMs. Construction of new facilities and upgrades of existing
facilities have in some cases been delayed or canceled during this
semiconductor industry downturn. Other companies have purchased MTX systems
which are being used in quality assurance and engineering applications, and
the Company believes that some of these companies are evaluating the MTX for
use in production applications. Market acceptance of the MTX system may also
be affected by a reluctance of IC manufacturers to rely on relatively small
suppliers such as the Company.
The Company's future sales and operating results are also partially
dependent on its sales of performance test boards for use with the MTX
system. Sales of PTBs by the Company and its licensees will depend upon the
number of MTX systems installed by customers.
DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF
DIEPAK CARRIER. Another element of the Company's strategy is to capture an
increasing share of the bare die burn-in and test product market through
sales of its DiePak carrier products. The Company developed the DiePak
carrier to enable burn-in and test of bare die in order to supply known good
die ("KGD") for use in applications such as multichip modules. The Company's
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. There can be no assurance that the Company's strategy will be
successful. The market for carriers to produce KGD has not expanded as
rapidly as expected, as some customers are adopting chip-scale packages
("CSPs"), which are smaller than traditional packages, as their next
packaging strategy. Even though CSPs are relatively expensive, the Company
believes that end users are expressing a preference for CSPs because they
believe that CSPs are more compatible with their existing PC board assembly
equipment. This has delayed the growth of the market for KGD, and therefore
for the Company's DiePak carrier. The failure of the bare die market to
expand or of the DiePak carrier to achieve broad market acceptance would have
a material adverse effect on the Company's business, financial condition and
operating results.
The emergence of the bare die market and broad acceptance of the DiePak
carrier are subject to a number of risks. The Company believes that the
growth of the bare die market depends largely on the relative cost and
benefits to the manufacturers of PCs and other electronic products of using
bare die rather than alternative IC packaging methods. There can be no
assurance that electronic manufacturers will perceive that the benefits of
KGD justify its potentially higher cost, and acceptance of KGD for many
applications may therefore be limited. In addition, electronics
manufacturers must change their manufacturing processes in order to use KGD,
but electronics manufacturers typically have substantial investments in
existing manufacturing technology and have historically been slow in
transitioning to new technologies.
The adoption of the DiePak products by IC manufacturers and burn-in and
test services companies typically will involve a lengthy qualification. Such
qualification processes have delayed high volume sales of DiePak products by
the Company. Motorola is the only customer to have ordered DiePak products
in production quantities. Motorola accounted for approximately 88%, 54% and
87% of the Company's net sales of DiePak products in fiscal 2000, 1999 and
1998, respectively. Sales to Motorola, which include both DiePak products
and other products, are made pursuant to individual purchase orders. There
is no long-term volume purchase commitment. There can be no assurance that
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Motorola will continue to purchase DiePak products for its production
facility. There can also be no assurance that the bare die market will
emerge and grow as the Company anticipates, that the DiePak carrier will
achieve commercial acceptance, or that the Company will not experience
difficulties in ramping up production to meet any increased demand for DiePak
products that may develop.
CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is
highly concentrated, with a relatively small number of large semiconductor
manufacturers and contract assemblers account for a substantial portion of
the purchases of semiconductor equipment. Sales to the Company's five
largest customers accounted for approximately 64.3%, 62.7% and 75.2% of its
net sales in fiscal 2000, 1999 and 1998, respectively. During fiscal 2000,
Texas Instruments, Formosa Advanced Technologies Co. Ltd. and First
International Computer Inc. accounted for 22.8%, 19.2% and 13.5% of the
Company's net sales, respectively. During fiscal 1999, Infineon (formerly
the semiconductor group of Siemens), Texas Instruments and Motorola accounted
for 21.9%, 18.1% and 11.9% of the Company's net sales, respectively. During
fiscal 1998, Infineon and Motorola accounted for 47.0% and 12.8% of the
Company's net sales, respectively. No other customers represented more than
10% of the Company's net sales for any of such periods. The Company expects
that sales of its products to a limited number of customers will continue to
account for a high percentage of net sales for the foreseeable future. In
addition, sales to particular customers may fluctuate significantly from
quarter to quarter. The loss of or reduction or delay in orders from a
significant customer, or a delay in collecting or failure to collect accounts
receivable from a significant customer could adversely affect the Company's
business, financial condition and operating results.
LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion
of the Company's net sales were derived from the sale of burn-in systems.
The market for burn-in systems is mature and estimated to be approximately
$100 million per year. In general, process control improvements in the
semiconductor industry have tended to reduce burn-in times. In addition, as
a given IC product generation matures and yields increase, the required burn-
in time may be reduced or eliminated. Some burn-in system suppliers
primarily provide "monitored" burn-in systems optimized for DRAMs. Sales of
monitored burn-in systems have reduced the size of the market segment
addressed by the Company's dynamic burn-in systems. IC manufacturers, which
historically have been the Company's primary customer base, increasingly
outsource test and burn-in to independent test labs which often build their
own systems. There can be no assurance that the market for burn-in systems
will grow, and sales of the Company's burn-in products could decline.
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in
significant part, upon the decision of a prospective customer to increase
manufacturing capacity or to restructure current manufacturing facilities,
either of which typically involve a significant commitment of capital. In
view of the significant investment or strategic issues that may be involved
in a decision to purchase MTX systems or DiePak carriers, the Company may
experience delays following initial qualification of the Company's systems as
a result of delays in a customer's approval process. Furthermore, the
approval process for MTX and DiePak carrier sales may require lengthy
qualification and correlation testing. For this and other reasons, the
Company's systems typically have a lengthy sales cycle during which the
Company may expend substantial funds and management effort in securing a
sale. Lengthy sales cycles subject the Company to a number of significant
risks, including inventory obsolescence and fluctuations in operating
results, over which the Company has little or no control. The loss of
individual orders due to the lengthy sales and evaluation cycle, or delays in
the sale of even a limited number of systems could have a material adverse
effect on the Company's business, operating results and financial condition
and, in particular, could contribute to significant fluctuations in operating
results on a quarterly basis.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 73.3%,
72.7% and 70.5% of the Company's net sales for fiscal 2000, 1999 and 1998,
respectively, were attributable to sales to customers for delivery outside of
the United States. The Company maintains a sales, service, product
engineering and manufacturing organization in Japan, and a sales and service
organization in Germany. The Company expects that sales of products for
delivery outside of the United States will continue to represent a
substantial portion of its future revenues. The future performance of the
Company will depend, in significant part, upon its ability to continue to
compete in foreign markets which in turn will depend, in part, upon a
continuation of current trade relations between the United States and foreign
countries in which semiconductor manufacturers or assemblers have operations.
A change toward more protectionist trade legislation in either the United
States or such foreign countries, such as a change in the current tariff
structures, export compliance or other trade policies, could adversely affect
the Company's ability to sell its products in foreign markets. In addition,
the Company is subject to other risks associated with doing business
internationally, including longer receivable collection periods and greater
difficulty in accounts receivable collection, the burden of complying with a
variety of foreign laws, difficulty in staffing and managing global
operations, risks of civil disturbance or other events which may limit or
disrupt markets, international exchange restrictions, changing political
conditions and monetary policies of foreign governments.
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A substantial portion of the Company's sales has been in Asia. Turmoil
in the Asian financial markets has resulted, and may result in the future, in
dramatic currency devaluations, stock market declines, restriction of
available credit and general financial weakness. In addition, DRAM prices
have sometimes fallen dramatically and will likely do so again in the future.
These developments may affect the Company in several ways. Currency
devaluations may make dollar-denominated goods such as those of the Company
relatively more expensive for Asian clients. The Company believes that many
international semiconductor manufacturers limited capital spending (including
the purchase of MTXs) in fiscal 1999, and that the uncertainty of the DRAM
market may cause some manufacturers to again delay capital spending plans.
