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, 2007.
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 March 31, 2007 was 7,799,582.
2
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2007
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28, 2007 and May 31, 2006 . . . . . . . . . . . 4
Condensed Consolidated Statements of Income for the three
months and nine months ended February 28, 2007 and 2006. 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 2007 and 2006 . . . . . . 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. . . . . . . . . . . . . . . . . . . . 23
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. . 26
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 26
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 26
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 26
ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Unaudited)
February 28, May 31,
2007 2006
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 6,799 $ 9,405
Short-term investments. . . . . . . . . . . . . 3,312 1,600
Accounts receivable, net of allowances for
doubtful accounts of $78 and $70 at
February 28, 2007 and May 31, 2006,
respectively . . . . . . . . . . . . . . . . 6,073 4,531
Inventories . . . . . . . . . . . . . . . . . . 7,079 7,242
Prepaid expenses and other. . . . . . . . . . . 432 357
----------- -----------
Total current assets . . . . . . . . . . . . 23,695 23,135
Property and equipment, net . . . . . . . . . . . 1,261 959
Goodwill . . . . . . . . . . . . . . . . . . . . 274 274
Other assets . . . . . . . . . . . . . . . . . . 523 525
----------- -----------
Total assets . . . . . . . . . . . . . . . . $25,753 $24,893
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 1,416 $ 1,130
Accrued expenses. . . . . . . . . . . . . . . . 2,369 2,347
Deferred revenue. . . . . . . . . . . . . . . . 239 2,335
----------- -----------
Total current liabilities . . . . . . . . . . 4,024 5,812
Deferred lease commitment . . . . . . . . . . . . 233 264
----------- -----------
Total liabilities . . . . . . . . . . . . . . 4,257 6,076
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 7,798 shares and
7,630 shares at February 28, 2007 and
May 31, 2006, respectively. . . . . . . . . . 78 76
Additional paid-in capital. . . . . . . . . . . 39,267 38,081
Accumulated other comprehensive income. . . . . 1,273 1,291
Accumulated deficit . . . . . . . . . . . . . . (19,122) (20,631)
----------- -----------
Total shareholders' equity . . . . . . . . . 21,496 18,817
----------- -----------
Total liabilities and shareholders' equity. . $25,753 $24,893
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
AEHR TEST SYSTEMS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------- ---------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Net sales. . . . . . . . . . . . . . . . . . . $5,687 $6,318 $19,072 $16,781
Cost of sales. . . . . . . . . . . . . . . . . 2,369 3,780 9,542 9,350
--------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . 3,318 2,538 9,530 7,431
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative. . . . . 1,619 1,328 4,773 4,322
Research and development . . . . . . . . . . 1,634 1,015 4,543 3,055
--------- --------- --------- ---------
Total operating expenses . . . . . . . . 3,253 2,343 9,316 7,377
--------- --------- --------- ---------
Income from operations . . . . . . . . . . . . 65 195 214 54
Interest income . . . . . . . . . . . . . . . 134 77 390 157
Other income, net . . . . . . . . . . . . . . 70 102 937 116
--------- --------- --------- ---------
Income before income tax expense . . . . . . . 269 374 1,541 327
Income tax expense . . . . . . . . . . . . . . 4 14 32 45
--------- --------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . $ 265 $ 360 $ 1,509 $ 282
========= ========= ========= =========
Net income per share - basic . . . . . . . . . $ 0.03 $ 0.05 $ 0.20 $ 0.04
Net income per share - diluted . . . . . . . . $ 0.03 $ 0.05 $ 0.18 $ 0.04
Shares used in per share calculations:
Basic. . . . . . . . . . . . . . . . . . . . 7,765 7,508 7,732 7,495
Diluted. . . . . . . . . . . . . . . . . . . 8,115 7,550 8,228 7,507
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)
Nine Months Ended
February 28,
----------------------
2007 2006
---------- ----------
Cash flows from operating activities:
Net income ................................... $1,509 $ 282
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Stock compensation expense.................. 521 --
Provision for doubtful accounts............. 8 (38)
Loss on disposal of property and equipment.. 41 64
Depreciation and amortization............... 233 280
Changes in operating assets and liabilities:
Accounts receivable....................... (1,542) (295)
