FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission file number: 333-28987.
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2424084
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 KATO TERRACE
FREMONT, CA 94539
- -------------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
(510) 623-9400
- ------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.
FORMER ADDRESS: 1667 PLYMOUTH STREET, MOUNTAIN VIEW, CA 94043
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period as the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(Item 1) YES X NO
--- ---
(Item 2) YES X NO
--- ---
Number of shares of Common Stock, $0.01 par value, outstanding
at February 29, 2000 was 6,803,409.
<PAGE>
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 2000
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 29, 2000 and May 31, 1999 . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 29, 2000 and
February 28, 1999. . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 29, 2000 and
February 28, 1999. . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 8
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 17
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 18
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 18
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
<PAGE>
PART I. FINANCIAL STATEMENTS
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
February 29, May 31,
2000 1999
(unaudited)
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 4,429 $ 5,336
Short-term investments. . . . . . . . . . . . . 10,784 14,847
Accounts receivable . . . . . . . . . . . . . . 7,302 3,533
Inventories . . . . . . . . . . . . . . . . . . 9,839 9,221
Prepaid expenses and other. . . . . . . . . . . 2,348 2,197
----------- -----------
Total current assets . . . . . . . . . . . . 34,702 35,134
Property and equipment, net . . . . . . . . . . . 2,369 1,936
Long-term investments . . . . . . . . . . . . . . 1,135 3,235
Other assets, net . . . . . . . . . . . . . . . . 1,100 882
----------- -----------
Total assets . . . . . . . . . . . . . . . . $39,306 $41,187
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term bank debt. . . . . $ 142 $ 152
Accounts payable. . . . . . . . . . . . . . . . 2,479 1,005
Accrued expenses. . . . . . . . . . . . . . . . 1,877 2,440
Deferred revenue. . . . . . . . . . . . . . . . 60 521
----------- -----------
Total current liabilities . . . . . . . . . . 4,558 4,118
Long-term bank debt, net of current portion . . . 343 391
----------- -----------
Total liabilities . . . . . . . . . . . . . . 4,901 4,509
----------- -----------
Shareholders' equity:
Common stock, $.01 par value:
Issued and outstanding: 6,803 shares and
6,756 shares at February 29, 2000 and
May 31, 1999, respectively . . . . . . . . . 68 68
Additional paid-in capital . . . . . . . . . . 34,931 34,806
Accumulated deficit . . . . . . . . . . . . . . (2,237) (55)
Accumulated other comprehensive income . . . . 1,643 1,859
----------- -----------
Total shareholders' equity . . . . . . . . . 34,405 36,678
----------- -----------
Total liabilities and shareholders' equity. . $39,306 $41,187
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- --------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . $ 6,644 $ 4,414 $17,294 $15,030
Cost of sales. . . . . . . . . . . . . . . . . 4,368 3,120 12,532 10,061
---------- ---------- --------- ----------
Gross profit . . . . . . . . . . . . . . . . . 2,276 1,294 4,762 4,969
---------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative. . . . . 1,927 1,745 5,874 5,390
Research and development . . . . . . . . . . 1,308 1,178 3,962 3,718
Research and development cost
reimbursement - DARPA. . . . . . . . . . . (350) (319) (866) (891)
---------- ---------- --------- ----------
Total operating expenses . . . . . . . . 2,885 2,604 8,970 8,217
---------- ---------- --------- ----------
Loss from operations . . . . . . . . . . . . . (609) (1,310) (4,208) (3,248)
Interest income . . . . . . . . . . . . . . . 234 273 774 911
Interest expense . . . . . . . . . . . . . . . (3) (3) (9) (9)
Other income (expense), net . . . . . . . . . (409) 138 257 401
---------- ---------- --------- ----------
Loss before income taxes . . . . . . . . . . . (787) (902) (3,186) (1,945)