These circumstances may also affect the ability of the Company's customers to
meet their payment obligations, resulting in cancellations or deferrals of
existing orders and the limitation of additional orders. In addition, Asian
governments have subsidized some portion of fab construction. Financial
turmoil may reduce these governments' willingness to continue such subsidies.
Such developments could have a material adverse affect on the Company's
business, financial condition and results of operations.
Because a substantial portion of the Company's net sales is from sales of
products for delivery outside the United States, an increase in the value of
the U.S. Dollar relative to foreign currencies would increase the cost of the
Company's products compared to products sold by local companies in such
markets. Approximately 85.7%, 10.9% and 3.4% of the Company's net sales for
fiscal 2000 were denominated in U.S. Dollars, Japanese Yen and German Marks,
respectively. Although most sales to German customers are denominated in
dollars, substantially all sales to Japanese customers are denominated in
yen. Since the price is determined at the time a purchase order is accepted,
the Company is exposed to the risks of fluctuations in the yen-dollar
exchange rate during the lengthy period from purchase order to ultimate
payment. This exchange rate risk is partially offset to the extent the
Company's Japanese subsidiary incurs yen-denominated expenses. To date, the
Company has not invested in instruments designed to hedge currency risks. In
addition, the Company's Japanese subsidiary typically carries debt or other
obligations due to the Company that may be denominated in either yen or
dollars. Since the financial statements of the Japanese subsidiary are based
in yen and the financial statements of the Company are based in dollars, the
Japanese subsidiary and the Company recognize currency exchange gain or loss
in any period in which the value of the yen rises or falls in relation to the
dollar. The Company recorded currency exchange gains of $371,000 and
$339,000 in fiscal 2000 and 1999, respectively. The Company experienced a
currency exchange loss of $385,000 in fiscal 1998.
A substantial portion of the world's manufacturers of memory devices are
in Korea, Japan and Taiwan and growth in the Company's net sales depends in
large part upon its ability to penetrate the Korean and Japanese markets.
Both the Korean and Japanese markets are difficult for foreign companies to
penetrate. The Company has served the Japanese market through its Japanese
subsidiary, which has experienced limited success and incurred operating
losses in recent years. Sales into Korea have not been significant in recent
years. In fiscal 1999, the Company signed an agreement with a new Korean
distributor. The lack of local manufacturing may impede the Company's
efforts to develop the Korean market. Taiwan also represents an increasingly
important portion of the memory manufacturer market. The Company relies on
an independent distributor in Taiwan and does not have any direct operations
in Taiwan. There can be no assurances that the Company's efforts in Japan,
Korea or Taiwan will be successful or that the Company will be able to
achieve and sustain significant sales to, or be able to successfully compete
in, the Japanese, Korean or Taiwanese test and burn-in markets.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION.
The semiconductor equipment industry is subject to rapid technological change
and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new
products and to introduce these products at competitive prices and on a
timely and cost-effective basis. The Company's success in developing new and
enhanced products depends upon a variety of factors, including product
selection, timely and efficient completion of product design, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. Because new
product development commitments must be made well in advance of sales, new
product decisions must anticipate both future demand and the technology that
will be available to supply that demand. Furthermore, introductions of new
and complex products typically involve a period in which design, engineering
and reliability issues are identified and addressed by the Company and its
suppliers. This process in the past required and in the future is likely to
require the Company to incur unreimbursed engineering expenses, and from time
to time to experience warranty claims or product returns. There can be no
assurance that the Company will be successful in selecting, developing,
manufacturing and marketing new products that satisfy market demand. Any
such failure would materially adversely affect the Company's business,
financial condition and results of operations.
Because of the complexity of the Company's products, significant delays
can occur between a product's introduction and the commencement of volume
production of such product. The Company has experienced significant delays
from time to time in the introduction of, and technical and manufacturing
difficulties with, certain of its products and may experience delays and
technical and manufacturing difficulties in future introductions or volume
production of new
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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.
As is common with new complex and software-intensive products, the
Company encountered reliability, design and manufacturing issues as it began
volume production and initial installations of certain products at customer
sites. The Company places a high priority on addressing these issues as they
arise. Certain of these issues in the past have been related to components
and subsystems supplied to the Company by third parties which have in some
cases limited the ability of the Company to address such issues promptly.
When the Company is in an early stage of the life cycle of one of its
products, there can be no assurance that reliability, design and
manufacturing issues will not be discovered in the future or that such
issues, if they arise, can be resolved to the customers' satisfaction or that
the resolution of such problems will not cause the Company to incur
significant development costs or warranty expenses or to lose significant
sales opportunities.
Future improvements in semiconductor design and manufacturing technology
may reduce or eliminate the need for the Company's products. For example,
the introduction of viable wafer-level burn-in and test systems, improvements
in built-in self test ("BIST") technology, and improvements in conventional
test systems, such as reduced cost or increased throughput, may significantly
reduce or eliminate the market for one or more of the Company's products.
UNCERTAINTIES RELATING TO DARPA FUNDING FOR RESEARCH AND DEVELOPMENT. In
1994, the Company entered into a cost-sharing agreement with DARPA, a U.S.
government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides
for potential payments by DARPA totaling up to $6.5 million. The agreement
provides that (i) the Company shall retain title to all co-funded inventions,
(ii) DARPA will receive a paid-up license to use the inventions for
government purposes and (iii) DARPA can require the Company to license the
inventions to third parties on reasonable terms if the Company fails to
adequately commercialize the inventions. Payments by DARPA depend on
satisfaction of development milestones, and DARPA has the right to terminate
project funding at any time. The level of payments may vary significantly
from quarter to quarter. There can be no assurance that the Company will
meet the development milestones or that DARPA will continue funding the
project. If DARPA funding were discontinued and the Company continued the
project, the Company's operating results would be adversely affected. There
also can be no assurance that the development project will result in any
marketable products. The Company has completed certain development
milestones and received DARPA payment of $5.9 million through May 31, 2000.
The remaining funding is subject to milestones scheduled to be completed
through September 2000, although the Company believes that completion of
certain milestones will be delayed beyond that date.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants, many of
which have greater financial, engineering, manufacturing and marketing
resources than the Company. The Company expects its competitors to continue
to improve the performance of their current products and to introduce new
products with improved price and performance characteristics. In addition,
continuing consolidation in the semiconductor equipment industry, and
potential future consolidation, could adversely affect the ability of smaller
companies such as the Company to compete with larger, integrated competitors.
New product introductions by the Company's competitors or by new market
entrants could cause a decline in sales or loss of market acceptance of the
Company's existing products. Increased competitive pressure could also lead
to intensified price-based competition, resulting in lower prices which could
adversely affect the Company's business, financial condition and operating
results. The Company believes that to remain competitive it must invest
significant financial resources in new product development and expand its
customer service and support worldwide. There can be no assurance that the
Company will be able to compete successfully in the future.
The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, flexibility, automation, cost of
ownership, reliability, throughput, product availability and customer
service. In each of the markets it serves, the Company faces competition
from established competitors and potential new entrants, many of which have
greater financial, engineering, manufacturing and marketing resources than
the Company.
Because the Company's MTX system performs burn-in and many of the
functional tests performed by traditional memory testers, the Company expects
that the MTX System will face intense competition from burn-in system
suppliers and traditional memory tester suppliers. The market for burn-in
systems is highly fragmented, with many domestic and international suppliers.
Some users, such as independent test labs, build their own burn-in systems,
and some other users, particularly large Japanese IC manufacturers, acquire
burn-in systems from captive or affiliated suppliers. Competing suppliers of
burn-in and functional test systems include Ando Corporation, Japan
Engineering Company and
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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 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
monitored and dynamic burn-in system faces severe competition from
manufacturers of more advanced monitored burn-in systems that perform limited
functional tests, including tests designed to ensure the devices receive the
specified voltages and signals.