Inventories............................... 163 (712)
Deferred lease commitment ................ (31) (14)
Accounts payable.......................... 268 296
Accrued expenses and deferred revenue..... (2,077) 875
Prepaid expenses and other................ (72) 227
---------- ----------
Net cash provided by (used in)
operating activities.................. (979) 965
---------- ----------
Cash flows from investing activities:
Purchase of investments..................... (12,408) (7,190)
Net proceeds from sales and
maturity of investments................... 10,697 9,212
Purchase of property and equipment ......... (584) (91)
---------- ----------
Net cash provided by (used in)
investing activities.................. (2,295) 1,931
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 666 71
---------- ----------
Net cash provided by
financing activities.................. 666 71
---------- ----------
Effect of exchange rates on cash................ 2 (164)
---------- ----------
Net increase (decrease) in cash and
cash equivalents...................... (2,606) 2,803
Cash and cash equivalents, beginning of period.. 9,405 4,952
---------- ----------
Cash and cash equivalents, end of period........ $6,799 $7,755
========== ==========
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 Reports on Form 10-Q for the quarterly periods ended August 31, 2006
and November 30, 2006 filed with the SEC on October 13, 2006 and January 16,
2007, respectively. 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
7
is accounted for as an equity instrument. The Company's condensed
consolidated financial statements as of and for the three and nine months
ended February 28, 2007 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 plan and the employee stock
purchase plan ("ESPP"). Under the modified prospective transition method,
stock compensation cost has been recognized in the three and nine months ended
February 28, 2007 in the condensed consolidated statements of income 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 nine months ended
February 28, 2006 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 Nine Months Ended
February 28, 2006 February 28, 2006
------------------ -----------------
Net income, as reported: ................... $360 $282
Deduct: Total stock compensation expense
determined under fair value based
method for all awards, net of
related tax effects................. (203) (611)
------------------ -----------------
Pro forma net income (loss)................. $157 $(329)
================== =================
Net income (loss) per share:
Basic and diluted, as reported ............. $0.05 $ 0.04
================== =================
Basic and diluted, pro forma ............... $0.02 $(0.04)
================== =================
Impact of the Adoption of SFAS No. 123(R)
The Company elected to adopt the modified prospective application
transition method as provided by SFAS No. 123(R), and we recorded $176,000 and
$521,000 of stock compensation expenses in our unaudited condensed
consolidated statements of income for the three and nine months ended February
28, 2007. 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 nine months ended
February 28, 2007 (in thousands, except per share data):
8
Three Months Ended Nine Months Ended
February 28, 2007 February 28, 2007
------------------ -----------------
Stock-based compensation in the form of employee
stock options and ESPP shares, included in:
Cost of sales . . . . . . . . . . . . . . . $ 15 $ 42
Selling, general and administrative . . . . 97 285
Research and development . . . . . . . . . . 64 194
------------------ -----------------
Total stock-based compensation . . . . . . . 176 521
Tax effect on stock-based compensation 3 3
------------------ -----------------
Net effect on net income $173 $518
================== =================
Effect on net income per share:
Basic $0.02 $0.07
Diluted $0.02 $0.06
As of February 28, 2007, the total compensation cost related to unvested
stock-based awards under the Company's 1996 Stock Option Plan and 2006 Equity
Incentive Plan, but not yet recognized, was approximately $1,003,000 which is
net of estimated forfeitures of $74,000. This cost will be amortized on a
straight-line basis over a weighted average period of approximately 3.1
years.
During the three and nine months ended February 28, 2007, the Company
recorded stock-based compensation related to our ESPP of $35,000 and $110,000,
respectively. As of February 28, 2007, the total compensation cost related to
options to purchase the Company's common shares under the ESPP but not yet
recognized was approximately $124,000. This cost will be amortized on a
straight-line basis over a weighted average period of approximately 1.3 years.
