FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 28, 2001. 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. N/A Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period as the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (Item 1) YES X NO --- --- (Item 2) YES X NO --- --- Number of shares of Common Stock, $0.01 par value, outstanding at February 28, 2001 was 7,104,588. 1
FORM 10-Q FOR THE QUARTER ENDED FEBRUARY 28, 2001 INDEX PART I. FINANCIAL INFORMATION ITEM 1. Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of February 28, 2001 and May 31, 2000 . . . . . . . . . . . 3 Condensed Consolidated Statements of Operations for the three months and nine months ended February 28, 2001 and February 29, 2000. . . . . . . . . . . . . . . . . . . . 4 Condensed Consolidated Statements of Cash Flows for the nine months ended February 28, 2001 and February 29, 2000. . . . . . . . . . . . . . . . . . . . 5 Notes to Condensed Consolidated Financial Statements. . . . . 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . 9 ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 18 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 20 ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 20 ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 20 ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 20 ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 20 SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2
PART I. FINANCIAL STATEMENTS Item 1. CONSOLIDATED FINANCIAL STATEMENTS AEHR TEST SYSTEMS CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> February 28, May 31, 2001 2000 (unaudited) ----------- ----------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . $12,662 $ 8,323 Short-term investments. . . . . . . . . . . . . 5,763 7,365 Accounts receivable . . . . . . . . . . . . . . 6,822 6,294 Inventories . . . . . . . . . . . . . . . . . . 9,758 11,183 Prepaid expenses and other. . . . . . . . . . . 3,168 3,277 ----------- ----------- Total current assets . . . . . . . . . . . . 38,173 36,442 Property and equipment, net . . . . . . . . . . . 2,236 2,613 Long-term investments . . . . . . . . . . . . . . 516 580 Other assets, net . . . . . . . . . . . . . . . . 1,113 1,094 ----------- ----------- Total assets . . . . . . . . . . . . . . . . $42,038 $40,729 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term bank debt. . . . . $ -- $ 143 Accounts payable. . . . . . . . . . . . . . . . 2,188 2,989 Accrued expenses. . . . . . . . . . . . . . . . 4,080 2,873 Deferred revenue. . . . . . . . . . . . . . . . 51 37 ----------- ----------- Total current liabilities . . . . . . . . . . 6,319 6,042 Long-term bank debt, net of current portion . . . -- 297 Deferred revenue. . . . . . . . . . . . . . . . . 44 39 Deferred lease commitment . . . . . . . . . . . . 122 46 ----------- ----------- Total liabilities . . . . . . . . . . . . . . 6,485 6,424 ----------- ----------- Shareholders' equity: Common stock, $0.01 par value: Issued and outstanding: 7,105 shares and 6,906 shares at February 28, 2001 and May 31, 2000, respectively . . . . . . . . . 71 69 Additional paid-in capital . . . . . . . . . . 36,090 35,332 Accumulated deficit . . . . . . . . . . . . . . (2,144) (2,660) Net unrealized gain (loss) on investments . . . 31 (13) Cumulative translation adjustment . . . . . . . 1,505 1,577 ----------- ----------- Total shareholders' equity . . . . . . . . . 35,553 34,305 ----------- ----------- Total liabilities and shareholders' equity. . $42,038 $40,729 =========== =========== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 3
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 28, February 29, February 28, February 29, 2001 2000 2001 2000 ---------- ---------- --------- ---------- <S> <C> <C> <C> <C> Net sales. . . . . . . . . . . . . . . . . . . $ 7,818 $ 6,644 $25,373 $17,294 Cost of sales. . . . . . . . . . . . . . . . . 5,114 4,368 16,006 12,532 ---------- ---------- --------- ---------- Gross profit . . . . . . . . . . . . . . . . . 2,704 2,276 9,367 4,762 ---------- ---------- --------- ---------- Operating expenses: Selling, general and administrative. . . . . 1,757 1,927 5,659 5,874 Research and development . . . . . . . . . . 1,266 1,308 3,866 3,962 Research and development cost reimbursement - DARPA. . . . . . . . . . . (300) (350) (600) (866) ---------- ---------- --------- ---------- Total operating expenses . . . . . . . . 2,723 2,885 8,925 8,970 ---------- ---------- --------- ---------- Income (loss) from operations. . . . . . . . . (19) (609) 442 (4,208) Interest income . . . . . . . . . . . . . . . 276 234 739 774 Interest expense . . . . . . . . . . . . . . . (1) (3) (7) (9) Other income (expense), net . . . . . . . . . (16) (409) (90) 257 ---------- ---------- --------- ---------- Income (loss) before income taxes. . . . . . . 240 (787) 1,084 (3,186) Income tax expense (benefit) . . . . . . . . . 98 (109) 568 (1,004) ---------- ---------- --------- ---------- Net income (loss). . . . . . . . . . . . . . . $ 142 $ (678) $ 516 $(2,182) ---------- ---------- --------- ---------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments income (expense). . . .. . . . 16 231 (72) (35) Unrealized holding gains (losses) arising during period. . . . . . . . . . . . . . . 44 50 44 47 ---------- ---------- --------- ---------- Comprehensive income (loss). . . . . . . . . . $ 202 $ (397) $ 488 $(2,170) ========== ========== ========= ========== Net income (loss) per share (basic). . . . . . $ 0.02 $ (0.10) $ 0.07 $ (0.32) Net income (loss) per share (diluted). . . . . $ 0.02 $ (0.10) $ 0.07 $ (0.32) Shares used in per share calculation: Basic. . . . . . . . . . . . . . . . . . . . 7,138 6,795 7,060 6,788 Diluted. . . . . . . . . . . . . . . . . . . 7,186 6,795 7,205 6,788 </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 4