The Company's DiePak products face significant competition. Texas
Instruments Incorporated sells a temporary, reusable bare die carrier which
is intended to enable burn-in and test of bare die, and the Company believes
that several other companies have developed or are developing other such
products. As the bare die market develops the Company expects that other
competitors will emerge. The DiePak products also face severe competition
from other alternative test solutions. The Company expects that the primary
competitive factors in this market will be cost, performance, reliability and
assured supply.
The Company's test fixture products face numerous competitors. There are
limited barriers to entry into the BIB market, and as a result, many small
companies design and manufacture BIBs, including BIBs for use with the
Company's MAX and ATX systems. The Company's strategy is to provide high
performance BIBs, and the Company generally does not compete to supply low
cost, low performance BIBs. The Company has granted a royalty-bearing
license to one company to make PTBs for use with its MTX systems, in order to
assure customers of a second source of supply, and the Company may license
others as well. Sales of PTBs by licensees result in royalties to the
Company but reduce the Company's own sales of PTBs.
The Company expects its competitors to continue to improve the
performance of their current products and to introduce new products with
improved price and performance characteristics. New product introductions by
the Company's competitors or by new market entrants could cause a decline in
sales or loss of market acceptance of the Company's products. Increased
competitive pressure could also lead to intensified price-based competition,
resulting in lower prices which could adversely affect the Company's
business, financial condition and operating results. The Company believes
that to remain competitive it must invest significant financial resources in
new product development and expand its customer service and support
worldwide. There can be no assurance that the Company will be able to
compete successfully in the future.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The Company's operating results depend
primarily upon the capital expenditures of semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service companies
worldwide, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. The
semiconductor and semiconductor equipment industries in general, and the
market for DRAMs and other memories in particular, historically have been
highly volatile and have experienced periodic downturns and slowdowns, which
have had a severe negative effect on the semiconductor industry's demand for
semiconductor capital equipment, including test and burn-in systems
manufactured and marketed by the Company. These downturns and slowdowns have
adversely affected the Company's operating results in the past and in fiscal
1998, 1999 and 2000. In addition, the purchasing patterns of the Company's
customers are also highly cyclical because most customers purchase the
Company's products for use in new production facilities or for upgrading
existing test lines for the introduction of next generation products.
Construction of new facilities and upgrades of existing facilities have in
some cases been delayed or canceled during the most recent semiconductor
industry downturn. A large portion of the Company's net sales are
attributable to a few customers and therefore a reduction in purchases by one
or more customers could materially adversely affect the Company's financial
results. There can be no assurance that the semiconductor industry will grow
in the future at the same rates it has grown historically. Any downturn or
slowdown in the semiconductor industry would have a material adverse effect
on the Company's business, financial condition and operating results. In
addition, the need to maintain investment in research and development and to
maintain customer service and support will limit the Company's ability to
reduce its expenses in response to any such downturn or slowdown period.
The semiconductor equipment manufacturing industry has historically been
subject to a relatively high rate of purchase order cancellation by customers
as compared to other high technology industry sectors. Manufacturing
companies that are the customers of semiconductor equipment companies
frequently revise, postpone and cancel capital facility expansion plans. In
such cases, semiconductor equipment companies may experience a significant
rate of cancellations and reschedulings of purchase orders, as was the case
in the industry in late 1995, early 1996, and 1998. There can be no
assurance that the Company will not be materially adversely affected by
future cancellations and reschedulings.
23
<PAGE>
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company relies on subcontractors to manufacture many of the components or
subassemblies used in its products. The Company's MTX, MAX and ATX systems
contain several components, including environmental chambers, power supplies
and certain ICs, which are currently supplied by only one or a limited number
of suppliers. The DiePak products include an interconnect substrate which
has primarily been supplied by Nitto Denko Corporation. Nitto Denko is
continuing to manufacture DiePak substrates, but the Company is also
qualifying an alternate supplier for the DiePak substrate. The Company's
reliance on subcontractors and single source suppliers involves a number of
significant risks, including the loss of control over the manufacturing
process, the potential absence of adequate capacity and reduced control over
delivery schedules, manufacturing yields, quality and costs. In the event
that any significant subcontractor or single source supplier was to become
unable or unwilling to continue to manufacture subassemblies, components or
parts in required volumes, the Company would have to identify and qualify
acceptable replacements. The process of qualifying subcontractors and
suppliers could be lengthy, and no assurance can be given that any additional
sources would be available to the Company on a timely basis. Any delay,
interruption or termination of a supplier relationship could have a material
adverse effect on the Company's business, financial condition and operating
results.
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, announcement of technological innovations, new systems or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights
and changes in the Company's relationships with customers and suppliers 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 Chief
Executive Officer, as well as other executive officers and key employees.
The Company does not maintain key person life insurance for its benefit on
any of its personnel, and none of the Company's employees is subject to a
non-competition agreement with the Company. The loss of the services of any
of its executive officers or a group of key employees could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company's future success will depend in significant part upon
its ability to attract and retain highly skilled technical, management, sales
and marketing personnel. There is a limited number of personnel with the
requisite skills to serve in these positions, and it has become increasingly
difficult for the Company to hire such personnel. Competition for such
personnel in the semiconductor equipment industry is intense, and there can
be no assurance that the Company will be successful in attracting or
retaining such personnel. The Company's inability to attract and retain the
executive management and other key personnel it requires could have a
material adverse effect on the Company's business, financial condition and
operating results.
INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT. The Company's ability
to compete successfully is dependent in part upon its ability to protect its
proprietary technology and information. Although the Company attempts to
protect its proprietary technology through patents, copyrights, trade secrets
and other measures, there can be no assurance that these measures will be
adequate or that competitors will not be able to develop similar technology
independently. Further, there can be no assurance that claims allowed on any
patent issued to the Company will be sufficiently broad to protect the
Company's technology, that any patent will issue from any pending application
or that foreign intellectual property laws will protect the Company's
intellectual property. Litigation may be necessary to enforce or determine
the validity and scope of the Company's proprietary rights, and there can be
no assurance that the Company's intellectual property rights, if challenged,
will be upheld as valid. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results, regardless of
the outcome of the litigation. In addition, there can be no assurance that
any of the patents issued to the Company will not be challenged, invalidated
or circumvented or that the rights granted thereunder will provide
competitive advantages to the Company.
24
<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. Such claims
could include assertions that the Company's products infringe, or may
infringe, the proprietary rights of third parties, requests for
indemnification against such infringement or suggestions that the Company may
be interested in acquiring a license from such third parties. There can be
no assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used in the Company's operations. The Company believes that its activities
conform in all material respects to current environmental and land use
regulations applicable to its operations and its current facilities and that
it has obtained environmental permits necessary to conduct its business.
Nevertheless, the failure to comply with current or future regulations could
result in substantial fines being imposed on the Company, suspension of
production, alteration of its manufacturing processes or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
Item 7a. Quantitative and Qualitative Disclosures about Market Risks
The Company considered the provisions of Financial Reporting Release No.
48 "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company has no holdings of derivative financial or
commodity instruments at May 31, 2000.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. To somewhat reduce these
risks, the Company invests excess cash in a managed portfolio of corporate
and government bond instruments with maturities of 18 months or less. The
Company does not use any financial instruments for speculative or trading
purposes. The Company has long-term debt that carries fixed interest rates.
Fluctuations in interest rates would not have a material effect on the
Company's financial position, results of operations and cash flows.