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 nine months ended February 28,
2007 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 nine months ended February 28, 2007 and 2006 was estimated using
the following weighted-average assumptions:
Three Months Ended Nine Months Ended
February 28, February 28,
------------------- -----------------
2007 2006 2007 2006
-------- ------- -------- -------
Option Plan Shares
Expected Term (in years).............. 5 5 5 5
Expected Volatility................... 0.75 0.75 0.75 0.75
Expected Dividend..................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates.............. 4.66% 4.44% 4.76% 4.22%
Estimated Forfeiture Rate............. 4% 0% 4% 0%
Weighted Average Fair Value........... -- $2.66 $5.19 $2.09
The fair value of our ESPP shares for the three months and nine months
ended February 28, 2007 and 2006 was estimated using the following weighted-
average assumptions:
Three Months Ended Nine Months Ended
February 28, February 28,
--------------------- ---------------------
2007 2006 2007 2006
--------- --------- --------- ---------
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.................. 0.61-0.74 0.69-0.80 0.61-0.74 0.69-0.80
Expected Dividend.................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates............. 4.5%-5.1% 3.4%-4.4% 4.5%-5.1% 3.4%-4.4%
Estimated Forfeiture Rate............ 4% 0% 4% 0%
Weighted Average Fair Value.......... $4.89 $5.04 $5.04 $5.04
10
The following table summarizes the stock option transactions during the
nine months ended February 28, 2007 (in thousands, except per share data):
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 exercised........... -- (2) $2.85
Options cancelled........... 1 (1) $6.00
---------- --------
Balances, February 28, 2007... 751 1,353 $4.37 $2,504
========== ========
Options exercisable and expected to be
exercisable at February 28, 2007 1,291 $4.37 $2,384
========
The options outstanding and exercisable at February 28, 2007 were in the
following exercise price ranges (in thousands, except per share data):
Options Outstanding Options Exercisable
at February 28, 2007 at February 28, 2007
-------------------------------- --------------------------------------
Weighted Weighted
Average Weighted Number Weighted Average
Range of Number Remaining Average Exer- Average Remaining Aggregate
Exercise Outstanding Contractual Exercise cisable Exercise Contractual Intrinsic
Prices Shares Life (Years) Price Shares Price Life (Years) Value
----------- ----------- ----------- -------- ------- -------- ----------- ---------
$2.49-$3.63 577 4.52 $3.09 345 $3.10 4.24
$3.66-$4.08 278 3.13 $3.91 264 $3.91 3.05
$4.25-$4.95 211 2.45 $4.50 187 $4.52 2.22
$5.25-$6.25 135 2.23 $5.89 105 $5.83 1.52
$8.45-$9.30 152 6.29 $8.51 22 $8.52 6.32
----------- -------
$2.49-$9.30 1,353 3.88 $4.37 923 $4.06 3.23 $1,783
=========== =======
The total intrinsic value of options exercised for the three and nine
months ended February 28, 2007 was $3,000 and $392,000, respectively. The
weighted average contractual life of the options exercisable and expected to
be exercisable was 3.83 years.
11
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.
Three Months Ended Nine Months Ended
February 28, February 28,
--------- ------- -------- --------
2007 2006 2007 2006
-------- ------- -------- --------
(in thousands, except per share amounts)
Numerator: Net income ..................... $ 265 $ 360 $1,509 $ 282
-------- ------- -------- --------
Denominator for basic net income per share:
Weighted-average shares outstanding ..... 7,765 7,508 7,732 7,495
-------- ------- -------- --------
Shares used in basic per share calculation. 7,765 7,508 7,732 7,495
Effect of dilutive securities.............. 350 42 496 12
-------- ------- -------- --------
Denominator for diluted net income
per share.............................. 8,115 7,550 8,228 7,507
-------- ------- -------- --------
Basic net income per share ................ $ 0.03 $ 0.05 $ 0.20 $ 0.04
======== ======= ======== ========
Diluted net income per share .............. $ 0.03 $ 0.05 $ 0.18 $ 0.04
======== ======= ======== ========
Stock options to purchase 248,938 and 1,180,787 shares of common stock
were outstanding on February 28, 2007 and February 28, 2006, respectively, but
not included in the computation of diluted income per share, because the
inclusion of such shares would be anti-dilutive.
4. INVENTORIES
Inventories are comprised of the following (in thousands):
February 28, May 31,
2007 2006
----------- ----------
Raw materials and sub-assemblies $3,630 $3,039
Work in process 3,438 2,978
Finished goods 11 1,225
----------- ----------
$7,079 $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 February 28, 2007:
Net sales...................... $ 4,773 $ 541 $746 $ (373) $ 5,687
Portion of U.S. net sales
from export sales............ 1,172 -- -- -- 1,172
Income (loss) from operations.. (226) (4) 199 96 65
Identifiable assets............ 34,464 1,388 997 (11,096) 25,753
Property and equipment, net.... 1,170 78 13 -- 1,261
Nine months ended February 28, 2007:
Net sales...................... $17,276 $2,503 $891 $(1,598) $19,072
Portion of U.S. net sales
from export sales............ 6,045 -- -- -- 6,045
Income (loss) from operations.. 47 174 (5) (2) 214
Identifiable assets............ 34,464 1,388 997 (11,096) 25,753
Property and equipment, net.... 1,170 78 13 -- 1,261
Three months ended February 28, 2006:
Net sales...................... $ 5,747 $ 550 $ 556 $ (535) $ 6,318
Portion of U.S. net sales
from export sales............ 4,119 -- -- -- 4,119
Income (loss) from operations.. 190 (39) 43 1 195
Identifiable assets............ 31,249 1,773 988 (11,205) 22,805
Property and equipment, net.... 859 139 30 -- 1,028
Nine months ended February 28, 2006:
Net sales...................... $15,054 $2,110 $1,135 $(1,518) $16,781
Portion of U.S. net sales