AEHR TEST SYSTEMS AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended ---------------------- February 28, February 29, 2001 2000 ---------- ---------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) . . . . . . . . . . . . . . . . . . . $ 516 $(2,182) Adjustments to reconcile net income (loss) to net cash Provided by (used in) operating activities: Provision for doubtful accounts. . . . . . . . . . . (11) 36 Depreciation and amortization. . . . . . . . . . . . 482 594 Deferred income taxes. . . . . . . . . . . . . . . . 89 16 Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . (616) (3,822) Inventories . . . . . . . . . . . . . . . . . . . 1,316 (578) Prepaid expenses and other. . . . . . . . . . . . 18 (164) Accounts payable. . . . . . . . . . . . . . . . . (485) 1,169 Accrued expenses and deferred revenue . . . . . . 1,274 (1,024) Deferred lease commitment . . . . . . . . . . . . 81 18 ---------- ---------- Net cash provided by (used in) operating activities . . . . . . . . . . . . 2,664 (5,937) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of short-term investments . . . . . . . . . . . . 1,602 4,063 Sale of long-term investments . . . . . . . . . . . . . 108 2,149 Acquisition of property and equipment . . . . . . . . . (71) (993) Increase in other assets. . . . . . . . . . . . . . . . (27) (211) ---------- ---------- Net cash provided by investing activities . . . 1,612 5,008 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term debt and capital lease principal payments . . (431) (132) Proceeds from issuance of common stock and exercise of stock options . . . . . . . . . . . . . . 1,187 260 Repurchase of common stock. . . . . . . . . . . . . . . (427) (135) ---------- ---------- Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . 329 (7) ---------- ---------- Effect of exchange rates on cash. . . . . . . . . . . . (266) 29 ---------- ---------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 4,339 (907) Cash and cash equivalents, beginning of period. . . . . 8,323 5,336 ---------- ---------- Cash and cash equivalents, end of period. . . . . . . . $12,662 $ 4,429 ========== ========== </TABLE> The accompanying notes are an integral part of these condensed consolidated financial statements. 5
AEHR TEST SYSTEMS NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED FEBRUARY 28, 2001 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed 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, 2000. 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
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 28, February 29, February 28, February 29, 2001 2000 2001 2000 ---------- ---------- --------- ---------- (in thousands, except per share amounts) (unaudited) <S> <C> <C> <C> <C> Basic EPS: Net income (loss) . . . . . . . . . . $ 142 $ (678) $ 516 $(2,182) ========== ========== ========== ========== Denominator: Weighted average common shares outstanding . . . . . . . . . 7,138 6,795 7,060 6,788 ========== ========== ========== ========== Net income (loss) per share (basic). . $ 0.02 $(0.10) $ 0.07 $ (0.32) ========== ========== ========== ========== Diluted EPS: Denominator: Weighted average common shares outstanding . . . . . . . . . 7,138 6,795 7,060 6,788 Options . . . . . . . . . . . . . . . 48 -- 145 -- ---------- ---------- --------- ---------- Total Shares . . . . . . . . . . . . . 7,186 6,795 7,205 6,788 ========== ========== ========== ========== Net income (loss) per share (diluted). $ 0.02 $(0.10) $ 0.07 $ (0.32) ========== ========== ========== ========== </TABLE> 3. INVENTORIES Inventories are comprised of the following (in thousands): <TABLE> <CAPTION> February 28, May 31, 2001 2000 (unaudited) ----------- ----------- <S> <C> <C> Raw materials and sub-assemblies $ 4,300 $ 4,164 Work in process 4,895 6,299 Finished goods 563 720 ----------- ----------- $ 9,758 $11,183 =========== =========== </TABLE> 7
4. 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> Three months ended February 28, 2001: Net sales...................... $6,647 $1,575 $355 $(759) $7,818 Portion of U.S. net sales from export sales............ 3,758 -- -- -- 3,758 Income (loss) from operations.. (51) 36 (54) 50 (19) Identifiable assets............ 48,197 3,009 909 (10,077) 42,038 Long-lived assets.............. 1,813 377 46 -- 2,236 Nine months ended February 28, 2001: Net sales...................... $22,750 $3,731 $1,600 $(2,708) $25,373 Portion of U.S. net sales from export sales............ 14,200 -- -- -- 14,200 Income (loss) from operations.. 432 (161) 175 (4) 442 Identifiable assets............ 48,197 3,009 909 (10,077) 42,038 Long-lived assets.............. 1,813 377 46 -- 2,236 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. 5. 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 2002. 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. 8