A majority of the Company's revenue and capital spending is transacted in
U.S. dollars. The Company, however, enters into transactions in other
currencies, primarily Japanese Yen. Substantially all sales to Japanese
customers are denominated in yen. Since the price is determined at the time
a purchase order is accepted, the Company is exposed to the risks of
fluctuations in the yen-dollar exchange rate during the lengthy period from
purchase order to ultimate payment. This exchange rate risk is partially
offset to the extent that the Company's Japanese subsidiary incurs yen-
denominated expenses. To date, the Company has not invested in instruments
designed to hedge currency risks. In addition, the Company's Japanese
subsidiary typically carries debt or other obligations due to the Company
that may be denominated in either yen or dollars. Since the Japanese
subsidiary's financial statements are based in yen and the Company's
financial statements are based in dollars, the Japanese subsidiary and the
Company recognize foreign exchange gain or loss in any period in which the
value of the yen rises or falls in relation to the dollar. A 10% decrease in
the value of the yen as compared with the dollar would potentially result in
an additional net loss of approximately $362,000.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data
AEHR TEST SYSTEMS AND SUBSIDIARIES
Index to Financial Statements
Report of Independent Accountants .................................. 27
Consolidated Balance Sheets at May 31, 2000 and 1999 ............... 28
Consolidated Statements of Operations for the years
ended May 31, 2000, 1999 and 1998 ................................ 29
Consolidated Statements of Shareholders' Equity for the years
ended May 31, 2000, 1999 and 1998 ................................ 30
Consolidated Statements of Cash Flows for the years ended
May 31, 2000, 1999 and 1998 ...................................... 31
Notes to Consolidated Financial Statements ......................... 32
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Aehr Test Systems:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1) and (2) on page 44 present fairly, in all
material respects, the financial position of Aehr Test Systems and its
subsidiaries at May 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended May 31, 2000, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
June 30, 2000
27
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
May 31,
-------------------------
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 8,323 $ 5,336
Short-term investments ............................. 7,365 14,847
Accounts receivable, net of allowance for doubtful
accounts of $150 and $125 at May 31, 2000 and
1999, respectively ............................... 6,294 3,533
Inventories ........................................ 11,183 9,221
Deferred income taxes............................... 1,613 1,543
Prepaid expenses and other ......................... 1,664 654
---------- ----------
Total current assets ........................... 36,442 35,134
Property and equipment, net .......................... 2,613 1,936
Long-term investments ................................ 580 3,235
Other assets, net .................................... 1,094 882
---------- ----------
Total assets ................................... $40,729 $41,187
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term bank debt ............. $ 143 $ 152
Accounts payable ................................... 2,989 1,005
Accrued expenses ................................... 2,873 2,440
Deferred revenue ................................... 37 521
---------- ----------
Total current liabilities ...................... 6,042 4,118
Long-term bank debt, net of current portion .......... 297 391
Deferred revenue ............................ 39 --
Deferred lease commitment ............................ 46 --
---------- ----------
Total liabilities .............................. 6,424 4,509
---------- ----------
Commitments (Note 6).
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized: 10,000 shares;
Issued and outstanding: none...................... -- --
Common stock, $.01 par value:
Authorized: 75,000 shares;
Issued and outstanding: 6,906 shares and 6,756
shares at May 31, 2000 and 1999, respectively... 69 68
Additional paid-in capital ......................... 35,332 34,806
Accumulated deficit ................................ (2,660) (55)
Accumulated other comprehensive income ........... 1,564 1,859
---------- ----------
Total shareholders' equity ..................... 34,305 36,678
---------- ----------
Total liabilities and shareholders' equity ..... $40,729 $41,187
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net sales..................................... $24,505 $18,146 $40,805
Cost of sales................................. 17,267 12,201 24,359
---------- ---------- ----------
Gross profit.................................. 7,238 5,945 16,446
---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 7,930 6,892 8,618
Research and development.................... 5,367 4,918 4,529
Research and development cost
reimbursement--DARPA ..................... (866) (1,233) (900)
---------- ---------- ----------
Total operating expenses.................. 12,431 10,577 12,247
---------- ---------- ----------
Income (loss) from operations................. (5,193) (4,632) 4,199
Interest income............................... 985 1,199 1,048
Interest expense.............................. (11) (15) (144)
Other income (expense), net................... 498 441 (364)
---------- ---------- ----------
Income (loss) before income taxes ............ (3,721) (3,007) 4,739
Income tax expense (benefit).................. (1,116) (677) 2,334
---------- ---------- ----------
Net income (loss)............................. (2,605) (2,330) 2,405
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
(expense) ................................ (343) (233) 81
Unrealized holding gains (losses) arising
during the year........................... 48 (61) --
---------- ---------- ----------
Comprehensive income (loss) .................. $(2,900) $(2,624) $2,486
========== ========== ==========
Net income (loss) per share (basic)........... $ (0.38) $ (0.34) $ 0.38
Net income (loss) per share (diluted)......... $ (0.38) $ (0.34) $ 0.36
Shares used in per share calculation
Basic....................................... 6,813 6,854 6,327
Diluted..................................... 6,813 6,854 6,761
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Unrealized Cumulative
----------------- Paid-in (Accumulated Investment Translation
Shares Amount Capital Deficit) Loss Adjustment Total
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 1, 1997.............. 4,296 $43 $ 8,085 $ (130) $ -- $2,072 $10,070
Issuance of common stock in initial
public offering, net of
issuance costs of $1,068 ....... 2,500 25 26,807 -- -- -- 26,832
Issuance of common stock
under employee plans ........... 121 1 576 -- -- -- 577
Repurchase of common stock........ -- -- (1) -- -- -- (1)
Net income........................ -- -- -- 2,405 -- -- 2,405
Translation adjustment............ -- -- -- -- -- 81 81
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 1998.............. 6,917 69 35,467 2,275 -- 2,153 39,964
Issuance of common stock
under employee plans ........... 123 2 481 -- -- -- 483
Repurchase of common stock........ (284) (3) (1,142) -- -- -- (1,145)
Net loss ......................... -- -- -- (2,330) -- -- (2,330)
Net unrealized loss on
investments .................... -- -- -- -- (61) -- (61)
Translation adjustment............ -- -- -- -- -- (233) (233)
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 1999 6,756 68 34,806 (55) (61) 1,920 36,678
Issuance of common stock
under employee plans ........... 178 1 662 -- -- -- 663
Repurchase of common stock........ (28) -- (136) -- -- -- (136)
Net loss ......................... -- -- -- (2,605) -- -- (2,605)
Net unrealized loss on
investments .................... -- -- -- -- 48 -- 48
Translation adjustment............ -- -- -- -- -- (343) (343)
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 2000 6,906 $69 $35,332 $(2,660) $(13) $1,577 $34,305
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $(2,605) $(2,330) $2,405
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for doubtful accounts............. 27 (136) 131
Loss (gain) on disposition of
property and equipment.................... 6 (4) 11
Depreciation and amortization............... 703 453 479
Deferred income taxes....................... -- (456) (102)
Changes in operating assets and liabilities:
Accounts receivable....................... (2,791) 3,820 36
Inventories............................... (1,891) 2,740 (1,627)
Accounts payable.......................... 1,564 (1,431) (1,871)
Accrued expenses and deferred revenue..... (46) (1,857) 143
Deferred lease commitment................. 85 (55) (165)
Other current assets...................... (1,008) (402) (104)
--------- --------- ---------
Net cash provided by (used in)
operating activities.................. (5,956) 342 (664)
--------- --------- ---------
Cash flows from investing activities:
(Increase) decrease in short-term
investments............................. 7,482 1,732 (15,323)
(Increase) decrease in long-
term investments........................ 2,703 (2,392) (904)
Additions to property and equipment......... (1,357) (755) (315)
(Increase) decrease in other assets......... (274) 9 (213)
--------- --------- ---------
Net cash provided by (used in)
investing activities.................. 8,554 (1,406) (16,755)
--------- --------- ---------
Cash flows from financing activities:
Decrease in notes payable--banks............ -- -- (4,535)
Borrowings under long-term debt............. -- 453 96
Long-term debt and capital lease
principal payments........................ (170) (147) (111)
Proceeds from issuance of common stock
and exercise of stock options............. 662 483 27,409
Repurchase of common stock.................. (136) (1,145) (1)
--------- --------- ---------
Net cash provided by (used in)
financing activities.................. 356 (356) 22,858
--------- --------- ---------
Effect of exchange rates on cash................ 33 8 133
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents...................... 2,987 (1,412) 5,572
Cash and cash equivalents, beginning of year.... 5,336 6,748 1,176
--------- --------- ---------
Cash and cash equivalents, end of year.......... $8,323 $5,336 $6,748
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Interest ................................. $10 $17 $148
Income taxes ............................. 38 152 2,281
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
Aehr Test Systems ("Company") was incorporated in California in June 1977
and primarily designs, engineers and manufactures test and burn-in equipment
used in the semiconductor industry. The Company's principal products are the
MTX massively parallel test system, the MAX and ATX burn-in systems, test
fixtures and the DiePak carrier.