Income tax benefit . . . . . . . . . . . . . . (109) (195) (1,004) (387)
---------- ---------- --------- ----------
Net loss . . . . . . . . . . . . . . . . . . . $ (678) $ (707) $(2,182) $(1,558)
---------- ---------- --------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation
adjustments income (expense) . . . . . . . 231 (63) (35) (266)
Unrealized holding gains (losses) arising
during period. . . . . . . . . . . . . . . 50 (80) 47 (3)
---------- ---------- --------- ----------
Comprehensive loss . . . . . . . . . . . . . . $ (397) $ (850) $(2,170) $(1,827)
========== ========== ========= ==========
Net loss per share (basic) . . . . . . . . . . $ (0.10) $ (0.10) $ (0.32) $ (0.23)
Net loss per share (diluted) . . . . . . . . . $ (0.10) $ (0.10) $ (0.32) $ (0.23)
Shares used in per share calculation:
Basic. . . . . . . . . . . . . . . . . . . . 6,795 6,842 6,788 6,884
Diluted. . . . . . . . . . . . . . . . . . . 6,795 6,842 6,788 6,884
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
February 29, February 28,
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . $(2,182) $(1,558)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts. . . . . . . . . . . 36 (104)
Gain on disposition of fixed assets . . . . . . . . -- (4)
Depreciation and amortization. . . . . . . . . . . . 594 403
Deferred income taxes. . . . . . . . . . . . . . . . 16 (42)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . (3,822) 1,260
Inventories . . . . . . . . . . . . . . . . . . . (578) 1,737
Accounts payable. . . . . . . . . . . . . . . . . 1,169 (1,304)
Accrued expenses and deferred revenue . . . . . . (1,024) (1,333)
Deferred lease commitment . . . . . . . . . . . . 18 (55)
Other assets and liabilities. . . . . . . . . . . (164) (258)
---------- ----------
Net cash used in operating activities . . . . . (5,937) (1,258)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments . . . . . . . . . . . . 4,063 1,051
Sale (purchase) of long-term investments . . . . . . . 2,149 (27)
Acquisition of property and equipment . . . . . . . . . (993) (816)
Decrease (increase) in other assets . . . . . . . . . . (211) 91
---------- ----------
Net cash provided by investing activities . . . 5,008 299
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term debt . . . . . . . . . . . . -- 447
Long-term debt payments . . . . . . . . . . . . . . . (132) (102)
Proceeds from issuance of common stock and
exercise of stock options . . . . . . . . . . . . . . 260 217
Repurchase of common stock. . . . . . . . . . . . . . . (135) (480)
---------- ----------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . (7) 82
---------- ----------
Effect of exchange rates on cash. . . . . . . . . . . . 29 44
---------- ----------
Net decrease in cash and cash equivalents. . . . (907) (833)
Cash and cash equivalents, beginning of period. . . . . 5,336 6,748
---------- ----------
Cash and cash equivalents, end of period. . . . . . . . $ 4,429 $ 5,915
========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED FEBRUARY 29, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial information has been prepared
by Aehr Test Systems, without audit, in accordance with the instructions to
Form 10-Q and therefore does not include all information and footnotes
necessary for a fair presentation of financial position, results of operations
and cash flows in accordance with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Aehr Test Systems and its subsidiaries (collectively,
the "Company"). All significant intercompany balances have been eliminated in
consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates.
UNAUDITED INTERIM FINANCIAL DATA. In the opinion of management, the
unaudited consolidated financial statements for the interim periods presented
reflect all adjustments, consisting of only normal recurring accruals,
necessary for a fair presentation of the consolidated financial position and
results of operations as of and for such periods indicated. These
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1999. Results for the interim periods presented herein are not
necessarily indicative of results which may be reported for any other interim
period or for the entire fiscal year.