Item 2. 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 28, February 29, February 28, February 29, 2001 2000 2001 2000 ---------- ---------- --------- ---------- <S> <C> <C> <C> <C> Net sales. . . . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales. . . . . . . . . . . . . . . . . 65.4 65.7 63.1 72.5 ---------- ---------- --------- -------- Gross profit . . . . . . . . . . . . . . . . . 34.6 34.3 36.9 27.5 ---------- ---------- --------- -------- Operating expenses: Selling, general and administrative. . . . . 22.5 29.0 22.3 33.9 Research and development . . . . . . . . . . 16.2 19.7 15.2 22.9 Research and development cost reimbursement - DARPA. . . . . . . . . . . (3.9) (5.2) (2.3) (5.0) ---------- ---------- --------- -------- Total operating expenses . . . . . . . . 34.8 43.5 35.2 51.8 ---------- ---------- --------- -------- Income (loss) from operations. . . . . . . . . (0.2) (9.2) 1.7 (24.3) Interest income . . . . . . . . . . . . . . . 3.5 3.5 2.9 4.5 Interest expense . . . . . . . . . . . . . . . -- -- -- (0.1) Other income (expense), net . . . . . . . . . (0.2) (6.1) (0.4) 1.5 ---------- ---------- --------- -------- Income (loss) before income taxes. . . . . . . 3.1 (11.8) 4.2 (18.4) Income tax expense (benefit) . . . . . . . . . 1.3 (1.6) 2.2 (5.8) ---------- ---------- --------- -------- Net income (loss). . . . . . . . . . . . . . . 1.8 % (10.2)% 2.0 % (12.6)% ========== ========== ========= ======== </TABLE> THREE MONTHS ENDED FEBRUARY 28, 2001 COMPARED TO THREE MONTHS ENDED FEBRUARY 29, 2000 NET SALES. Net sales consist primarily of sales of systems, die carriers, test fixtures, upgrades and spare parts and revenues from service contracts. 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 and installation is recorded at the time the products are shipped. Actual warranty and installation 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. Net sales increased to $7.8 million in the three months ended February 28, 2001 from $6.6 million in the three months ended February 29, 2000, an increase of 17.7%. The increase in net sales resulted primarily from an increase in shipments of dynamic burn-in products of approximately $1.8 million, partially offset by a decrease in shipments of Die products of approximately $524,000. The Company anticipates that net sales in the fourth quarter of fiscal 2001 will be down significantly from net sales in the third quarter of fiscal 2001. 9
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 $2.7 million in the three months ended February 28, 2001 from $2.3 million in the three months ended February 29, 2000, an increase of 18.8%. Gross profit margin increased to 34.6% in the three month ended February 28, 2001 from 34.3% in the three month ended February 29, 2000. The increase in gross profit margin was primarily the result of a decrease in the provision for inventory reserves, partially offset by an increase in the provision for warranty. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative ("SG&A") expenses consist primarily of salaries and related costs of employees, customer support costs, commission expenses to independent sales representatives, product promotion and other professional services. SG&A expenses decreased to $1.8 million in the three months ended February 28, 2001 from $1.9 million in the three months ended February 29, 2000, a decrease of 8.8%. The decrease in SG&A expenses was primarily due to a decrease in product support expenses. As a percentage of net sales, SG&A expenses decreased to 22.5% in the three months ended February 28, 2001 from 29.0% in the three months ended February 29, 2000, 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 were unchanged at $1.3 million in the three months ended February 28, 2001 and in the three months ended February 29, 2000. As a percentage of net sales, R&D expenses decreased to 16.2% in the three months ended February 28, 2001 from 19.7% in the three months ended February 29, 2000, 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 decreased to $300,000 in the three months ended February 28, 2001 from $350,000 in the three months ended February 29, 2000, a decrease of 14.3%. Payments by DARPA depend on satisfaction of development milestones, and the level of payments may vary significantly from quarter to quarter. The two final milestones of this agreement were approved and paid during the third quarter of fiscal 2001. It is not expected that there will be any additional R&D - DARPA credits recorded for this project after the third quarter of fiscal 2001. There can be no assurance that this development project will result in any marketable products. INTEREST INCOME. Interest income increased to $276,000 in the three months ended February 28, 2001 from $234,000 in the three months ended February 29, 2000, an increase of 17.9%. The increase in interest income was primarily related to a higher average rate of return on investments. INTEREST EXPENSE. Interest expense decreased to $1,000 in the three months ended February 28, 2001 from $3,000 in the three months ended February 29, 2000, a decrease of 66.7%. The decrease in interest expense was primarily related to a lower level of outstanding debt. OTHER INCOME (EXPENSE), NET. Other expense, net was $16,000 in the three months ended February 28, 2001, compared with other expense, net of $409,000 in the three months ended February 29, 2000, primarily due to foreign currency exchange losses recorded by the Company and its subsidiaries in the three months ended February 28, 2001 being lower than in the three months ended February 29, 2000. 10