CONSOLIDATION:
The financial statements include the accounts of the Company, its wholly
owned foreign sales corporation ("FSC") and both its wholly owned and
majority owned foreign subsidiaries. Intercompany accounts and transactions
have been eliminated. The Company's 25% interest in ESA Electronics PTE Ltd.
("ESA"), a Singapore company, is accounted for under the equity method.
Equity income recorded related to ESA totaled $76,000, $127,000 and $155,000
in fiscal years 2000, 1999 and 1998, respectively. The Company has another
investment which is accounted for at cost.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
Assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. Dollars from Japanese Yen and German Marks using the
exchange rate in effect at the balance sheet date. Additionally, their
revenues and expenses are translated using exchange rates approximating
average rates prevailing during the fiscal year. Translation adjustments
that arise from translating their financial statements from their local
currencies to U.S. Dollars are accumulated and reflected as a separate
component of shareholders' equity and comprehensive income (loss).
Transaction gains and losses that arise from exchange rate changes
denominated in currencies other than the local currency are included in the
statements of operations as incurred.
USE OF 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 could differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS:
Cash equivalents consist of money market instruments, commercial paper
and other highly liquid investments purchased with an original maturity of
three months or less. All investments are classified as available-for-sale.
Investments in available-for-sale securities are reported at fair value with
unrealized gains and losses, net of tax, if any, included as a component of
shareholders' equity.
CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to semiconductor manufacturers
in North America, the Far East, and Europe. As of May 31, 2000,
approximately 33%, 58% and 9% of accounts receivable are from customers
located in the United States, the Far East and Europe, respectively. As of
May 31, 1999, approximately 48%, 18% and 34% of accounts receivable are from
customers located in the United States, the Far East and Europe,
respectively. Three customers accounted for 42%, 15% and 11% of accounts
receivable at May 31, 2000, and two customers accounted for 21% and 13% of
accounts receivable at May 31, 1999. Three customers accounted for 23%, 19%
and 14% of net sales in fiscal 2000, respectively and three customers
accounted for 22%, 18% and 12% of net sales in fiscal 1999, respectively.
Two customers accounted for 47% and 13% of net sales in fiscal 1998. The
Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company also maintains allowances for
potential credit losses and such losses have been within management's
expectations. The Company uses letter of credit terms for some of its
international customers.
32
<PAGE>
Primarily all of the Company's cash, cash equivalents and short-term cash
deposits are deposited with major banks in the United States and Japan. The
Company invests its excess cash in money market funds and short-term cash
deposits. The money market funds and short-term cash deposits bear the risk
associated with each fund. The money market funds have variable interest
rates, and the short-term cash deposits have fixed rates. The Company has
not experienced any losses on its money market funds or short-term cash
deposits.
INVENTORIES:
Inventories are stated at the lower of standard cost (which approximates
cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Leasehold improvements are
amortized over the lesser of their estimated useful lives or the term of the
related lease. Furniture, fixtures, machinery and equipment are depreciated
on a straight-line basis over their estimated useful lives. The ranges of
estimated useful lives for furniture, fixtures, machinery and equipment are
as follows:
Leasehold improvements................................ life of the lease
Furniture and fixtures................................ 2 to 15 years
Machinery and equipment............................... 4 to 11 years
Test equipment........................................ 4 to 11 years
GOODWILL:
Cost in excess of the fair value of net assets of acquired companies of
$956,000 is being amortized on a straight-line basis over 24.5 years and is
included in other assets, net of accumulated amortization of $586,000 and
$538,000 at May 31, 2000 and 1999, respectively.
REVENUE RECOGNITION:
Revenue for all products except royalties is recognized upon shipment of
product provided no significant obligations remain and collectability is
probable. Provision for the estimated future cost of warranty is recorded at
the time the products are shipped. Actual warranty costs incurred have not
materially differed from those provided. Royalty revenue related to PTB
licensing income is recognized when paid by the licensee. This income is
recorded in net sales.
PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs incurred in the research and development of new products or systems
are charged to operations as incurred.
Costs incurred in the development of software programs for the Company's
products are charged to operations as incurred until technological
feasibility of the software has been established. Generally, technological
feasibility is established when the software module performs its primary
functions described in its original specifications, contains features
required for it to be usable in a production environment, is completely
documented and the related hardware portion of the product is complete.
After technological feasibility is established, any additional costs are
capitalized. Capitalized costs are amortized over the estimated life of the
related software product using the greater of the units of sales or straight-
line methods over ten years. Capitalized cost, net of accumulated
amortization, of approximately $57,000 was included as of May 31, 1997.
System software development costs were fully amortized as of May 31, 1998,
and no new system software development costs were capitalized in fiscal 1999
and 2000.
During 1994, the Company entered into a cost-sharing research agreement
with the Defense Advanced Research Projects Agency ("DARPA"), a U.S.
government agency, under which DARPA will provide co-funding up to a maximum
amount of $6.5 million during fiscal 1994 through September 2000 for the
development of a new product that will allow for burn-in and test at the
wafer level. Payments from DARPA are received upon DARPA's approval of the
achievement by the Company of milestones as outlined in the contract. The
Company recognizes such reimbursements as a reduction to research and
development expenses in an amount equal to actual reimbursable project costs
incurred. At May 31, 2000 and May 31, 1999, no outstanding payments were due
from DARPA.
33
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses approximate fair value due
to their short maturities. Based on borrowing rates currently available to
the Company for loans with similar terms, the carrying value of notes payable
approximates fair value.
The Company's investments are composed primarily of government and
corporate fixed income securities, certificates of deposit and commercial
paper. Long-term investments mature after one year but less than two years.
While it is the Company's general intent to hold such securities until
maturity, management will occasionally sell particular securities for cash
flow purposes. Therefore, the Company's investments are classified as
available-for-sale and are carried at fair value. Through May 31, 2000, no
material losses had been experienced on such investments.
Unrealized gains and losses on available-for-sale investments, net of
tax, are computed on the basis of specific identification and are included in
shareholders' equity. Realized gains, realized losses, and declines in
value, judged to be other-than-temporary, are included in other income. The
cost of securities sold is based on the specific identification method and
interest earned is included in other income.
IMPAIRMENT OF LONG-LIVED ASSETS:
In the event that facts and circumstances indicate that the carrying
value of assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the assets would be compared to the asset's
carrying value to determine if a write-down is required.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts expected to be
realized.
STOCK-BASED COMPENSATION:
The Company accounts for its employee stock based compensation in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and presents disclosures required
by Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation."
EARNINGS PER SHARE ("EPS") DISCLOSURES:
The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," and all prior
periods have been restated accordingly. Basic EPS is computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed giving
effect to all dilutive potential common shares that were outstanding during
the period. Dilutive potential common shares consist of the incremental
common shares issuable upon exercise of stock options for all periods.
