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 November 30, 2006.
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: 000-22893.
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
--- ---
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
1
Number of shares of Common Stock, $0.01 par value, outstanding
at December 31, 2006 was 7,758,820.
2
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 2006
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
November 30, 2006 and May 31, 2006 . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the three
months and six months ended November 30, 2006 and 2005 . 5
Condensed Consolidated Statements of Cash Flows for the
six months ended November 30, 2006 and 2005 . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . 16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks. . 22
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 22
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds. . 25
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 25
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 26
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
3
PART I. FINANCIAL STATEMENTS
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
November 30, May 31,
2006 2006
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 8,963 $ 9,405
Short-term investments. . . . . . . . . . . . . 3,182 1,600
Accounts receivable, net of allowances for
doubtful accounts of $41 and $70 at
November 30, 2006 and May 31, 2006,
respectively . . . . . . . . . . . . . . . . 3,557 4,531
Inventories . . . . . . . . . . . . . . . . . . 5,938 7,242
Prepaid expenses and other. . . . . . . . . . . 1,107 357
----------- -----------
Total current assets . . . . . . . . . . . . 22,747 23,135
Property and equipment, net . . . . . . . . . . . 1,032 959
Goodwill . . . . . . . . . . . . . . . . . . . . 274 274
Other assets . . . . . . . . . . . . . . . . . . 523 525
----------- -----------
Total assets . . . . . . . . . . . . . . . . $24,576 $24,893
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 901 $ 1,130
Accrued expenses. . . . . . . . . . . . . . . . 2,330 2,347
Deferred revenue. . . . . . . . . . . . . . . . 238 2,335
----------- -----------
Total current liabilities . . . . . . . . . . 3,469 5,812
Accrued lease commitment. . . . . . . . . . . . . 247 264
----------- -----------
Total liabilities . . . . . . . . . . . . . . 3,716 6,076
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 7,757 shares and
7,630 shares at November 30, 2006 and
May 31, 2006, respectively. . . . . . . . . . 78 76
Additional paid-in capital. . . . . . . . . . . 38,904 38,081
Accumulated other comprehensive income. . . . . 1,265 1,291
Accumulated deficit . . . . . . . . . . . . . . (19,387) (20,631)
----------- -----------
Total shareholders' equity . . . . . . . . . 20,860 18,817
----------- -----------
Total liabilities and shareholders' equity. . $24,576 $24,893
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
November 30, November 30,
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net sales. . . . . . . . . . . . . . . . . . . $6,249 $5,817 $13,385 $10,463
Cost of sales. . . . . . . . . . . . . . . . . 3,290 3,112 7,173 5,570
--------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . 2,959 2,705 6,212 4,893
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative. . . . . 1,519 1,542 3,154 2,994
Research and development . . . . . . . . . . 1,522 1,006 2,909 2,040
--------- --------- --------- ---------
Total operating expenses . . . . . . . . 3,041 2,548 6,063 5,034
--------- --------- --------- ---------
Income (loss) from operations . . . . . . . . (82) 157 149 (141)
Interest income . . . . . . . . . . . . . . . 134 36 256 80
Other income, net . . . . . . . . . . . . . . 651 12 867 14
--------- --------- --------- ---------
Income (loss) before income tax expense. . . . 703 205 1,272 (47)
Income tax expense . . . . . . . . . . . . . . 16 39 28 31
--------- --------- --------- ---------
Net income (loss) . .. . . . . . . . . . . . . $ 687 $ 166 $ 1,244 $ (78)
========= ========= ========= =========
Net income (loss) per share - basic . . . . . $ 0.09 $ 0.02 $ 0.16 $ (0.01)
Net income (loss) per share - diluted . . . . $ 0.08 $ 0.02 $ 0.15 $ (0.01)
Shares used in per share calculations:
Basic. . . . . . . . . . . . . . . . . . . . 7,749 7,496 7,716 7,489
Diluted. . . . . . . . . . . . . . . . . . . 8,243 7,514 8,284 7,489
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
November 30,
----------------------
2006 2005
---------- ----------
Cash flows from operating activities:
Net income (loss)............................. $1,244 $ (78)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Stock compensation expense.................. 345 --
Provision for doubtful accounts............. (28) 66
Accrued lease commitment ................... (17) (5)
Loss on disposal of property and equipment.. 41 45
Depreciation and amortization............... 144 210
Changes in operating assets and liabilities:
Accounts receivable....................... 973 (1,394)
Inventories............................... 1,317 (1,726)
Accounts payable.......................... (229) 180
Accrued expenses and deferred revenue..... (2,114) 610
Prepaid expenses and other................ (750) 190
---------- ----------
Net cash provided by (used in)
operating activities.................. 926 (1,902)
---------- ----------
Cash flows from investing activities:
Purchase of investments..................... (9,482) (4,790)
Net proceeds from sales and
maturity of investments................... 7,901 8,013
Purchase of property and equipment ......... (261) (136)
---------- ----------
Net cash provided by (used in)
investing activities.................. (1,842) 3,087
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 480 68
---------- ----------
Net cash provided by
financing activities.................. 480 68
---------- ----------
Effect of exchange rates on cash................ (6) (398)
---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... (442) 855
Cash and cash equivalents, beginning of period.. 9,405 4,952
---------- ----------
Cash and cash equivalents, end of period........ $8,963 $5,807
========== ==========
Supplementary disclosure of non-cash item:
Transfer of inventory to property and equipment. $ -- $ 231
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
AEHR TEST SYSTEMS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial information has been
prepared by Aehr Test Systems, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") 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 accounting principles generally accepted in the United States
of America.
In the opinion of management, the unaudited condensed consolidated
financial statements for the interim periods presented reflect all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the condensed consolidated financial position and results of
operations as of and for such periods indicated. These unaudited condensed
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2006 Annual Report on Form 10-K for the fiscal year
ended May 31, 2006 filed with the SEC on August 29, 2006 and the Company's
Quarterly Report on Form 10-Q for the quarterly period ended August 31, 2006
filed with the SEC on October 13, 2006. 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.
PRINCIPLES OF CONSOLIDATION. The unaudited condensed consolidated
financial statements include the accounts of Aehr Test Systems and its
subsidiaries (collectively, the "Company," "we," "us," and "our"). All
significant intercompany balances have been eliminated in consolidation.
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America 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.
2. STOCK-BASED COMPENSATION
Prior to June 1, 2006, the Company's stock-based employee compensation
plans were accounted for under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations, as permitted by Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123").