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $98,000 in the three months ended February 28, 2001, compared with income tax benefit of $109,000 in the three months ended February 29, 2000. The income tax expense in the three months ended February 28, 2001 was primarily due to the tax expense recorded as a result of income earned in the Company's U.S. operations. The income tax benefit in the three months ended February 29, 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 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 primarily because no tax benefit is being recorded for losses in the Company's Japanese subsidiary. NINE MONTHS ENDED FEBRUARY 28, 2001 COMPARED TO NINE MONTHS ENDED FEBRUARY 29, 2000 NET SALES. Net sales increased to $25.4 million in the nine months ended February 28, 2001 from $17.3 million in the nine months ended February 29, 2000, an increase of 46.7%. The increase in net sales resulted primarily from an increase in shipments of dynamic burn-in products of approximately $12.4 million, partially offset by a decrease in shipments of MTX products of approximately $4.1 million. GROSS PROFIT. Gross profit increased to $9.4 million in the nine months ended February 28, 2001 from $4.8 million in the nine months ended February 29, 2000, an increase of 96.7%. Gross profit margin increased to 36.9% in the nine months ended February 28, 2001 from 27.5% in the nine months ended February 29, 2000. 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 net sales, and a decrease in provision for inventory reserves. SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $5.7 million in the nine months ended February 28, 2001 from $5.9 million in the nine months ended February 29, 2000, a decrease of 3.7%. The decrease in SG&A expenses was primarily due to decreases in product support expenses and commissions paid to outside sales representatives of $209,000 and $175,000, respectively, partially offset by an increase in employment-related expenses of $168,000. As a percentage of net sales, SG&A expenses decreased to 22.3% in the nine months ended February 28, 2001 from 33.9% in the nine months ended February 29, 2000, reflecting higher net sales. RESEARCH AND DEVELOPMENT. R&D expenses decreased to $3.9 million in the nine months ended February 28, 2001 from $4.0 million in the nine months ended February 29, 2000, a decrease of 2.4%. The decrease in R&D expenses was primarily due to a decrease in engineering project material expenses. As a percentage of net sales, R&D expenses decreased to 15.2% in the nine months ended February 28, 2001 from 22.9% in the nine months ended February 29, 2000, reflecting higher net sales. RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA decreased to $600,000 in the nine months ended February 28, 2001 from $866,000 in the nine months ended February 29, 2000, a decrease of 30.7%. 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 $739,000 in the nine months ended February 28, 2001 from $774,000 in the nine months ended February 29, 2000, a decrease of 4.5%. The decrease in interest income was primarily related to a lower level of cash and investments, partially offset by a higher average rate of return on investments. 11
INTEREST EXPENSE. Interest expense decreased to $7,000 in the nine months ended February 28, 2001 from $9,000 in the nine months ended February 29, 2000, a decrease of 22.2%. The decrease in interest expense was primarily related to a lower level of outstanding debt. OTHER INCOME (EXPENSE), NET. Other expense, net was $90,000 in the nine months ended February 28, 2001, compared with other income, net of $257,000 in the nine months ended February 29, 2000, primarily due to foreign currency exchange losses recorded by the Company and its subsidiaries in the nine months ended February 28, 2001 versus foreign currency gains recorded in the nine months ended February 29, 2000. INCOME TAX EXPENSE (BENEFIT). Income tax expense was $568,000 in the nine months ended February 28, 2001, compared with income tax benefit of $1.0 million in the nine months ended February 29, 2000. The income tax expense in the nine months ended February 28, 2001 was primarily due to the tax expense recorded as a result of income earned in the Company's U.S. operations. The income tax benefit in the nine months ended February 29, 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 income tax rate did 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 28, 2001, the Company had $18.4 million in cash and short-term investments. Net cash provided by operating activities was approximately $2.7 million for the nine months ended February 28, 2001 and net cash used in operating activities was approximately $5.9 million for the nine months ended February 29, 2000. For the nine months ended February 28, 2001, net cash provided by operating activities was due primarily to a decrease in inventories of $1.3 million and an increase in accrued expenses and deferred revenue of $1.3 million. 