34
<PAGE>
In accordance with the disclosure requirements of SFAS No. 128, a
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Numerator: Net income (loss) ............... $(2,605) $(2,330) $2,405
---------- ---------- ----------
Denominator for basic income per share:
Weighted-average shares outstanding ...... 6,813 6,854 6,327
---------- ---------- ----------
Shares used in basic per share calculation.. 6,813 6,854 6,327
Effect of dilutive securities:
Employee stock options.................. -- -- 434
---------- ---------- ----------
Denominator for diluted income (loss)
per share............................... 6,813 6,854 6,761
---------- ---------- ----------
Basic income (loss) per share............... $(0.38) $(0.34) $0.38
========= ========= =========
Diluted income (loss) per share............. $(0.38) $(0.34) $0.36
========= ========= =========
</TABLE>
Stock options to purchase 150,000 and 122,000 shares of common stock were
outstanding in fiscal 2000 and 1999, respectively, but were not included in
the computation of diluted loss per share because the inclusion of such
shares would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS 137 amends Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," to defer its effective date to all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments
including standalone instruments, as forward currency exchange contracts and
interest rate swaps or embedded derivatives and requires that these
instruments be marked-to-market on an ongoing basis. These market value
adjustments are to be included either in the income statement or
stockholders' equity, depending on the nature of the transaction. We are
required to adopt SFAS 133 in the first quarter of our fiscal year 2001. We
are in process of evaluating the effect of SFAS 133 on our financial
statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the Securities and
Exchange Commission. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The Staff Accounting Bulletin was amended in June 2000
to delay the implementation to the fourth quarter of fiscal year 2001. We
are currently evaluating SAB 101 and its effects on the Company's revenue
recognition policies and practices.
In April 2000, the Financial Accounting Standards Board ("FASB") issued
FASB interpretation of No. 44, "Accounting for Certain Transactions Involving
Stock Compensation," an interpretation of Accounting Principles Board ("APB")
Opinion No. 25. Among other issues, this interpretation clarifies the
definition of employees for purposes of applying APB Opinion No. 25, the
criteria for determining whether a plan qualifies as a non-compensatory plan,
the accounting consequence of various modifications to the terms of a
previously fixed stock option or award and the accounting for an exchange of
stock compensation awards in a business combination. This interpretation is
effective July 1, 2000, but certain conclusions in the interpretation cover
specific events that occur after either December 15, 1998 or January 12,
2000. To the extent that this interpretation covers events occurring during
the period after December 15,
35
<PAGE>
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effect of applying this interpretation is recognized on a prospective basis
from July 1, 2000. We are currently reviewing stock grants to determine the
impact, if any, that may arise from implementation of this interpretation,
although we do not expect the impact, if any, to be material to our financial
statements.
2. INVENTORIES:
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
May 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Raw materials and subassemblies......... $4,164 $4,931
Work in process......................... 6,299 3,876
Finished goods.......................... 720 414
------------ ------------
$11,183 $9,221
============ ============
</TABLE>
3. PROPERTY AND EQUIPMENT:
Property and equipment comprise (in thousands):
<TABLE>
<CAPTION>
May 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Leasehold improvements.................. $1,494 $441
Furniture and fixtures.................. 3,367 3,203
Machinery and equipment................. 3,214 3,163
Test equipment.......................... 2,109 2,155
------------ ------------
10,184 8,962
Less accumulated depreciation
and amortization...................... (7,571) (7,026)
------------ ------------
$2,613 $1,936
============ ============
</TABLE>
4. LONG-TERM BANK DEBT:
Long-term bank debt comprises (in thousands):
<TABLE>
<CAPTION>
May 31,
------------------------
2000 1999
------------ -----------
<S> <C> <C>
Various notes payable to Japanese banks, denominated
in Japanese Yen, bearing interest at 1.3% to 1.9%
per annum. These notes are payable in monthly
principal installments of $1,000 to $7,000 plus
accrued interest, maturing through November 2003
and are collateralized by accounts receivable...... $440 $543
Less current portion................................. (143) (152)
------------ -----------
$297 $391
============ ===========
</TABLE>
36
<PAGE>
The long-term debt agreements contain certain cross-default covenants
under which outstanding borrowings would become payable on demand if the
Company were to be in default of any other debt agreement and any lender were
to accelerate the other debt. The Company is not in violation of any
covenants at May 31, 2000.
Principal payments under long-term bank debt obligations for each of the
next four fiscal years as of May 31, 2000 are as follows (in thousands):
2001................................. $143
2002................................. 140
2003................................. 110
2004................................. 47
------------
$440
============
5. ACCRUED EXPENSES:
Accrued expenses comprise (in thousands):
<TABLE>
<CAPTION>
May 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Payroll related......................... $ 854 $ 804
Commissions and bonuses................. 536 300
Warranty................................ 346 303
Deferred rent, current.................. 0 55
Other................................... 1,137 978
------------ ------------
$2,873 $2,440
============ ============
</TABLE>
6. COMMITMENTS:
The Company leases most of its manufacturing and office space under
operating leases. The Company entered into a non-cancelable operating lease
agreement for its United States manufacturing and office facilities, which
commenced in December 1999 and expires in December 2009. Under the lease
agreement, the Company is responsible for payments of utilities, taxes and
insurance.
Minimum annual rentals payable under operating leases in each of the next
five fiscal years and thereafter are as follows (in thousands):
2001.................................... $899
2002.................................... 914
2003.................................... 937
2004.................................... 953
2005 and thereafter..................... 4,499
Rental expense for the years ended May 31, 2000, 1999 and 1998 was
approximately $1,275,000, $1,029,000 and $1,067,000, respectively.
At May 31, 2000, the Company has a $50,000 certificate of deposit held by
a financial institution representing a security deposit for its United States
manufacturing office and facilities lease.
37
<PAGE>
7. CAPITAL STOCK:
PREFERRED STOCK:
The Board of Directors is authorized to determine the rights of the
preferred shareholders.
STOCK OPTIONS:
The Company has reserved 1,264,505 shares of common stock for issuance to
employees and consultants under its two stock option plans. Both plans
provide that qualified options be granted at an exercise price equal to the
fair market value at the date of grant, as determined by the Board of
Directors (85% of fair market value in the case of non-statutory options and
purchase rights and 110% of fair market value in certain circumstances).
Options generally expire five years from date of grant. Most options become
exercisable in increments over a four-year period from the date of grant.
Options to purchase approximately 557,416 shares were exercisable at May 31,
2000.
Activity under the Company's stock option plans was as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
Outstanding Options
--------------------------------------
Number
Available of
Shares Shares Price per Share Total
--------- -------- -------------------- --------
<S> <C> <C> <C> <C>
Balances, June 1, 1997........ 582 759 $3.25 -- $6.00 3,049
Options granted............. (151) 151 $6.19 -- $17.00 1,429
Options terminated.......... 17 (17) $3.25 -- $7.50 (85)
Options exercised........... -- (77) $3.25 -- $6.00 (287)
1986 Plan expiration........ (8) -- -- --
--------- -------- --------
Balances, May 31, 1998........ 440 816 $3.25 -- $17.00 4,106
Options granted............. (257) 257 $4.25 -- $6.63 1,488
Options terminated.......... 103 (103) $3.25 -- $7.50 (462)
Options exercised........... -- (49) $3.25 -- $4.00 (172)
1986 Plan expiration........ (71) -- --
--------- -------- --------
Balances, May 31, 1999........ 215 921 $3.25 -- $17.00 $4,960
========= ======== ========
Additional shares reserved.. 300 -- -- --
Options granted............. (369) 369 $3.88 -- $6.75 1,780
Options terminated.......... 171 (171) $3.25 -- $17.00 (1,107)
Options exercised........... -- (140) $3.25 -- $8.88 (513)
1986 Plan expiration........ (32) -- --
--------- -------- --------
Balances, May 31, 2000........ 285 979 $3.88 -- $17.00 $5,120
========= ======== ========
</TABLE>
The following information concerning the Company's stock option and
employee stock purchase plans is provided in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company accounts for such
plans in accordance with APB No. 25 and related Interpretations.