6
<PAGE>
2. EARNINGS PER SHARE
EARNINGS PER SHARE. Earnings per share is computed based on the
weighted average number of common and common equivalent shares (common stock
options and warrants) outstanding, when dilutive, during each period using the
treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- --------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
---------- ---------- --------- ----------
(in thousands, except per share amounts)
(unaudited)
<S> <C> <C> <C> <C>
Basic EPS:
Net loss . . . . . . . . . . . . . . $ (678) $ (707) $(2,182) $(1,558)
========== ========== ========== ==========
Denominator: Weighted average common
shares outstanding . . . . . . . . 6,795 6,842 6,788 6,884
========== ========== ========== ==========
Net loss per share (basic) . . . . . $(0.10) $(0.10) $ (0.32) $(0.23)
========== ========== ========== ==========
Diluted EPS:
Denominator: Weighted average common
shares outstanding . . . . . . . . 6,795 6,842 6,788 6,884
Options . . . . . . . . . . . . . . -- -- -- --
---------- ---------- --------- ----------
Total Shares . . . . . . . . . . . . 6,795 6,842 6,788 6,884
========== ========== ========== ==========
Net loss per share (diluted) . . . . $(0.10) $(0.10) $ (0.32) $(0.23)
========== ========== ========== ==========
</TABLE>
3. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
February 29, May 31,
2000 1999
(unaudited)
----------- -----------
<S> <C> <C>
Raw materials and sub-assemblies $ 3,787 $ 4,931
Work in process 4,931 3,876
Finished goods 1,121 414
----------- -----------
$ 9,839 $ 9,221
=========== ===========
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," 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.
SAB 101 is effective for the fiscal quarter beginning April 1, 2000, however
earlier adoption is permitted. The Company has not yet determined the impact,
if any, that adoption will have on the consolidated financial statements.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included herein. The
following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results of operations could differ
materially from those anticipated in such forward-looking statements as a
result of certain factors set forth under "Factors That May Affect Future
Results of Operations."
RESULTS OF OPERATIONS
The following table sets forth items in the Company's Consolidated
Statements of Operations as a percentage of net sales for the periods
indicated.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- --------------------
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . . . 65.7 70.7 72.5 66.9
---------- ---------- --------- ----------
Gross profit . . . . . . . . . . . . . . . . . 34.3 29.3 27.5 33.1
---------- ---------- --------- ----------
Operating expenses:
Selling, general and administrative. . . . . 29.0 39.5 33.9 35.9
Research and development . . . . . . . . . . 19.7 26.7 22.9 24.7
Research and development cost
reimbursement - DARPA. . . . . . . . . . . (5.2) (7.2) (5.0) (5.9)
---------- ---------- --------- ----------
Total operating expenses . . . . . . . . 43.5 59.0 51.8 54.7
---------- ---------- --------- ----------
Loss from operations . . . . . . . . . . . . . (9.2) (29.7) (24.3) (21.6)
Interest income . . . . . . . . . . . . . . . 3.5 6.1 4.5 6.1
Interest expense . . . . . . . . . . . . . . . -- -- (0.1) (0.1)
Other income (expense), net . . . . . . . . . (6.1) 3.2 1.5 2.7
---------- ---------- --------- ----------
Loss before income taxes . . . . . . . . . . . (11.8) (20.4) (18.4) (12.9)
Income tax benefit . . . . . . . . . . . . . . (1.6) (4.4) (5.8) (2.5)
---------- ---------- --------- ----------
Net loss . . . . . . . . . . . . . . . . . . . (10.2)% (16.0)% (12.6)% (10.4)%
========== ========== ========= ==========
</TABLE>
THREE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO THREE MONTHS ENDED FEBRUARY
28, 1999
NET SALES. Net sales consist primarily of sales of systems, die carriers,
test fixtures, upgrades and spare parts and revenues from service contracts.
The Company recognizes revenue upon shipment of product. Net sales increased
to $6.6 million in the three months ended February 29, 2000 from $4.4 million
in the three months ended February 28, 1999, an increase of 50.5%. The
increase in net sales resulted primarily from increased shipments of dynamic
burn-in, MTX, and DiePak products. The Company anticipates that net sales in
the fourth quarter of fiscal 2000 will exceed net sales in the third 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
8
<PAGE>
costs, and overhead from operations. Gross profit increased to $2.3 million
in the three months ended February 29, 2000 from $1.3 million in the three
months ended February 28, 1999, an increase of 75.9%. The increase in gross
profit was due to the increases in net sales and gross profit margin. Gross
profit margin increased to 34.3% in the three months ended February 29, 2000
from 29.3% in the three months ended February 28, 1999. The increase in gross
profit margin was primarily the result of a change in product mix, resulting
in lower material costs as a percentage of sales, and improvement in
production efficiencies due to the higher volume of sales, partially offset by
an increase in inventory reserves.