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. Net cash provided by investing activities was approximately $1.6 million and $5.0 million for the nine months ended February 28, 2001 and February 29, 2000, respectively. The cash provided by investing activities during the nine months ended February 28, 2001 was primarily due to the sale of short-term investments. The cash provided by investing activities during the nine months ended February 29, 2000 was primarily due to the sale of both short-term and long-term investments. Financing activities provided cash of approximately $329,000 in the nine months ended February 28, 2001 and used cash of $7,000 in the nine months ended February 29, 2000. The cash provided by financing activities during the nine months ended February 28, 2001 was primarily due to proceeds from issuance of common stock and exercise of stock options, partially offset by the long-term debt principal payments and the Company's repurchase of 88,800 of its outstanding common shares at an average price of $4.80. 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. 12
As of February 28, 2001, the Company had working capital of $31.9 million, compared with $30.4 million as of May 31, 2000. Working capital consists of cash and cash equivalents, short-term investments, accounts receivable, inventory and other current assets, less current liabilities. The increase in working capital was primarily due to an increase in cash and short-term investments, a decrease in accounts payable and an increase in accounts receivable, partially offset by a decrease in inventories and an increase in accrued expenses. 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. Through February 28, 2001, the Company has repurchased 400,500 shares at an average price of $4.26. 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 2002. After fiscal 2002, 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 Special Note Regarding Forward Looking Statements This Quarterly Report on Form 10-Q (this "Report") contains forward- looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Discussions containing such forward-looking statements may be found in this section, as well as within this Report generally. In addition, when used in this Report, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties. Consequently, such forward-looking statements should be regarded solely as our current plans, estimates and beliefs. We do not undertake, and specifically decline, any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 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 13
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. RECENT OPERATING LOSSES. The Company incurred operating losses 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 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 2000. Given the current adverse market conditions, and the Company's lack of visibility related to the timing of any potential business rebound, the Company anticipates that net sales in the fourth quarter of fiscal 2001 will be down significantly from net sales in the third quarter of fiscal 2001. Although the Company returned to profitability in the first three quarters of fiscal 2001, there can be no assurance that the Company will remain profitable in the remaining quarter of fiscal 2001 or in later years. 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. 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 64.3%, 62.7% and 75.2% of its net sales in fiscal 2000, 1999 and 1998, respectively. Sales to the Company's five largest customers accounted for approximately 70.4% of its net sales in the nine months ended February 28, 2001. 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), 14
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 fiscal 2000, 1999 and 1998. 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. 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. 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 semiconductor market is causing most manufacturers to again 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 had completed certain development milestones and received DARPA payment of $6.5 million through February 28, 2001. This contract is considered complete and 15
it is not expected that there will be any additional R&D - DARPA credits related to this project recorded after the third quarter of fiscal 2001. There 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. 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 royalty-bearing licenses to two companies 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, 1999 and 2000. 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. The Company continues to see a reduction in spending by a number of the Company's customers. Some of the Company's customers have delayed shipments and a small number have canceled existing orders. Certain semiconductor manufacturers and industry analysts expect that this trend will continue at least through calendar year 2001. 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, 16