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (loss) -- as reported............. $(2,605) $(2,330) $2,405
Net income (loss) -- pro forma............... $(3,133) $(2,783) $2,240
Net income (loss) per share -- as reported:
Basic...................................... $(0.38) $(0.34) $0.38
Diluted.................................... $(0.38) $(0.34) $0.36
Net income (loss) per share -- pro forma:
Basic...................................... $(0.46) $(0.41) $0.35
Diluted.................................... $(0.46) $(0.41) $0.33
</TABLE>
38
<PAGE>
The above pro forma effects on income (loss) may not be representative of
the effects on net income (loss) for future years as option grants typically
vest over several years and additional options are generally granted each
year.
The fair value of each option grant has been estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants:
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free Interest Rates............. 6.25% 4.40% 6.47%
Expected Life........................ 5 years 5 years 5 years
Volatility........................... 0.70 0.70 0.94
Dividend Yield....................... -- -- --
</TABLE>
The pro forma weighted average expected life was calculated based on the
exercise behavior. The pro forma weighted average fair value of those options
granted in 2000, 1999 and 1998 was $5.23, $5.73 and $9.37, respectively.
The following table summarizes information with respect to stock options
at May 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices May 31, 2000 Life (Years) Price May 31, 2000 Price
-------------------- ------------ ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$3.8750 161,037 4.08 $3.8750 47,038 $3.8750
$4.0000 256,510 0.52 $4.0000 256,510 $4.0000
$4.2500 22,593 2.63 $4.2500 20,267 $4.2500
$4.2625 25,000 4.08 $4.2625 5,729 $4.2625
$4.4000 70,000 0.46 $4.4000 70,000 $4.4000
$5.0000 16,125 4.64 $5.0000 1,915 $5.0000
$5.0625 28,792 4.39 $5.0625 10,787 $5.0625
$5.3750 100,000 3.81 $5.3750 29,166 $5.3750
$6.0000 8,792 1.69 $6.0000 7,112 $6.0000
$6.1250 62,334 3.03 $6.1250 29,641 $6.1250
$6.1875 10,390 2.90 $6.1875 6,314 $6.1875
$6.6250 18,500 3.66 $6.6250 6,163 $6.6250
$6.6880 29,859 2.56 $6.6880 17,852 $6.6880
$6.7375 20,000 3.03 $6.7375 9,583 $6.7375
$6.7500 94,250 4.84 $6.7500 1,955 $6.7500
$7.5000 22,500 2.05 $7.5000 16,402 $7.5000
$8.2500 5,000 2.05 $8.2500 3,645 $8.2500
$13.3130 20,000 2.44 $13.3130 12,500 $13.3130
$17.0000 7,500 2.38 $17.0000 4,837 $17.0000
------------ ------------
$3.8750 - 17.0000 979,182 2.64 $5.2292 557,416 $4.9350
============ ============
</TABLE>
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK BONUS PLAN:
The Company has a noncontributory, trusteed employee stock bonus plan for
full-time employees who have completed three consecutive months of service
and for part-time employees who have completed one year of service and have
attained an age of 21. The Company can contribute either shares of the
Company's stock or cash to the plan. The contribution is determined annually
by the Company and cannot exceed 15% of the annual aggregate salaries of
those employees eligible for participation in the plan. Individuals' account
balances vest at a rate of 25% per year commencing upon completion of three
years of service. Non-vested balances, which are forfeited, are allocated to
the
39
<PAGE>
remaining employees in the plan. Contributions made to the plan during fiscal
2000, 1999 and 1998 were $60,000, $60,000 and $150,000, respectively.
401(K) PLAN:
The Company maintains a 401(k) profit-sharing plan for its full-time
employees who have completed three consecutive months of service and for
part-time employees who have completed one year of service and have attained
an age of 21. Each participant in the plan may elect to contribute from 1% to
20% of their annual salary to the plan, subject to certain limitations. The
Company, at its discretion, may make an annual contribution to the plan. The
Company did not make any contributions to the plan during fiscal 2000, 1999
and 1998.
EMPLOYEE STOCK PURCHASE PLAN:
The Company's Board of Directors adopted the 1997 Employee Stock Purchase
Plan in June 1997. A total of 300,000 shares of Common Stock have been
reserved for issuance under the plan. The plan has consecutive, overlapping,
twenty-four month offering periods. The offering periods generally begin on
the first trading day on or after April 1 and October 1 each year, except
that the first such offering period commences with the effectiveness of the
Company's initial public offering and ends on the last trading day on or
before March 31, 1999. Shares are purchased through employee payroll
deductions at exercise prices equal to 85% of the lesser of the fair market
value of the Company's Common Stock at either the first day of an offering
period or the last day of such offering period. If a participant's rights to
purchase stock under all employee stock purchase plans of the Company accrue
at a rate which exceeds $25,000 worth of stock for a calendar year, such
participant may not be granted an option to purchase stock under the 1997
Employee Stock Purchase Plan. To date, 114,952 shares have been issued under
the plan.
9. INCOME TAXES:
Domestic and foreign components of pretax income (loss) are as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Domestic.......................... $(3,282) $(1,865) $6,526
Foreign........................... (439) (1,142) (1,787)
------------ ------------ ------------
$(3,721) $(3,007) $4,739
============ ============ ============
</TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Federal income taxes:
Current......................... $(1,190) $(294) $2,182
Deferred........................ -- (263) (124)
State income taxes:
Current......................... 18 33 266
Deferred........................ -- (193) 22
Foreign income taxes:
Current......................... 56 40 (12)
Deferred........................ -- -- --
------------ ------------ ------------
$(1,116) $(677) $2,334
============ ============ ============
</TABLE>
40
<PAGE>
The components of the net deferred tax asset (liability) are as follows
(in thousands):
<TABLE>
<CAPTION>
May 31,
-------------------------
2000 1999
------------ ------------
<S> <C> <C>
Non current assets:
Net operating losses..................... $2,202 $2,285
Credit carryforwards..................... 269 126
Depreciation and amortization............ (91) (114)
------------ ------------
2,380 2,297
Less valuation allowance................... (2,380) (2,227)
------------ ------------
-- 70
------------ ------------
Current assets:
Inventory and other revenues............. 1,629 1,585
Accrued liabilities...................... 816 851
------------ ------------
2,445 2,436
Less valuation allowance................... (832) (893)
------------ ------------
1,613 1,543
------------ ------------
Net deferred tax asset..................... $1,613 $1,613
============ ============
</TABLE>
The Company's effective tax rate differs from the U.S. federal statutory
tax rate, as follows:
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Maximum statutory rate.. (34.0)% (34.0)% 34.0%
Foreign taxes..................... 1.5 0.3 --
State taxes, net of federal tax
effect.......................... (4.3) (4.6) 6.9
Other............................. 1.3 2.8 (0.7)
Foreign earnings not currently
benefited....................... 4.1 13.0 7.2
Foreign Sales Corporation -- -- (4.7)
Change in valuation allowance..... 1.5 -- 6.6
------------ ------------ ------------
Effective tax rate................ (30.0)% (22.5)% 49.3%
============ ============ ============
</TABLE>
Foreign net operating loss carryforwards of approximately $4.8 million
are available to reduce future foreign taxable income and start to expire in
fiscal 2001 through fiscal 2005 if not utilized. A valuation allowance has
been provided for the deferred tax assets of the Japanese subsidiary as
management does not believe it is more likely than not the tax assets will be
realized, due to the subsidiary's cumulative losses.