The Company generally did not recognize stock-based compensation cost in its
condensed consolidated statement of operations for periods prior to June 1,
2006 as most options granted had an exercise price equal to or higher than the
market value of the underlying common stock on the date of the grant.
The Company adopted the provisions of SFAS No. 123 (revised 2004),"Share-
Based Payment" ("SFAS No. 123(R)"), using the modified prospective transition
method, which requires the application of the accounting standard as of June 1,
2006, the first day of the Company's fiscal year 2007. SFAS No. 123(R)
establishes accounting for stock-based awards exchanged for employee services.
Accordingly, stock-based compensation cost is measured at each grant date,
based on the fair value of the award, and is recognized as expense over the
employee's requisite service period. All of the Company's stock compensation
is accounted for as an equity instrument. The Company's condensed consolidated
financial statements as of and for the three and six months ended November 30,
7
2006 reflect the impact of SFAS No. 123(R). In accordance with the modified
prospective transition method, the Company's condensed consolidated financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R). See Notes 9 and 10 in the Company's
Form 10-K for fiscal 2006 filed on August 29, 2006 for further information
regarding the stock option and employee stock purchase plans ("ESPP"). Under
the modified prospective transition method, stock compensation cost has been
recognized in the three and six months ended November 30, 2006 in the condensed
consolidated statement of operations for stock awards granted or modified after
May 31, 2006 and for stock awards granted prior to, but unvested as of, June 1,
2006.
Prior to the Adoption of SFAS No. 123(R)
Prior to the adoption of SFAS No. 123(R), the Company provided the
disclosures required under SFAS No. 123, as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148").
The following table illustrates the pro forma effect on our net income
(loss) and net income (loss) per share for the three and six months ended
November 30, 2005 if we had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation using the Black-Scholes
valuation method (in thousands, except per share data):
Three Months Ended Six months ended
November 30, 2005 November 30, 2005
------------------ -----------------
Net income (loss), as reported:............. $166 $(78)
Deduct: Total stock compensation expense
determined under fair value based
method for all awards, net of
related tax effects................. (189) (382)
------------------ -----------------
Pro forma net loss.......................... $(23) $(460)
================== =================
Net income (loss) per share:
Basic and diluted, as reported ............. $0.02 $(0.01)
================== =================
Basic and diluted, pro forma ............... $0.00 $(0.06)
================== =================
Impact of the Adoption of SFAS 123(R)
The Company elected to adopt the modified prospective application
transition method as provided by SFAS No. 123(R), and we recorded $177,000 and
$345,000 of stock compensation expense in our unaudited condensed consolidated
statements of operations for the three and six months ended November 30, 2006.
As required by SFAS No. 123(R), the Company has made an estimate of expected
forfeitures and is recognizing compensation costs only for those stock-based
compensation awards expected to vest.
The following table summarizes compensation costs related to the Company's
stock-based compensation for the three and six months ended November 30, 2006
(in thousands, except per share data):
8
Three Months Ended Six months ended
November 30, 2006 November 30, 2006
------------------ -----------------
Stock-based compensation in the form of employee
stock options and ESPP shares, included in:
Cost of sales . . . . . .. . . . . . . . . $ 15 $ 27
Selling, general and administrative . . . . 96 188
Research and development . . . . . . . . . . 66 130
------------------ -----------------
Total stock-based compensation . . . . . . . 177 345
Tax effect on stock-based compensation -- --
------------------ -----------------
Net effect on net income $177 $345
================== =================
Effect on net income per share:
Basic $0.02 $0.04
Diluted $0.02 $0.04
As of November 30, 2006, the total compensation cost related to unvested
stock-based awards under the Company's 1996 and 2006 Stock Option Plans, but
not yet recognized, was approximately $1,141,000 which is net of estimated
forfeitures of $84,000. This cost will be amortized on a straight-line basis
over a weighted average period of approximately 3.4 years.
During the three and six months ended November 30, 2006, the Company
recorded stock-based compensation related to our ESPP of $37,000 and $74,000,
respectively. As of November 30, 2006, the total compensation cost related to
options to purchase the Company's common shares under the ESPP but not yet
recognized was approximately $165,000.
Valuation Assumptions
Valuation and Amortization Method. The Company estimates the fair value of
stock options granted using the Black-Scholes option valuation method and a
single option award approach for options granted after June 1, 2006. The
multiple option approach has been used for all options granted prior to June 1,
2006. The fair value under the single option approach is amortized on a
straight-line basis over the requisite service periods of the awards, which is
generally the vesting period. The fair value under the multiple option
approach is amortized on a weighted basis over the requisite service periods of
the awards, which is generally the vesting period.
Expected Term. The Company's expected term represents the period that the
Company's stock-based awards are expected to be outstanding and was determined
based on historical experience, giving consideration to the contractual terms
of the stock-based awards, vesting schedules and expectations of future
employee behavior as evidenced by changes to the terms of its stock-based
awards.
Expected Volatility. Volatility is a measure of the amounts by which a
financial variable such as stock price has fluctuated (historical volatility)
or is expected to fluctuate (expected volatility) during a period. The Company
uses the historical volatility for the past five years, which matches the term
of most of the option grants, to estimate expected volatility. Volatility for
each of the ESPP's four time periods of six months, twelve months, eighteen
months, and twenty-four months is calculated separately and included in the
overall stock-based compensation cost recorded.
Dividends. The Company has never paid any cash dividends on our common
stock and we do not anticipate paying any cash dividends in the foreseeable
future. Consequently, we use an expected dividend yield of zero in the Black-
Scholes option valuation method.
9
Risk-Free Interest Rate. The Company bases the risk-free interest rate
used in the Black-Scholes option valuation method on the implied yield in
effect at the time of option grant on U.S. Treasury zero-coupon issues with a
remaining term equivalent to the expected term of the stock awards including
the ESPP.
Estimated Forfeitures. When estimating forfeitures, the Company considers
voluntary termination behavior as well as analysis of actual option
forfeitures.
Fair Value. The fair values of the Company's stock options granted to
employees and ESPP shares for the three and six months ended November 30, 2006
were estimated using the following weighted average assumptions in the Black-
Scholes valuation method consistent with the provisions of SFAS No. 123(R),
Securities and Exchange Commission Staff Accounting Bulletin No. 107 and the
Company's prior pro forma disclosures of net income (loss), including stock-
based compensation (determined under a fair value method as prescribed by SFAS
No. 123).