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 $1.9 million in the three months ended February 29, 2000
from $1.7 million in the three months ended February 28, 1999, an increase of
10.4%. The increase in SG&A expenses was primarily due to increases in
employment-related expenses, product support expenses, and commissions to
outside sales representatives. As a percentage of net sales, SG&A expenses
decreased to 29.0% in the three months ended February 29, 2000 from 39.5% in
the three months ended February 28, 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 $1.3 million in the three months ended February 29, 2000 from
$1.2 million in the three months ended February 28, 1999, an increase of
11.0%. The increase in R&D expenses was primarily due to an increase in
engineering project material expenses. As a percentage of net sales, R&D
expenses decreased to 19.7% in the three months ended February 29, 2000 from
26.7% in the three months ended February 28, 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 Defense Advanced Research Projects Agency
("DARPA"), a U.S. government agency, of costs incurred in the Company's wafer-
level burn-in development project. R&D - DARPA increased to $350,000 in the
three months ended February 29, 2000 from $319,000 in the three months ended
February 28, 1999, an increase of 9.7%. Payments by DARPA depend on
satisfaction of development milestones, and the level of payments may vary
significantly from quarter to quarter. As of February 29, 2000, there was an
outstanding payment due from DARPA of $350,000. The Company does not expect
to record any R&D - DARPA credit in the fourth quarter of fiscal 2000.
INTEREST INCOME. Interest income decreased to $234,000 in the three
months ended February 29, 2000 from $273,000 in the three months ended
February 28, 1999, a decrease of 14.3%. The decrease in interest income was
related to a lower level of cash and investments.
OTHER INCOME (EXPENSE), NET. Other expense, net was $409,000 in the three
months ended February 29, 2000, primarily due to foreign currency exchange
losses recorded by the Company and its subsidiaries. Other income, net was
$138,000 in the three months ended February 28, 1999, primarily due to foreign
currency exchange gains recorded by the Company and its subsidiaries.
INCOME TAX BENEFIT. Income tax benefit decreased to $109,000 in the three
months ended February 29, 2000 from $195,000 in the three months ended
February 28, 1999, a decrease of 44.1%. The income tax benefit was primarily
due to the tax benefit recorded as a result of losses incurred in the
9
<PAGE>
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 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 may not approximate the statutory tax rates of the
jurisdictions in which the Company operates because no tax benefit is being
recorded for losses in the Company's Japanese subsidiary.
NINE MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
1999
NET SALES. Net sales increased to $17.3 million in the nine months ended
February 29, 2000 from $15.0 million in the nine months ended February 28,
1999, an increase of 15.1%. The increase in net sales resulted primarily from
increased shipments of MTX products, partially offset by reduced shipments of
dynamic burn-in products.
GROSS PROFIT. Gross profit decreased to $4.8 million in the nine months
ended February 29, 2000 from $5.0 million in the nine months ended February
28, 1999, a decrease of 4.2%. Gross profit margin decreased to 27.5% in the
nine months ended February 29, 2000 from 33.1% in the nine months ended
February 28, 1999. The decrease in gross profit and gross profit margin was
primarily the result of increases in provisions for warranty and inventory
reserves related to an initial test fixture design, and a higher proportion of
sales of lower margin MTX products.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $5.9
million in the nine months ended February 29, 2000 from $5.4 million in the
nine months ended February 28, 1999, an increase of 9.0%. The increase in
SG&A expenses was primarily due to increases in product support expenses,
employment-related expenses and commissions to outside sales representatives.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $4.0 million in the
nine months ended February 29, 2000 from $3.7 million in the nine months ended
February 28, 1999, an increase of 6.6%. The increase in R&D expenses was
primarily due to an increase in engineering project material expenses.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA
decreased to $866,000 in the nine months ended February 29, 2000 from $891,000
in the nine months ended February 28, 1999, a decrease of 2.8%. Payments by
DARPA depend on satisfaction of development milestones, and the level of
payments may vary significantly from quarter to quarter.