failure to meet securities analysts' expectations, general conditions in the semiconductor and semiconductor equipment industries and the worldwide economy could cause the price of the Company's Common Stock to fluctuate substantially. In addition, in recent years the stock market in general, and the market for small capitalization and high technology stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the market price of the Company's Common Stock. MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it must expand its operations. Such expansion will place a significant strain on the Company's administrative, operational and financial resources. Such expansion will result in a continuing increase in the responsibility placed upon management personnel and will require development or enhancement of operational, managerial and financial systems and controls. If the Company is unable to manage the expansion of its operations effectively, the Company's business, financial condition and operating results will be materially and adversely affected. DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant extent upon the continued service of Rhea Posedel, its 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 17
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. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain of the statements and subject areas contained herein in "Management's Discussion and Analysis of Financial Condition and Results of Operations" that are not based on historical or current facts deal with or may be impacted by potential future circumstances and developments. Such statements and the discussion of such subject areas involve, and are therefore qualified by, the inherent risks and uncertainties surrounding future expectations generally, and also may materially differ from the Company's actual future experience involving any one or more of such subject areas. The Company has attempted to identify, in context, certain of the factors that it currently believes may cause actual future experience and results to differ from current expectations regarding the relevant statement or subject area. The Company's operations and results may be subject to the effect of other risks and uncertainties in addition to the relevant qualifying factors identified herein, including but not limited to, cyclicality and seasonality in the industries to which the Company sells its products, the impact of competitive products and pricing, extraordinary fluctuations in the pricing and supply of the Company's raw materials, volatility of commodities markets, unanticipated developments in the areas of environmental compliance and other risks and uncertainties identified from time to time in the Company's reports filed with the Securities and Exchange Commission. 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 28, 2001. 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 had long-term debt that carried fixed interest rates but all debt was paid off during the third quarter of fiscal 2001. 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 either yen or dollars. Since the Japanese subsidiary's financial statements are based in yen and the Company's financial statements 18
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 $210,000. 19
PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. 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 $ 2,510,274 Repayment of indebtedness 4,455,179 Working capital 19,866,544 Temporary investments, including cash and cash equivalents -- ------------ Total $26,832,297 ============ Pursuant to a Preferred Shares Rights Agreement between Aehr Test Systems and U.S. Stock Transfer Corporation, as Rights Agent, entered into as of March 5, 2001, the Company's Board of Directors declared a dividend of one right to purchase one one-thousandth of a share of the Company's Series A Participating Preferred Stock for each outstanding share of Common Stock, no par value, of the Company. The dividend is payable on April 2, 2001, to shareholders of record as of the close of business on that date. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred at an exercise price of $35.00, subject to adjustment. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The Exhibits listed on the accompanying "Index to Exhibits" are filed as part hereof, or incorporated by reference into, the report. (b) Report on Form 8-K The Company filed a Form 8-K on March 5, 2001 reporting that on March 5, 2001, the Company issued a press release announcing that the Board of Directors of the Company had approved the adoption of a Preferred Shares Rights Agreement. The Company filed a Form 8-K on March 28, 2001 reporting certain immaterial changes in the Preferred Shares Rights Agreement dated March 5, 2001. 20
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, 2001 /s/ RHEA J. POSEDEL --------------- Rhea J. Posedel Chief Executive Officer and Chairman of the Board of Directors Date: April 13, 2001 /s/ GARY L. LARSON -------------- Gary L. Larson Vice President of Finance and Chief Financial Officer 21
AEHR TEST SYSTEMS INDEX TO EXHIBITS Exhibit No. Description - ---------- ----------- 10.1 Preferred Shares Rights Agreement, dated as of March 5, 2001, between Aehr Test Systems and U.S. Stock Transfer Corporation, including the Certificate of Determination, the Form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B, and C, respectively. (This is incorporated by reference to Exhibit 4.1 to Aehr Test Systems' Form 8-K filed March 28, 2001). 22