The fair value of our stock options granted to employees for the three
months and six months ended November 30, 2006 and 2005 was estimated using the
following weighted-average assumptions:
Three months ended Six months ended
November 30, November 30,
------------------- ----------------
2006 2005 2006 2005
-------- ------- ------- -------
Option Plan Shares
Expected Term (in years).............. 5 5 5 5
Expected Volatility................... 0.76 0.79 0.76 0.79
Expected Dividend..................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates.............. 4.81% 4.26% 4.81% 4.11%
Estimated Forfeiture Rate............. 4% 0% 4% 0%
Weighted Average Fair Value........... $4.17 $2.44 $5.19 $2.08
The fair value of our ESPP shares for the three months and six months
ended November 30, 2006 and 2005 was estimated using the following weighted-
average assumptions:
Three months ended Six months ended
November 30, November 30,
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Employee Stock Purchase Plan Shares
Expected Term (in years)............. 0.5-2.0 0.5-2.0 0.5-2.0 0.5-2.0
Expected Volatility.................. 0.73-0.84 0.79-0.80 0.73-0.84 0.79-0.80
Expected Dividend.................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates............. 4.3%-5.1% 3.0%-3.8% 4.3%-5.1% 3.0%-3.8%
Estimated Forfeiture Rate............ 4% 0% 4% 0%
Weighted Average Fair Value.......... $5.11 $5.21 $5.11 $5.21
The following table summarizes the stock option transactions during the six
months ended November 30, 2006 (in thousands, except per share data):
10
Outstanding Options
---------------------------------------------
Weighted
Number Average Aggregate
Available of Exercise Intrinsic
Shares Shares Price Value
---------- -------- --------- ----------
Balances, May 31, 2006........ 334 1,269 $3.81
Options granted............. (145) 145 $8.54
Options exercised........... -- (91) $4.11
---------- --------
Balances, August 31, 2006..... 189 1,323 $4.31 $7,496
Additional shares reserved.. 600 --
Options granted............. (39) 39 $6.43
Options exercised........... -- (6) $3.81
---------- --------
Balances, November 30, 2006..... 750 1,356 $4.37 $802
========== ========
Options exercisable and expected to be
exercisable at November 30, 2006 1,302 $4.37 $768
========
The options outstanding and exercisable at November 30, 2006 were in the
following exercise price ranges (in thousands, except per share data):
Options Outstanding Options Exercisable
at November 30, 2006 at November 30, 2006
----------------------------------- ----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average Aggregate
Range of Outstanding Contractual Exercise Exercisable Exercise Intrinsic
Exercise Prices Shares Life (Years) Price Shares Price Value
---------------- ------------ ----------- -------- ----------- -------- ---------
$2.49 - $3.63 578 4.77 $3.09 309 $3.10
$3.66 - $4.08 278 3.78 $3.91 262 $3.91
$4.25 - $4.95 211 2.70 $4.50 182 $4.52
$5.25 - $6.25 137 2.51 $5.89 98 $5.81
$8.45 - $9.30 152 6.54 $8.51 13 $8.53
------------ -----------
$2.49 - $9.30 1,356 4.13 $4.37 864 $4.03 $803
============ ===========
The total intrinsic value of options exercised for the three and six months
ended November 30, 2006 was $22,000 and $389,000, respectively.
3. EARNINGS PER SHARE
Earnings per share is computed based on the weighted average number of
common and common equivalent shares (common stock options and ESPP shares)
outstanding, when dilutive, during each period using the treasury stock method.
11
Three Months Ended Six Months Ended
November 30, November 30,
--------- ------- -------- --------
2006 2005 2006 2005
-------- ------- -------- --------
(in thousands, except per share amounts)
Numerator: Net income (loss)............... $ 687 $ 166 $1,244 $ (78)
-------- ------- -------- --------
Denominator for basic net income (loss) per
share:
Weighted-average shares outstanding ..... 7,749 7,496 7,716 7,489
-------- ------- -------- --------
Shares used in basic per share calculation. 7,749 7,496 7,716 7,489
Effect of dilutive securities.............. 494 18 568 --
-------- ------- -------- --------
Denominator for diluted net income (loss)
per share.............................. 8,243 7,514 8,284 7,489
-------- ------- -------- --------
Basic net income (loss) per share.......... $ 0.09 $ 0.02 $ 0.16 $(0.01)
======== ======= ======== ========
Diluted net income (loss) per share........ $ 0.08 $ 0.02 $ 0.15 $(0.01)
======== ======= ======== ========
Stock options to purchase 162,596 shares of common stock were outstanding
on November 30, 2006, but not included in the computation of diluted income per
share, because the inclusion of such shares would be anti-dilutive. Stock
options to purchase 1,392,888 shares of common stock were outstanding on
November 30, 2005, but were not included in the computation of diluted loss per
share because the inclusion of such shares would be anti-dilutive.
4. INVENTORIES
Inventories are comprised of the following (in thousands):
November 30, May 31,
2006 2006
----------- ----------
Raw materials and sub-assemblies $2,997 $3,039
Work in process 2,928 2,978
Finished goods 13 1,225
----------- ----------
$5,938 $7,242
=========== ==========
5. SEGMENT INFORMATION
The Company operates in one reportable segment: the design, manufacture and
marketing of advanced test and burn-in products to the semiconductor
manufacturing industry.
The following presents information about the Company's operations in
different geographic areas (in thousands):
12
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended November 30, 2006:
Net sales...................... $ 6,061 $ 746 $116 $ (674) $ 6,249
Portion of U.S. net sales
from export sales............ 1,884 -- -- -- 1,884
Income (loss) from operations.. (13) 81 (54) (96) (82)
Identifiable assets............ 33,508 1,521 820 (11,273) 24,576
Property and equipment, net.... 928 83 21 -- 1,032
Six months ended November 30, 2006:
Net sales...................... $12,503 $1,962 $145 $(1,225) $13,385
Portion of U.S. net sales
from export sales............ 4,873 -- -- -- 4,873
Income (loss) from operations.. 273 178 (204) (98) 149
Identifiable assets............ 33,508 1,521 820 (11,273) 24,576
Property and equipment, net.... 928 83 21 -- 1,032
Three months ended November 30, 2005:
Net sales...................... $ 5,766 $ 557 $384 $ (890) $ 5,817
Portion of U.S. net sales
from export sales............ 4,662 -- -- -- 4,662
Income (loss) from operations.. 185 (82) 86 (32) 157
Identifiable assets............ 30,301 1,907 903 (11,069) 22,042
Property and equipment, net.... 1,137 157 34 -- 1,328
Six months ended November 30, 2005:
Net sales...................... $ 9,727 $1,140 $579 $ (983) $10,463
Portion of U.S. net sales
from export sales............ 7,940 -- -- -- 7,940
Income (loss) from operations.. (102) (85) 43 3 (141)
Identifiable assets............ 30,301 1,907 903 (11,069) 22,042
Property and equipment, net.... 1,137 157 34 -- 1,328
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.