INTEREST INCOME. Interest income decreased to $774,000 in the nine months
ended February 29, 2000 from $911,000 in the nine months ended February 28,
1999, a decrease of 15.0%. The decrease in interest income was related to a
lower level of cash and investments.
OTHER INCOME (EXPENSE), NET. Other income, net decreased to $257,000 in
the nine months ended February 29, 2000 from $401,000 in the nine months ended
February 28, 1999, a decrease of 35.9%. The decrease in other income was
primarily due to the decrease in currency exchange gains recorded by the
Company and its subsidiaries in the nine months ended February 29, 2000
compared with the nine months ended February 28, 1999.
INCOME TAX BENEFIT. Income tax benefit increased to $1.0 million in the
nine months ended February 29, 2000 from $387,000 in the nine months ended
February 28, 1999, an increase of 159.4%. The income tax benefit was
10
<PAGE>
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 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 may not approximate the statutory tax rates of the
jurisdictions in which the Company operates because no tax benefit is being
recorded for losses in the Company's Japanese subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the cash flow generated
from the Company's August 1997 initial public offering, resulting in net
proceeds to the Company of approximately $26.8 million. As of February 29,
2000, the Company had $15.2 million in cash and short-term investments.
Net cash used in operating activities was approximately $5.9 million and
$1.3 million for the nine months ended February 29, 2000 and February 28,
1999, respectively. For the nine months ended February 29, 2000, net cash
used in operating activities was due primarily to an increase in accounts
receivable of $3.8 million and the net loss of $2.2 million, partially offset
by an increase in accounts payable of $1.2 million. For the nine months ended
February 28, 1999, net cash used in operating activities was due primarily to
the net loss of $1.6 million, a decrease in accrued expenses and deferred
revenue of $1.3 million and a decrease in accounts payable of $1.3 million,
partially offset by a decrease in inventory of $1.7 million and a decrease in
accounts receivable of $1.3 million.
Net cash provided by investing activities was approximately $5.0 million
and $299,000 for the nine months ended February 29, 2000 and February 28,
1999, respectively. The cash provided by investing activities during both
periods was primarily due to the sale of investments.
Financing activities used cash of approximately $7,000 in the nine months
ended February 29, 2000 and provided cash of $82,000 in the nine months ended
February 28, 1999. The cash used by financing activities during the nine
months ended February 29, 2000 was primarily due to the long-term debt
principal payments and the Company's repurchase of 28,200 of its outstanding
common shares at an average price of $4.80, partially offset by the proceeds
from issuance of common stock and exercise of stock options. The cash
provided by financing activities during the nine months ended February 28,
1999 was primarily due to the increase in long-term debt of the Company's
subsidiary in Japan and proceeds from exercise of stock options, partially
offset by the Company's repurchase of 129,500 of its outstanding common shares
at an average price of $3.71.
As of February 29, 2000, the Company had working capital of $30.1 million,
compared with $31.0 million as of May 31, 1999. Working capital consists of
cash and cash equivalents, short-term cash deposits, accounts receivable,
inventory and other current assets, less current liabilities. The decrease in
working capital was primarily due to a decrease in cash and short-term
investments, partially offset by an increase in accounts receivable.
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
11
<PAGE>
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. Through February 29, 2000, the Company has repurchased
311,700 shares at an average price of $4.10.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
Any such transactions, if consummated, may use a portion of the Company's
working capital or require the issuance of equity. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions.
The Company anticipates that the existing cash balance together with
anticipated cash provided by operations are adequate to meet its working
capital and capital equipment requirements through fiscal 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This report on Form 10-Q contains forward-looking statements within the
meaning of the Securities Act of 1933, as amended and the Securities Exchange
Act of 1934, as amended. The Company's future results of operations could
vary significantly from the results anticipated by such forward-looking
statements as a result of various factors, including those set forth as
follows and elsewhere in this quarterly report on Form 10-Q.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and
expects to continue to experience significant fluctuations in its quarterly
and annual operating results. The Company's future operating results will
depend upon a variety of factors, including the timing of significant orders,
the mix of products sold, changes in pricing by the Company, its competitors,
customers or suppliers, market acceptance of new products and enhanced
versions of the Company's products, capital spending patterns by customers,
the Company's ability to produce systems and products in volume and meet
customer requirements. The Company's gross margins have varied and will
continue to vary based on a variety of factors, including the mix of products
sold, sales volume, and the amount of products sold under volume purchase
arrangements, which tend to have lower selling prices. Accordingly, past
performance may not be indicative of future performance.
DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. The Company
derives a substantial portion of its revenues from the sale of a relatively
small number of systems which typically range in selling price from
approximately $100,000 to $1.0 million. As a result, the loss or deferral of
a limited number of system sales could have a material adverse effect on the
Company's net sales and operating results in a particular period. A delay or
reduction in shipments near the end of a particular quarter, due, for example,
to unanticipated shipment reschedulings, cancellations or deferrals by
customers, customer credit issues, unexpected manufacturing difficulties
experienced by the Company, or delays in deliveries by suppliers, could cause
net sales in a particular quarter to fall significantly below the Company's
expectations. Requested shipment delays by certain customers negatively
impacted the Company's net sales in fiscal 1999.
RECENT OPERATING LOSSES. The Company incurred an operating loss of $4.6
million in fiscal 1999. The Company also incurred operating losses of $2.1,
12
<PAGE>
$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 to Siemens (the semiconductor group of
Siemens is now known as Infineon). 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 an operating loss in fiscal
1999 and the first nine months of fiscal 2000. There can be no assurance that
the Company's net sales will continue to rebound or that the Company will soon
return to profitability.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. The Company's strategy
depends, in part, upon its ability to persuade potential customers that the
MTX system can successfully perform a significant portion of final test
functions and that transferring such tests to MTX systems will reduce their
overall capital and test costs. The Company experienced a decline in
shipments of MTX products in fiscal 1999 compared with fiscal 1998. Although
the Company received new production orders for MTX systems in the first
quarter of fiscal 2000, 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.
DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF
DIEPAK CARRIER. The Company's DiePak strategy depends upon increased industry
acceptance of bare die as an alternative to packaged die as well as acceptance
of the Company's DiePak products. The failure of the bare die market to
expand or of the DiePak carrier to achieve broad market acceptance would have
a material adverse effect on the Company's business, financial condition and
operating results.
CUSTOMER CONCENTRATION. Sales to the Company's five largest customers
accounted for approximately 62.7%, 75.2% and 69.2% of its net sales in fiscal
1999, 1998 and 1997, respectively. Sales to the Company's five largest
customers accounted for approximately 65.8% of its net sales in the nine
months ended February 29, 2000. During fiscal 1999, 1998 and 1997, Infineon
(formerly the semiconductor group of Siemens) accounted for 21.9%, 47.0% and
55.7% of the Company's net sales, respectively. During fiscal 1999 and 1998,
Motorola accounted for 11.9% and 12.8% of the Company's net sales,
respectively. During fiscal 1999, Texas Instruments accounted for 18.1% of
net sales. No other customers represented more than 10% of the Company's net
sales for fiscal 1999, 1998 or 1997. The loss of or reduction or delay in
orders from a significant customer, or a delay in collecting or failure to
collect accounts receivable from a significant customer could adversely affect
the Company's business, financial condition and operating results.
LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion
of the Company's net sales were derived from the sale of burn-in systems. The
market for burn-in systems is mature and estimated to be less than $100
million per year. There can be no assurance that the market for burn-in
systems will grow, and sales of the Company's burn-in products could decline.
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 involves a significant commitment of capital. The
loss of individual orders due to the lengthy sales and evaluation cycle, or
delays in the sale of even a limited number of systems could have a material
adverse effect on the Company's business, operating results and financial
condition and, in particular, could contribute to significant fluctuations in
operating results on a quarterly basis.
13
<PAGE>
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 72.7%,
70.5% and 92.5% of the Company's net sales for fiscal 1999, 1998 and 1997,
respectively, were attributable to sales to customers for delivery outside of
the United States. A substantial portion of the Company's sales has been in
Asia. In recent years, turmoil in the Asian financial markets 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 fallen dramatically and will likely do so again in
the future. 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 further delay capital spending plans. Such developments
could have a material adverse affect on the Company's business, financial
condition and results of operations.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION.