from export sales............ 12,059 -- -- -- 12,059
Income (loss) from operations.. -- (36) 86 4 54
Identifiable assets............ 31,249 1,773 988 (11,205) 22,805
Property and equipment, net.... 859 139 30 -- 1,028
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 nine months ended February 28, 2007 and
2006 (in thousands):
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ ----------------
2007 2006 2007 2006
-------- -------- ------- -------
Balance at the beginning of the period . . $137 $119 $169 $213
Accruals for warranties issued
during the period . . . . . . . . . . . 26 92 201 148
Reversals of warranties issued
during the period . . . . . . . . . . . (21) -- (70) (52)
Settlement made during the period
(in cash or in kind) . . . . . . . . . . (26) (88) (184) (186)
-------- ------- ------- -------
Balance at the end of the period . . . . . $116 $123 $116 $123
======== ======= ======= =======
13
The accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
7. OTHER COMPREHENSIVE INCOME
Other comprehensive income, net of tax is comprised of the following (in
thousands):
Three Months Ended Nine Months Ended
February 28, February 28,
------------------ ------------------
2007 2006 2007 2006
------- ------- -------- -------
Net income . . . . . . . . . . . . . . . $265 $360 $1,509 $282
Foreign currency translation
adjustments expense. . . . . . . . . . 9 (27) (18) (91)
Unrealized holding gains (losses)
arising during period. . . . . . . . . (1) 3 -- 7
------- ------- -------- -------
Comprehensive income . . . . . . . . . . $273 $336 $1,491 $198
======= ======= ======== =======
8. EMPLOYEE BENEFIT PLANS
In addition to the Company's 1996 Stock Option Plan and the 1997 Employee
Stock Purchase Plan discussed in Notes 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 respectively 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 February 28, 2007, out of the 2,104,050 shares authorized for grant
under the 1996 Stock Option Plan and 2006 Equity Incentive Plan, approximately
1,353,395 shares had been granted. As of February 28, 2007, no shares had
been issued from the 200,000 shares authorized for grant under the 2006
Employee Stock Purchase Plan. All shares authorized by the 1997 Employee
Stock Purchase Plan 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, which are
not considered material. As such, EITF 06-03 will not impact the method for
recording these sales taxes in the condensed consolidated financial
statements.
14
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, if any, 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. The Company is
currently assessing the impact of adopting SAB 108, but the Company does not
expect that it will have a material effect on its 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, if any, of SFAS 158 on
its condensed consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 provides companies with an option to
report selected financial assets and liabilities at fair value. SFAS 159's
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. SFAS 159 is effective as of the beginning of an
entity's first fiscal year beginning after November 15, 2007. The Company is
currently evaluating the potential impact, if any, that the adoption of SFAS
159 will have 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 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), "Share-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
over the requisite service period for the employee. This methodology requires
16
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 nine months ended February 28, 2007, 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 income as a percentage of net sales for the periods
indicated.
Three Months Ended Nine Months Ended
February 28, February 28,
-------------------- -------------------
2007 2006 2007 2006
-------- --------- -------- --------
Net sales. . . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . . 41.7 59.8 50.0 55.7
-------- --------- -------- --------
Gross profit . . . . . . . . . . . . . . . 58.3 40.2 50.0 44.3
-------- --------- -------- --------
Operating expenses:
Selling, general and administrative. . . 28.5 21.0 25.0 25.8
Research and development . . . . . . . . 28.7 16.1 23.8 18.2
-------- --------- -------- --------
Total operating expenses . . . . . . 57.2 37.1 48.8 44.0
-------- --------- -------- --------
Income from operations . . . . . . . . . . 1.1 3.1 1.2 0.3
Interest income . . . . . . . . . . . . . 2.4 1.2 2.0 1.0
Other income, net . . . . . . . . . . . . 1.3 1.6 4.9 0.7
-------- ---------- -------- --------
Income before income tax expense . . . . . 4.8 5.9 8.1 2.0
Income tax expense . . . . . . . . . . . . 0.1 0.2 0.2 0.3
-------- --------- -------- --------
Net income . . . . . . . . . . . . . . . . 4.7 % 5.7 % 7.9 % 1.7 %
======== ========= ======== ========
THREE MONTHS ENDED FEBRUARY 28, 2007 COMPARED TO THREE MONTHS ENDED FEBRUARY
28, 2006
NET SALES. Net sales decreased to $5.7 million in the three months ended
February 28, 2007 from $6.3 million in the three months ended February 28,
2006, a decrease of 10.0%. The decrease in net sales in the three months
ended February 28, 2007 resulted primarily from a decrease in net sales of the
Company's MTX products, partially offset by an increase in sales of the
Company's wafer/die level products. Net sales of the Company's MTX products
for the three months ended February 28, 2007 were $0.4 million, and decreased
approximately $3.1 million from the three months ended February 28, 2006. Net
sales of the Company's wafer/die level products for the three months ended
February 28, 2007 were $2.8 million, and increased approximately $2.7 million
from the three months ended February 28, 2006. The Company expects net sales
and net income to increase in the fourth quarter of fiscal 2007, exceeding the
levels of the fourth quarter of fiscal 2006.