6. PRODUCT WARRANTIES
The Company provides for the estimated cost of product warranties at the
time the products are shipped. While the Company engages in extensive product
quality programs and processes, including actively monitoring and evaluating
the quality of its component suppliers, the Company's warranty obligation is
affected by product failure rates, material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
material usage or service delivery costs differ from the Company's estimates,
revisions to the estimated warranty liability would be required.
Following is a summary of changes in the Company's liability for product
warranties during the three months and six months ended November 30, 2006 and
2005 (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ----------------
2006 2005 2006 2005
-------- -------- ------- -------
Balance at the beginning of the period . . $177 $142 $169 $213
Accruals for warranties issued
during the period . . . . . . . . . . . 61 13 175 54
Reversals of warranties issued
during the period . . . . . . . . . . . (49) -- (49) (52)
Settlement made during the period
(in cash or in kind) . . . . . . . . . . (52) (36) (158) (96)
-------- ------- ------- -------
Balance at the end of the period . . . . . $137 $119 $137 $119
======== ======= ======= =======
13
7. OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss), net of tax are comprised of the
following (in thousands):
Three Months Ended Six Months Ended
November 30, November 30,
------------------ ------------------
2006 2005 2006 2005
------- ------- -------- -------
Net income (loss). . . . . . . . . . . . $687 $166 $1,244 $ (78)
Foreign currency translation
adjustments expense. . . . . . . . . . (15) (65) (27) (64)
Unrealized holding gains (losses)
arising during period. . . . . . . . . (1) -- 1 4
------- ------- -------- -------
Comprehensive income (loss). . . . . . . $671 $101 $1,218 $(138)
======= ======= ======== =======
8. EMPLOYEE BENEFIT PLANS
In addition to the Company's 1996 Stock Option Plan and the 1997 Employee
Stock Purchase Plan discussed in Note 9 and 10 in the Company's 2006 Form 10-K,
the Company maintains the equity incentive plan and employee benefit plans
under which its equity securities are authorized for issuance to the Company's
employees, directors and consultants.
The purpose of these plans is to provide equity ownership and compensation
opportunities in the Company by attracting and retaining the services of
qualified and talented persons to serve as employees, directors and/or
consultants of the Company. Those plans were approved by the Company's
shareholders.
In October 2006, the Company's 2006 Equity Incentive Plan and the 2006
Employee Stock Purchase Plan ("2006 Plans,") were approved by the
shareholders. The 2006 Plans replace the Company's Amended and Restated
1996 Stock Option Plan, which would otherwise have expired in 2006; and
the Company's 1997 Employee Stock Purchase Plan, which would have otherwise
expired in 2007. The Amended and Restated 1996 Stock Option Plan will continue
to govern awards previously granted under that plan.
As of November 30, 2006, out of the 2,105,612 shares authorized for grant
under the 1996 Stock Option Plan and 2006 Plans, approximately 1,356,207 shares
had been granted.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, FASB Emerging Issues Task Force issued Issue 06-03 ("EITF
06-03"), "How Sales Taxes Collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement." A consensus was
reached that entities may adopt a policy of presenting sales taxes in the
income statement on either a gross or net basis. If taxes are significant, an
entity should disclose its policy of presenting taxes and the amounts of
taxes. The guidance is effective for periods beginning after December 15, 2006.
The Company presents sales net of sales taxes. As such, EITF 06-03 will not
impact the method for recording these sales taxes in the consolidated financial
statements.
In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertain Tax Positions - An Interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109 "Accounting for Income Taxes". It prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
14
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of FIN 48 to its financial position and results
of operations.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 requires
that public companies utilize a "dual-approach" to assessing the quantitative
effects of financial misstatements. This dual approach includes both an income
statement focused assessment and a balance sheet focused assessment. The
guidance in SAB 108 must be applied to annual financial statements for fiscal
years ending after November 15, 2006. We are currently assessing the impact of
adopting SAB 108, but we do not expect that it will have a material effect on
our consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a common definition for fair value to be
applied to U.S. GAAP guidance requiring use of fair value. Also, SFAS 157
establishes a framework for measuring fair value, and expands disclosure about
such fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. The Company is currently assessing the impact, if
any, of SFAS 157 on its condensed consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires that
employers recognize on a prospective basis the funded status of their defined
benefit pension and other postretirement plans on their balance sheet and
recognize as a component of other comprehensive income, net of tax, the gains
or losses and prior service costs or credits that arise during the period but
are not recognized as components of net periodic benefit cost. SFAS 158 also
requires additional disclosures in the notes to financial statements. SFAS 158
is effective for fiscal years ending after December 15, 2006. The Company is
currently evaluating the impact of SFAS 158 on its condensed consolidated
financial statements.
15
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 unaudited
condensed consolidated financial statements and the related notes that appear
elsewhere in this document and with our Annual Report on Form 10-K for the
fiscal year ended May 31, 2006 and the consolidated financial statements and
notes thereto.
In addition to historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Act of 1934. These statements typically may be
identified by the use of forward-looking words or phrases such as "believe,"
"expect," "intend," "anticipate," "should," "planned," "estimated," and
"potential," among others and include, but are not limited to, statements
concerning our expectations regarding our operations, business, strategies,
prospects, revenues, expenses, costs and resources. These forward-looking
statements are subject to certain risks and uncertainties that could cause our
actual results to differ materially from those the anticipated results or other
expectations reflected in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in this report and other factors beyond our control, and in
particular, the risks discussed in Part II, Item 1A. Risk Factors and those
discussed in other documents we file with the Securities and Exchange
Commission. All forward-looking statements included in this document are based
on our current expectations, and we undertake no obligation to revise or
publicly release the results of any revision to these forward-looking
statements. Given these risks and uncertainties, readers are cautioned not to
place undue reliance on such forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's unaudited condensed
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, the Company evaluates its estimates,
including those related to customer programs and incentives, product returns,
bad debts, inventories, investments, intangible assets, income taxes, financing
operations, warranty obligations, long-term service contracts, and
contingencies and litigation. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. For a discussion of the
critical accounting policies, see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Critical Accounting
Policies" in the Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 2006.
During the first quarter of fiscal 2007, the Company implemented the
following new critical accounting policy.