41
<PAGE>
10. OTHER INCOME (EXPENSE), NET:
Other income (expense), net comprises the following (in thousands):
<TABLE>
<CAPTION>
Year Ended May 31,
--------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Foreign exchange gain (loss)...... $371 $339 $(385)
Other, net........................ 127 102 21
------------ ------------ ------------
$498 $441 $(364)
============ ============ ============
</TABLE>
11. SEGMENT INFORMATION:
FOREIGN OPERATIONS:
The Company develops, manufactures and sells systems to semiconductor
manufacturers and operates in one operating segment. The following presents
information about the Company's operations in different geographic areas (in
thousands):
<TABLE>
<CAPTION>
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1998:
Net sales...................... $37,748 $3,703 $2,926 $(3,572) $40,805
Portion of U.S. net sales
from export sales............ 25,724 -- -- -- 25,724
Income (loss) from operations.. 5,511 (1,206) (53) (53) 4,199
Identifiable assets............ 50,396 2,173 1,500 (6,964) 47,105
Long-lived assets.............. 976 496 69 -- 1,541
1999:
Net sales...................... $15,233 $2,185 $3,059 $(2,331) $18,146
Portion of U.S. net sales
from export sales............ 9,531 -- -- -- 9,531
Income (loss) from operations.. (3,213) (1,484) 90 (25) (4,632)
Identifiable assets............ 45,582 1,995 1,732 (8,122) 41,187
Long-lived assets.............. 1,340 499 97 -- 1,936
2000:
Net sales...................... $21,622 $3,248 $2,332 $(2,697) $24,505
Portion of U.S. net sales
from export sales............ 15,090 -- -- -- 15,090
Income (loss) from operations.. (4,501) (840) 53 95 (5,193)
Identifiable assets............ 45,292 3,267 912 (10,029) 39,442
Long-lived assets.............. 2,074 474 65 -- 2,613
</TABLE>
The Company's foreign operations are primarily those of its Japanese and
German subsidiaries. Substantially all of the sales of the subsidiaries are
made to unaffiliated Japanese or European customers. Net sales and income
(loss) from operations from outside the United States include the operating
results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
Adjustments consist of intercompany eliminations. Identifiable assets are all
assets identified with operations in each geographic area.
42
<PAGE>
SELECTED QUARTERLY DATA (UNAUDITED)
The following table (presented in thousands, except per share data)
sets forth selected statements of operations data for each of the four
quarters of the fiscal years ended May 31, 2000 and May 31, 1999. The
unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring entries)
necessary for a fair presentation of the information for the quarters
presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
1998 1998 1999 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $5,430 $5,186 $4,414 $3,116
Gross profit...................... $2,144 $1,531 $1,294 $ 976
Net loss.......................... $ (359) $ (492) $ (707) $ (772)
Net loss per share (basic)........ $(0.05) $(0.07) $(0.10) $(0.11)
Net loss per share (diluted)...... $(0.05) $(0.07) $(0.10) $(0.11)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 29, May 31,
1999 1999 2000 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales......................... $4,356 $6,294 $6,644 $7,211
Gross profit...................... $1,149 $1,337 $2,276 $2,476
Net loss.......................... $ (768) $ (736) $ (678) $ (423)
Net loss per share (basic)........ $(0.11) $(0.11) $(0.10) $(0.06)
Net loss per share (diluted)...... $(0.11) $(0.11) $(0.10) $(0.06)
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item relating to directors is
incorporated by reference to the information under the caption "Proposal 1 --
Election of Directors" in the Proxy Statement. The information required by
this item relating to executive officers is incorporated by reference to the
information under the caption "Management -- Executive Officers and
Directors" at the end of Part I of this report on Form 10-K.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
section entitled "Compensation of Executive Officers" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners, Directors
and Management" of the Proxy Statement.
43
<PAGE>
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" of the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at May 31, 2000 and 1999
Consolidated Statements of Operations for the years ended May 31, 2000,
1999 and 1998
Consolidated Statements of Shareholders' Equity for the years ended May 31,
2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended May 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following consolidated financial statement schedule is filed as part of
this report and should be read in conjunction with the consolidated
financial statements:
II Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule or because the information required is included in the
consolidated financial statements or notes thereto.
44
<PAGE>
SCHEDULE II
AEHR TEST SYSTEMS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
Balance at Charged to Balance
beginning costs and at end
of year expenses Deductions of year
---------- ---------- ---------- ----------
Allowance for doubtful
accounts receivable:
May 31, 2000 $125 $33 $8 $150
========== ========== ========== ==========
May 31, 1999 $260 $22 $157 $125
========== ========== ========== ==========
May 31, 1998 $270 $131 $141 $260
========== ========== ========== ==========
(b) Reports on Form 8-K.
None
45
<PAGE>
3. Exhibits
The following exhibits are filed as part of or incorporated by reference into
this Report:
Exhibit
No. Description
------- -------------------------------------------------------------------
3.1+ Restated Articles of Incorporation of Registrant.
3.2+ Bylaws of Registrant.
4.1++ Form of Common Stock certificate.
10.1+ Amended 1986 Incentive Stock Plan and form of agreement thereunder.
10.2++ 1996 Stock Option Plan (as amended and restated) and forms of
Incentive Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder.
10.3++ 1997 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4++ Form of Indemnification Agreement entered into between Registrant
and its directors and executive officers.
10.5+ Capital Stock Purchase Agreement dated September 11, 1979 between
Registrant and certain holders of Common Stock.
10.6+ Capital Stock Investment Agreement dated April 12, 1984 between
Registrant and certain holders of Common Stock.
10.7+ Amendment dated September 17, 1985 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain
holders of Common Stock.
10.8+ Amendment dated February 26, 1990 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain
holders of Common Stock.
10.9+ Stock Purchase Agreement dated September 18, 1985 between
Registrant and certain holders of Common Stock.
10.10+ Common Stock Purchase Agreement dated February 26, 1990 between
Registrant and certain holders of Common Stock.
10.11+ Lease dated May 14, 1991 for facilities located at 1667 Plymouth
Street, Mountain View, California.
10.12+++ Lease dated August 3, 1999 for facilities located at Building C,
400 Kato Terrace, Fremont, California.
11.1++ Computations of Net Income (Loss) Per Share.
21.1+ Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 48).
27.1 Financial Data Schedule.
------------------------
+ Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 filed June 11, 1997
(File No. 333-28987).
++ Incorporated by reference to the same-numbered exhibit previously filed
with Amendment No.1 to the Company's Registration Statement on Form S-1 filed
July 17, 1997 (File No. 333-28987).
+++ Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Form 10-K for the year ended May 31, 1999 filed August 27,
1999 (File No. 333-28987).
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 29, 2000
AEHR TEST SYSTEMS
By: /s/ RHEA J. POSEDEL
----------------------------------------
Rhea J. Posedel
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Rhea J. Posedel and Gary L. Larson,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
------------------------- --------------------------------- ---------------
Chief Executive Officer August 29, 2000
and Chairman of the
/s/ RHEA J. POSEDEL Board of Directors
------------------------- (Principal Executive Officer)
Rhea J. Posedel
Vice President of Finance August 29, 2000
and Chief Financial Officer
/s/ GARY L. LARSON (Principal Financial and
------------------------- Accounting Officer)
Gary L. Larson
/s/ WILLIAM W. R. ELDER Director August 29, 2000
-------------------------
William W. R. Elder
/s/ MUKESH PATEL Director August 29, 2000
-------------------------
Mukesh Patel
/s/ MARIO M. ROSATI Director August 29, 2000
-------------------------
Mario M. Rosati
47