The semiconductor equipment industry is subject to rapid technological change
and new product introductions and enhancements. The Company's ability to
remain competitive will depend in part upon its ability to develop new
products and to introduce these products at competitive prices and on a timely
and cost-effective basis. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products
that satisfy market demand. Any such failure would materially adversely
affect the Company's business, financial condition and results of operations.
The Company has experienced significant delays from time to time in the
introduction of, and technical and manufacturing difficulties with, certain of
its products and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new products, and
there can be no assurance that the Company will not encounter such
difficulties in the future. The Company's inability to complete product
development, or to manufacture and ship products in volume and in time to meet
customer requirements would materially adversely affect the Company's
business, financial condition and results of operations.
UNCERTAINTIES RELATING TO DARPA FUNDING FOR RESEARCH AND DEVELOPMENT. In
1994, the Company entered into a cost-sharing agreement with DARPA, a U.S.
government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides
for potential payments by DARPA totaling up to $6.5 million. The Company has
completed certain development milestones and received DARPA payment of $5.6
million through February 29, 2000. As of February 29, 2000, there was an
outstanding payment due from DARPA of $350,000. Payments by DARPA depend on
satisfaction of development milestones, and DARPA has the right to terminate
project funding at any time. If DARPA funding were discontinued and the
Company continued the project, the Company's operating results would be
adversely affected. There also can be no assurance that the development
project will result in any marketable products.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants. New
product introductions by the Company's competitors or by new market entrants
could cause a decline in sales or loss of market acceptance of the Company's
existing products. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices that could
adversely affect the Company's business, financial condition and operating
results. Competing suppliers of burn-in and functional test systems include
Ando Corporation, Japan Engineering Company and Reliability Incorporated. In
addition, suppliers of memory test equipment, including Advantest Corporation
and Teradyne, Inc., may seek to offer competitive parallel test systems in the
future. The Company's MAX dynamic and ATX monitored and dynamic burn-in
systems increasingly have faced and are expected to continue to face severe
competition, especially from local, low cost manufacturers. Also, the MAX
14
<PAGE>
dynamic burn-in system faces severe competition from manufacturers of
monitored burn-in systems. The Company's DiePak products face significant
competition. The Company believes that several companies, including Yamaichi
and Texas Instruments, have developed or are developing products that compete
with the Company's DiePak products. The DiePak products also face severe
competition from other alternative test solutions. The Company's test fixture
products face numerous competitors. The Company has granted a royalty-bearing
license to one company to make Performance Test Boards ("PTBs") for use with
its MTX systems. Sales of PTBs by licensees result in royalties to the
Company but reduce the Company's own sales of PTBs.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF
CANCELLATIONS AND RESCHEDULINGS. The semiconductor and semiconductor
equipment industries in general, and the market for DRAMs and other memories
in particular, historically have been highly volatile and have experienced
periodic downturns and slowdowns. These downturns and slowdowns have
adversely affected the Company's operating results in the past and in fiscal
1998 and 1999. A large portion of the Company's net sales is attributable to
a few customers and therefore a reduction in purchases by one or more
customers could materially adversely affect the Company's financial results.
Semiconductor equipment companies may experience a significant rate of
cancellations and reschedulings of purchase orders, as was the case in the
industry in late 1995, early 1996, and 1998. There can be no assurance that
the Company will not be materially adversely affected by future cancellations
and reschedulings.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company's MTX, MAX and ATX systems contain several components, including
environmental chambers, power supplies and certain ICs, which are currently
supplied by only one or a limited number of suppliers. The DiePak products
include an interconnect substrate which has primarily been supplied by Nitto
Denko Corporation. The Company has qualified an alternate supplier for the
DiePak substrate. 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.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock has been, and may continue to be, extremely volatile. The
Company believes that factors such as announcements of developments related to
the Company's business, fluctuations in the Company's operating results,
failure to meet securities analysts' expectations, general conditions in the
semiconductor and semiconductor equipment industries and the worldwide economy
could cause the price of the Company's Common Stock to fluctuate
substantially. In addition, in recent years the stock market in general, and
the market for small capitalization and high technology stocks in particular,
has experienced extreme price fluctuations which have often been unrelated to
the operating performance of affected companies. Such fluctuations could
adversely affect the market price of the Company's Common Stock.
MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it
must expand its operations. Such expansion will place a significant strain on
the Company's administrative, operational and financial resources. Such
expansion will result in a continuing increase in the responsibility placed
upon management personnel and will require development or enhancement of
operational, managerial and financial systems and controls. If the Company is
unable to manage the expansion of its operations effectively, the Company's
business, financial condition and operating results will be materially and
adversely affected.
15
<PAGE>
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the continued service of Rhea Posedel, its President
and Chief Executive Officer, as well as other executive officers and key
employees. The loss of the services of any of its executive officers or a
group of key employees could have a material adverse effect on the Company's
business, financial condition and operating results. The Company's future
success will depend in significant part upon its ability to attract and retain
highly skilled technical, management, sales and marketing personnel.
Competition for such personnel in the semiconductor equipment industry is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The Company's inability to attract
and retain the executive management and other key personnel it requires could
have a material adverse effect on the Company's business, financial condition
and operating results.
INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT. The Company's ability
to compete successfully is dependent in part upon its ability to protect its
proprietary technology and information. Although the Company attempts to
protect its proprietary technology through patents, copyrights, trade secrets
and other measures, there can be no assurance that these measures will be
adequate or that competitors will not be able to develop similar technology
independently. Litigation may be necessary to enforce or determine the
validity and scope of the Company's proprietary rights, and there can be no
assurance that the Company's intellectual property rights, if challenged, will
be upheld as valid. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business, financial condition and operating results, regardless of
the outcome of the litigation.
There are no pending claims against the Company regarding infringement of
any patents or other intellectual property rights of others. However, the
Company may receive, in the future, communications from third parties
asserting intellectual property claims against the Company. There can be no
assurance that any such claim made in the future will not result in
litigation, which could involve significant expense to the Company, and, if
the Company is required or deems it appropriate to obtain a license relating
to one or more products or technologies, there can be no assurance that the
Company would be able to do so on commercially reasonable terms, or at all.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose
various controls on the use, storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used in the Company's operations. The Company believes that its activities
conform in all material respects to current environmental and land use
regulations applicable to its operations and its current facilities and that
it has obtained environmental permits necessary to conduct its business.
Nevertheless, the failure to comply with current or future regulations could
result in substantial fines being imposed on the Company, suspension of
production, alteration of its manufacturing processes or cessation of
operations. Such regulations could require the Company to acquire expensive
remediation equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
16
<PAGE>
Item 3. 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 February 29, 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 Japanese Yen. Since the price is determined at
the time a purchase order is accepted, the Company is exposed to the risks of
fluctuations in the yen-dollar exchange rate during the lengthy period from
purchase order to ultimate payment. This exchange rate risk is partially
offset to the extent 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 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 $410,000.
17
<PAGE>
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following information is provided as an amendment to the initial
report on Form 10-K "Use of Proceeds from the IPO," regarding the use of
proceeds from the sale of securities under the Company's Registration
Statement Form S-1 (333-28987), which was declared effective on August 18,
1997. From the effective date of the Registration Statement, the net proceeds
have been used for the following purposes:
Purchase and installation of machinery and equipment $ 2,075,118
Repayment of indebtedness 4,455,179
Working capital 5,937,000
Temporary investments, including cash and cash equivalents 14,365,000
------------
Total $26,832,297
============
All of the foregoing expenses were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons owning
ten percent (10%) or more of the Company's Common Stock; or (iii) affiliates
of the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company
during the quarter ended February 29, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: April 13, 2000 /s/ RHEA J. POSEDEL
---------------
Rhea J. Posedel
President and Chief Executive Officer
Date: April 13, 2000 /s/ GARY L. LARSON
--------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
19
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<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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