STOCK-BASED COMPENSATION EXPENSE. Beginning on June 1, 2006, the Company
began accounting for stock options and ESPP shares under the provisions of SFAS
No. 123(R), "Shared-Based Payment," which requires the recognition of the fair
value of stock-based compensation. Accordingly, stock-based compensation
expense for all stock-based compensation awards granted after June 1, 2006 is
measured at grant date, based on the fair value of the award which is computed
using the Black-Scholes option valuation model, and is recognized as expense
16
over the requisite service period for the employee. This methodology requires
the use of subjective assumptions in implementing SFAS No. 123(R), including
expected stock price volatility and estimated life of each award.
Prior to the implementation of SFAS No. 123(R), the Company accounted for
stock options and ESPP share under the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, and
provided pro forma disclosures as required by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123," which amended SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company elected to adopt the modified prospective
transition method as provided by SFAS No. 123(R). Accordingly, during the
three and six months ended November 30, 2006, the Company recorded stock
compensation cost totaling the amount that would have been recognized had the
fair value method been applied since the effective date of SFAS No. 123. We
did not restate previously reported amounts.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's unaudited condensed
consolidated statements of operations as a percentage of net sales for the
periods indicated.
Three Months Ended Six Months Ended
November 30, November 30,
-------------------- -------------------
2006 2005 2006 2005
-------- --------- -------- --------
Net sales. . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . 52.6 53.5 53.6 53.2
-------- --------- -------- --------
Gross profit . . . . . . . . . . . . . . . 47.4 46.5 46.4 46.8
-------- --------- -------- --------
Operating expenses:
Selling, general and administrative. . . 24.3 26.5 23.6 28.6
Research and development . . . . . . . . 24.4 17.3 21.7 19.5
-------- --------- -------- --------
Total operating expenses . . . . . . 48.7 43.8 45.3 48.1
-------- --------- -------- --------
Income (loss) from operations . .. . . . . (1.3) 2.7 1.1 (1.3)
Interest income . . . . . . . . . . . . . 2.1 0.7 1.9 0.8
Other income, net . . . . . . . . . . . . 10.4 0.2 6.5 0.1
-------- ---------- -------- --------
Income (loss) before income tax expense. . 11.2 3.6 9.5 (0.4)
Income tax expense . . . . . . . . . . . . 0.2 0.7 0.2 0.3
-------- --------- -------- --------
Net income (loss) . . . . . . . . . . . 11.0 % 2.9 % 9.3 % (0.7)%
======== ========= ======== ========
THREE MONTHS ENDED NOVEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED NOVEMBER
30, 2005
NET SALES. Net sales increased to $6.2 million in the three months ended
November 30, 2006 from $5.8 million in the three months ended November 30,
2005, an increase of 7.4%. The increase in net sales in the three months ended
November 30, 2006 resulted primarily from increases in net sales of the
Company's wafer/die level products, partially offset by a decrease in sales of
the Company's dynamic burn-in products. Net sales of the Company's wafer/die
level products for the three months ended November 30, 2006 were $3.2 million,
and increased approximately $3.0 million from the three months ended November
30, 2005. Net sales of the Company's dynamic burn-in products for the three
months ended November 30, 2006 were $2.7 million, and decreased approximately
$2.7 million from the three months ended November 30, 2005. The Company
expects net sales in the third quarter of fiscal 2007 will be relatively
similar to those of the second quarter of fiscal 2007.
17
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 $3.0 million in the
three months ended November 30, 2006 from $2.7 million in the three months
ended November 30, 2005, an increase of 9.4%. As a percentage of net sales,
gross profit margin increased to 47.4% in the three months ended November 30,
2006 from 46.5% in the three months ended November 30, 2005.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses consist primarily of salaries and related costs of employees,
commission expenses to independent sales representatives, product promotion and
other professional services. SG&A expenses of $1.5 million in the three months
ended November 30, 2006 were flat compared with the three months ended November
30, 2005. Included in SG&A in the three months ended November 30, 2006 was
$96,000 in stock compensation expense, pursuant to our adoption of SFAS No.
123(R). As a percentage of net sales, SG&A expenses decreased to 24.3% in the
three months ended November 30, 2006 from 26.5% in the three months ended
November 30, 2005, 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 $1.5
million in the three months ended November 30, 2006 from $1.0 million in the
three months ended November 30, 2005, an increase of 51.3%. This increase was
primarily due to an increase in project related expenses of $247,000, project
related professional service expenses of $195,000, and stock compensation
expenses of approximately $66,000. As a percentage of net sales, R&D expenses
increased to 24.4% in the three months ended November 30, 2006 from 17.3% in
the three months ended November 30, 2005, reflecting the previously detailed
cost increases partially offset by higher net sales.
INTEREST INCOME. Interest income increased to $134,000 in the three months
ended November 30, 2006 from $36,000 in the three months ended November 30,
2005. Approximately 70% of the increase in interest income was the result of
higher invested balances and approximately 30% of the increase in interest
income was the result of higher interest rates earned.
OTHER INCOME, NET. Other income, net increased to $651,000 in the three
months ended November 30, 2006 from $12,000 in the three months ended November
30, 2005. The increase in other income, net was primarily due to the
recognition of an earn-out payment included in the consideration received on
the 2003 sale of a portion of the Company's ownership in ESA Electronics Pte
Ltd., a Singapore company. The Company does not anticipate any further gains
from this earn-out transaction.
INCOME TAX EXPENSE. Income tax expense decreased to $16,000 in the three
months ended November 30, 2006 from $39,000 in the three months ended November
30, 2005. The income tax expense in the three months ended November 30, 2006
was primarily attributable to alternate minimum tax requirements on the
Company's U.S. operations. The income tax expense in the three months ended
November 30, 2005 related primarily to the tax expense recorded as a result of
income earned in the Company's German Subsidiary. The Company's U.S.
operations and its Japanese subsidiary have experienced significant cumulative
losses and thus generated certain net operating losses available to offset
future taxes payable in the U.S. and Japan. As a result of the cumulative
operating losses in the Company's U.S. operations and its Japanese subsidiary,
a valuation allowance was established for the full amount of its net deferred
tax assets for both its U.S. operations and its Japanese subsidiary.
18
SIX MONTHS ENDED NOVEMBER 30, 2006 COMPARED TO SIX MONTHS ENDED NOVEMBER 30,
2005
NET SALES. Net sales increased to $13.4 million in the six months ended
November 30, 2006 from $10.5 million in the six months ended November 30, 2005,
an increase of 27.9%. The increase in net sales in the six months ended
November 30, 2006 resulted primarily from an increase in net sales of the
Company's wafer/die level products. Net sales of the Company's wafer/die level
products for the six months ended November 30, 2006 were $4.3 million, and
increased approximately $4.0 million from the six months ended November 30,
2005.
GROSS PROFIT. Gross profit increased to $6.2 million in the six months
ended November 30, 2006 from $4.9 million in the six months ended November 30,
2005, an increase of 27.0%. Gross profit margin decreased slightly to 46.4% in
the six months ended November 30, 2006 from 46.8% in the six months ended
November 30, 2005.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $3.2
million in the six months ended November 30, 2006 from $3.0 million in the six
months ended November 30, 2005, an increase of 5.3%. The increase in SG&A
expenses was primarily due to stock compensation expenses of approximately
$188,000. As a percentage of net sales, SG&A expenses decreased to 23.6% in
the six months ended November 30, 2006 from 28.6% in the six months ended
November 30, 2005, reflecting higher net sales.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $2.9 million in the
six months ended November 30, 2006 from $2.0 million in the six months ended
November 30, 2005. The increase in R&D expenses was primarily due to increases
in project related professional service expenses of $332,000, project material
expenses of $248,000, and stock compensation expenses of approximately
$130,000. As a percentage of net sales, R&D expenses increased to 21.7% in the
six months ended November 30, 2006 from 19.5% in the six months ended November
30, 2005, reflecting the previously detailed cost increases partially offset by
higher net sales.
INTEREST INCOME. Interest income increased to $256,000 in the six months
ended November 30, 2006 from $80,000 in the six months ended November 30, 2005,
an increase of 220.0%. Approximately 60% of the increase in interest income
was the result of higher invested balances and approximately 40% of the
increase in interest income was the result of higher interest rates earned.
OTHER INCOME (EXPENSE), NET. Other income, net increased to $867,000 in
the six months ended November 30, 2006 from $14,000 in the six months ended
November 30, 2005. The increase in other income, net was primarily due to the
recognition of an earn-out payment included in the consideration received on
the 2003 sale of a portion of the Company's ownership in ESA Electronics, a
Singapore company. The Company does not anticipate any further gains from this
earn-out transaction.
INCOME TAX EXPENSE. Income tax expense decreased to $28,000 in the six
months ended November 30, 2006, from $31,000 in the six months ended November
30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was approximately $926,000 for
the six months ended November 30, 2006 and net cash used in operating
activities was approximately $1.9 million for the six months ended November 30,
2005. For the six months ended November 30, 2006, net cash provided by
operating activities was primarily due to an inventory decrease of $1.3
million, the net income of $1.2 million and a decrease in accounts receivable
of $973,000, offset partially by $2.1 million from a decrease in accrued
expenses and deferred revenue and an increase of $750,000 in prepaid expense
and other. Inventory decreased primarily due to costs associated with revenue
19
transactions recognized from previous deferrals. Accounts receivable decreased
primarily because of payment of past due balances by a major international
customer with multiple plant locations. Accrued expenses and deferred revenue
decreased primarily due to revenue recognized from deferrals made in prior
periods which were earned in this six month period. Prepaid expense and other
increased primarily because of the recognition of an earn-out payment included
in the consideration received on the 2003 sale of a portion of the Company's
ownership in ESA Electronics, a Singapore company.
Net cash used in investing activities was approximately $1.8 million for
the six months ended November 30, 2006 and net cash provided by investing
activities was approximately $3.1 million for the six months ended November 30,
2005. The net cash used in investing activities during the six months ended
November 30, 2006 was primarily attributable to $9.5 million in purchases of
investments, partially offset by $7.9 million in net proceeds from sales and
maturities of investments. The net cash provided by investing activities
during the six months ended November 30, 2005 was primarily due to the net
proceeds from sales and maturity of investments, partially offset by the
purchase of investments.
Financing activities provided cash of approximately $480,000 in the six
months ended November 30, 2006 and $68,000 in the six months ended November 30,
2005. Net cash provided by financing activities during the six months ended
November 30, 2006 and 2005 was due to proceeds from issuance of common stock
from the exercise of stock options.
As of November 30, 2006, the Company had working capital of $19.3 million.
Working capital consists of cash and cash equivalents, short-term investments,
accounts receivable, inventory and other current assets, less current
liabilities.
The Company announced in August 1998 that its board of directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
shares. The Company may repurchase the shares in the open market or in
privately negotiated transactions, from time to time, subject to market
conditions. The number of shares of common stock actually acquired by the
Company will depend on subsequent developments and corporate needs, and the
repurchase program may be interrupted or discontinued at any time. Any such
repurchase of shares, if consummated, may use a portion of the Company's
working capital. As of May 31, 2006, the Company had repurchased 523,700
shares at an average price of $3.95. Shares repurchased by the Company are
cancelled. During the six months ended of November 30, 2006, the Company did
not repurchase any of its outstanding common stock.
The Company leases most of its manufacturing and office space under
operating leases. The Company entered into a non-cancelable operating lease
agreement for its United States manufacturing and office facilities, which
commenced in December 1999 and expires in December 2009. Under the lease
agreement, the Company is responsible for payments of utilities, taxes and
insurance.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
Any such transactions, if consummated, may use a portion of the Company's
working capital or require the issuance of equity. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions.
The Company anticipates that the existing cash balance together with cash
provided by operations, if any, are adequate to meet its working capital and
capital equipment requirements through fiscal year 2007. After fiscal year
2007, 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.
20
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet financing
arrangements and has not established any variable interest entities.
OVERVIEW OF CONTRACTUAL OBLIGATIONS
There have been no material changes in the composition, magnitude or other
key characteristics of the Company's contractual obligations or other
commitments as disclosed in the Company's Form 10-K for the year ended May 31,
2006.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, FASB Emerging Issues Task Force issued Issue 06-03 ("EITF
06-03"), "How Sales Taxes Collected From Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement." A consensus was
reached that entities may adopt a policy of presenting sales taxes in the
income statement on either a gross or net basis. If taxes are significant, an
entity should disclose its policy of presenting taxes and the amounts of
taxes. The guidance is effective for periods beginning after December 15, 2006.
The Company presents sales net of sales taxes. As such, EITF 06-03 will not
impact the method for recording these sales taxes in the consolidated financial
statements.
In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for
Uncertain Tax Positions - An Interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109 "Accounting for Income Taxes". It prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of FIN 48 to its financial position and results
of operations.
In September 2006, the SEC released Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 requires
that public companies utilize a "dual-approach" to assessing the quantitative
effects of financial misstatements. This dual approach includes both an income
statement focused assessment and a balance sheet focused assessment. The
guidance in SAB 108 must be applied to annual financial statements for fiscal
years ending after November 15, 2006. We are currently assessing the impact of
adopting SAB 108, but we do not expect that it will have a material effect on
our consolidated financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 establishes a common definition for fair value to be
applied to U.S. GAAP guidance requiring use of fair value. Also, SFAS 157
establishes a framework for measuring fair value, and expands disclosure about
such fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. The Company is currently assessing the impact, if
any, of SFAS 157 on its condensed consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires that
employers recognize on a prospective basis the funded status of their defined
benefit pension and other postretirement plans on their balance sheet and
recognize as a component of other comprehensive income, net of tax, the gains
or losses and prior service costs or credits that arise during the period but
are not recognized as components of net periodic benefit cost. SFAS 158 also
21
requires additional disclosures in the notes to financial statements. SFAS 158
is effective for fiscal years ending after December 15, 2006. The Company is
currently evaluating the impact of SFAS 158 on its condensed consolidated
financial statements.
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 had no holdings of derivative financial or commodity
instruments at November 30, 2006.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. 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. Fluctuations in interest
rates would not have a material effect on the Company's financial position,
results of operations and cash flows.
A majority of the Company's revenue and capital spending is transacted in
U.S. dollars. The Company, however, enters into transactions in other
currencies, primarily Japanese Yen. Substantially all sales to Japanese
customers are denominated in Yen. Since the price is determined at the time a
purchase order is accepted, the Company is exposed to the risks of fluctuations
in the Yen-U.S. 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 expenses payable in Yen.
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 U.S. dollars. Since the Japanese subsidiary's financial statements are
based in Yen and the Company's financial statements are based in U.S. 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
U.S. dollar. A 10% decrease in the value of the Yen as compared with the U.S.
dollar would not be expected to result in a significant change in the net
income or loss.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Our management
evaluated, with the participation of our Chief Executive Officer and our Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities and Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.
Changes in internal controls over financial reporting. There was no change
in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
22
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 1A. RISK FACTORS
Set forth below and elsewhere in this Quarterly Report on Form 10-Q and in
other documents we file with the Securities and Exchange Commission, including
without limitation our most recently filed Form 10-K, are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements in this Quarterly Report
on Form 10-Q. We believe that these risks and uncertainties are the principal
material risks facing the Company as of the date of this Form 10-Q. In the
future, we may become subject to additional risks that are not currently known
to us. If any of these risks actually occur, our business, financial condition
and operating results could be seriously harmed. As a result, the trading
price of our common stock could decline, and you could lose all or part of the
value of your investment.
CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is
highly concentrated, with a relatively small number of large semiconductor
manufacturers and contract assemblers accounting for a substantial portion of
the purchases of semiconductor equipment. Sales to the Company's five largest
customers accounted for approximately 82.9% and 73.1% of its net sales in
fiscal 2006 and 2005, respectively. Sales to the Company's five largest
customers accounted for approximately 75.6% of its net sales in the six months
ended November 30, 2006. During fiscal 2006, Texas Instruments Incorporated
and Spansion Inc. (formerly FASL LLC) accounted for 47.9% and 24.9% of the
Company's net sales, respectively. During fiscal 2005, Spansion Inc. and Texas
Instruments Incorporated accounted for 43.1% and 16.9% of the Company's net
sales, respectively. No other customers represented more than 10% of the
Company's net sales for any of such periods. The Company expects that sales of
its products to a limited number of customers will continue to account for a
high percentage of net sales for the foreseeable future. In addition, sales to
particular customers may fluctuate significantly from quarter to quarter. The
loss of or reduction or delay in an order or 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.
DEPENDENCE ON MARKET ACCEPTANCE OF FOX SYSTEM. One element of the
Company's business strategy is to capture an increasing share of the test
equipment market through sales of its FOX wafer-level test and burn-in
systems. The FOX systems are newly designed to simultaneously burn-in and/or
test all of the die on a wafer. The market for the FOX systems is in the very
early stages of development. The FOX-14 full wafer contact burn-in and parallel
test system was introduced in July 2001 and the FOX-1 full wafer parallel test
system was introduced in June 2005. The Company's strategy depends, in part,
upon its ability to persuade potential customers that the FOX system can
successfully contact and functionally test allof the die on a wafer
simultaneously, and that this method of testing is cost-effective for the
customer. There can be no assurance that the Company's strategy will be
successful. The failure of the FOX system to achieve market acceptance would
have a material adverse effect on the Company's future operating results and
long-term prospects. The Company's stock price may also decline.
Market acceptance of the FOX systems are subject to a number of risks. The
Company must complete development of the FOX system and the manufacturing
processes used to build it. Before a customer will incorporate the FOX system
into a production line, lengthy qualification and correlation tests must be
performed. The Company anticipates that potential customers may be reluctant
to change their procedures in order to transfer burn-in and test functions to
the FOX system. Initial purchases by new customers are expected to be limited
23
to systems used for these qualifications and for engineering studies. Market
acceptance of the FOX system also may be affected by a reluctance of IC
manufacturers to rely on relatively small suppliers such as the Company. As is
common with new complex products incorporating leading-edge technologies, the
Company may encounter reliability, design and manufacturing issues as it begins
volume production and initial installations of FOX systems at customer sites.
While the Company places a high priority on addressing these issues as they
arise, there can be no assurance that they can be resolved to the customer's
satisfaction or that the resolution of such problems will not cause the Company
to incur significant development costs or warranty expenses or to lose
significant sales opportunities.
INTENSE COMPETITION. In each of the markets it serves, the Company faces
competition from established competitors and potential new entrants, many of
which have greater financial, engineering, manufacturing and marketing
resources than the Company. The Company expects its competitors will continue
to improve the performance of their current products and to introduce new
products with improved price and performance characteristics. In addition,
continuing consolidation in the semiconductor equipment industry, and potential
future consolidation, could adversely affect the ability of smaller companies,
such as the Company, to compete with larger, integrated competitors. New
product introductions by the Company's competitors or by new market entrants
could cause a decline in sales or loss of market acceptance of the Company's
existing products. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices which could
adversely affect the Company's business, financial condition and operating
results. The Company believes that to remain competitive it must invest
significant financial resources in new product development and expand its
customer service and support worldwide. There can be no assurance that the
Company will be able to compete successfully in the future.
The semiconductor equipment industry is intensely competitive. Significant
competitive factors in the semiconductor equipment market include price,
technical capabilities, quality, delivery lead-time, flexibility, automation,
cost of ownership, reliability, throughput, product availability and customer
service. In each of the markets it serves, the Company faces competition from
established competitors and potential new entrants, many of which have greater
financial, engineering, manufacturing and marketing resources than the Company.
Because the Company's MTX system performs burn-in and many of the
functional tests performed by traditional memory testers, the MTX system faces
intense competition from burn-in system suppliers and traditional memory tester
suppliers. The market for burn-in systems is highly fragmented, with many
domestic and international suppliers. Some users of such systems, such as
independent test labs, build their own burn-in systems, while others,
particularly large IC manufacturers in Asia, acquire burn-in systems from
captive or affiliated suppliers. Competing suppliers of burn-in and functional
test systems include Advantest Corporation and Dong-Il Corporation.
The Company's MAX monitored burn-in systems have faced and are expected to
continue to face increasingly severe competition, especially from several
regional, low-cost manufacturers and from systems manufacturers that offer
higher power dissipation per device under test.
The Company's FOX full wafer contact systems are expected to face
competition from larger systems manufacturers that have sufficient
technological know-how and manufacturing capability. Competing suppliers of
full wafer contact systems include Matsushita Electric Industrial Co., Ltd. and
Delta V Instruments, Incorporated.
The Company expects that its DiePak products will face significant
competition. The Company believes that several companies have developed or are
developing products which are intended to enable test and burn-in of bare die.
As the bare die market develops, the Company expects that other competitors
will emerge. The DiePak products also face severe competition from other
alternative test solutions. The Company expects that the primary competitive
24
factors in this market will be cost, performance, reliability and assured
supply. Competing suppliers of DiePak products include Yamaichi Electronics
Co., Ltd.
The Company's test fixture products face numerous regional competitors.
There are limited barriers to entry into the burn-in board ("BIB") market, and
as a result, many companies design and manufacture BIBs, including BIBs for use
with the Company's MAX system. The Company's strategy is to provide only
certain high performance BIBs, and the Company generally does not compete to
supply low cost, low performance BIBs. The Company has a partnership with
Pycon, Inc. whereby Pycon, Inc. designs, manufactures and sells the BIBs and
the Company provides Pycon, Inc. with system know-how. Both companies jointly
market and sell the BIBs and performance test boards ("PTBs"). There can be no
assurance that the partnership will be successful. The Company has granted
royalty-bearing licenses to several companies to make performance test boards
for use with the Company's MTX systems and BIBs for use with the Company's MAX4
systems, in order to assure customers of a second source of supply, and the
Company may grant additional licenses as well. Sales of PTBs and MAX4 BIBs by
licensees result in royalties to the Company.
The Company expects its competitors to continue to improve the performance
of their current products and to introduce new products with improved price and
performance characteristics. New product introductions by the Company's
competitors or by new market entrants could cause a decline in sales or loss of
market acceptance of the Company's products. The Company has observed price
competition in the systems market, particularly with respect to its less
advanced products. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices which could
adversely affect the Company's operating margins and results. The Company
believes that to remain competitive it must invest significant financial
resources in new product development and expand its customer service and
support worldwide. There can be no assurance that the Company will be able to
compete successfully in the future.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The
Company relies on subcontractors to manufacture many of the components or
subassemblies used in its products. The Company's MTX, MAX, and FOX systems
and DiePak carriers contain several components, including environmental
chambers, power supplies, wafer and die contactors, signal distribution
substrates and certain ICs, which are currently supplied by only one or a
limited number of suppliers. The Company's reliance on subcontractors and
single source suppliers involves a number of significant risks, including the
loss of control over the manufacturing process, the potential absence of
adequate capacity and reduced control over delivery schedules, manufacturing
yields, quality and costs. In the event that any significant subcontractor or
single source supplier was to become unable or unwilling to continue to
manufacture subassemblies, components or parts in required volumes, the Company
would have to identify and qualify acceptable replacements. The process of
qualifying subcontractors and suppliers could be lengthy, and no assurance can
be given that any additional sources would be available to the Company on a
timely basis. Any delay, interruption or termination of a supplier
relationship could have a material and adverse effect on the Company's
business, financial condition and operating results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Shareholders on October 26, 2006 (the
"Annual Meeting"). There were issued and outstanding on September 12, 2006,
the record date, 7,720,800 shares of Common Stock. There were present at the
Annual Meeting in person and by proxy Shareholders of the Company who were
holders of 7,186,925 shares of Common Stock entitled to vote thereat,
constituting a quorum. At the Annual Meeting, the following votes were cast
for the proposals indicated:
Proposal One: Election of Directors of the Company.
NOMINEE VOTES FOR VOTES WITHHELD BROKER NON-VOTES
------------------ --------- -------------- ----------------
Rhea J. Posedel 6,146,712 1,040,213 --
Robert R. Anderson 6,175,967 1,010,958 --
William W.R. Elder 6,084,813 1,102,112 --
Mukesh Patel 7,169,773 17,152 --
Mario M. Rosati 7,054,752 132,173 --
Proposal Two: Approve the adoption of the Company's 2006 Equity Incentive Plan
and authorize the reservation of 600,000 shares of common stock for issuance
thereunder.
TOTAL VOTES TOTAL VOTES TOTAL VOTES TOTAL BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
----------- ----------- ----------- ----------- ------------
TWO 4,535,314 1,333,848 17,165 1,300,598
Proposal Three: Approve the adoption of the Company's 2006 Employee Stock
Purchase Plan and authorize the reservation of 200,000 shares of common stock
for issuance thereunder.
TOTAL VOTES TOTAL VOTES TOTAL VOTES TOTAL BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
----------- ----------- ----------- ----------- ------------
THREE 5,575,272 295,303 15,752 1,300,598
Proposal Four: Ratify the selection of Burr, Pilger & Mayer LLP as the
Company's independent registered public accounting firm for the fiscal year
ending May 31, 2007.
TOTAL VOTES TOTAL VOTES TOTAL VOTES TOTAL BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
----------- ----------- ----------- ----------- ------------
FOUR 7,171,923 1,000 14,002 --
Proposal Five: Transact such other business as may properly come before the
Annual Meeting or any adjournments thereof.
TOTAL VOTES TOTAL VOTES TOTAL VOTES TOTAL BROKER
PROPOSAL FOR AGAINST ABSTAIN NON-VOTES
----------- ----------- ----------- ----------- ------------
FIVE 5,541,011 1,591,778 54,136 --
26
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
The Exhibits listed on the accompanying "Index to Exhibits" are filed as
part hereof, or incorporated by reference into, the report.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Aehr Test Systems
(Registrant)
Date: January 12, 2007 /s/ RHEA J. POSEDEL
---------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: January 12, 2007 /s/ GARY L. LARSON
----------------------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
28
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
---------- ------------
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated under the Securities
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
29