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 $3.3 million
in the three months ended February 28, 2007 from $2.5 million in the three
months ended February 28, 2006, an increase of 30.7%. As a percentage of net
sales, gross profit margin increased to 58.3% in the three months ended
February 28, 2007 from 40.2% in the three months ended February 28, 2006. The
increase in gross profit margin was primarily the result of lower material
costs as a percentage of net sales. Over the next few quarters, the Company
believes that its gross margin will be in the high 40% to low 50% range.
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 $1.6 million in
the three months ended February 28, 2007 increased from $1.3 million in the
three months ended February 28, 2006, an increase of 21.9%. The increase in
SG&A expense for the three months ended February 28, 2007 was primarily
attributable to a reduction in bad debt reserves of approximately $141,000 in
fiscal 2006 and stock-based compensation expense of approximately $97,000
associated with the adoption of SFAS No. 123(R) in fiscal 2007. As a
percentage of net sales, SG&A expenses increased to 28.5% in the three months
ended February 28, 2007 from 21.0% in the three months ended February 28,
2006.
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 $1.6 million in the three months ended February 28, 2007 from
$1.0 million in the three months ended February 28, 2006, an increase of
61.0%. This increase was primarily due to an increase in project related
expenses of $340,000, project related professional service expenses of
$116,000 and stock compensation expense of approximately $64,000. As a
percentage of net sales, R&D expenses increased to 28.7% in the three months
ended February 28, 2007 from 16.1% in the three months ended February 28,
2006.
INTEREST INCOME. Interest income increased to $134,000 in the three
months ended February 28, 2007 from $77,000 in the three months ended February
28, 2006, an increase of 74.0%. The increase was primarily related to higher
invested balances.
OTHER INCOME, NET. Other income, net decreased to $70,000 in the three
months ended February 28, 2007 from $102,000 in the three months ended
February 28, 2006. The decrease in other income, net was primarily due to a
decrease in the dividend received from ESA Electronics Pte Ltd., a Singapore
company in which the Company holds a minority ownership position.
INCOME TAX EXPENSE. Income tax expense decreased to $4,000 in the three
months ended February 28, 2007 from $14,000 in the three months ended February
28, 2006. The income tax expense in the three months ended February 28, 2007
and the income tax expense in the three months ended February 28, 2006 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
NINE MONTHS ENDED FEBRUARY 28, 2007 COMPARED TO NINE MONTHS ENDED FEBRUARY 28,
2006
NET SALES. Net sales increased to $19.1 million in the nine months ended
February 28, 2007 from $16.8 million in the nine months ended February 28,
2006, an increase of 13.7%. The increase in net sales in the nine months
ended February 28, 2007 resulted primarily from an increase in net sales of
the Company's wafer/die level products, partially offset by decreases in net
sales of the Company's MTX products and dynamic burn-in products. Net sales
of the Company's wafer/die level products for the nine months ended February
28, 2007 were $7.1 million, and increased approximately $6.7 million from the
nine months ended February 28, 2006. Net sales of the Company's MTX products
for the nine months ended February 28, 2007 were $2.6 million, and decreased
approximately $3.1 million from the nine months ended February 28, 2006. Net
sales of the Company's dynamic burn-in products for the nine months ended
February 28, 2007 were $9.4 million, and decreased approximately $1.2 million
from the nine months ended February 28, 2006.
GROSS PROFIT. Gross profit increased to $9.5 million in the nine months
ended February 28, 2007 from $7.4 million in the nine months ended February
28, 2006, an increase of 28.2%. Gross profit margin increased to 50.0% in the
nine months ended February 28, 2007 from 44.3% in the nine months ended
February 28, 2006. The increase in gross profit margin was primarily related
to manufacturing efficiencies resulting from increased production levels.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $4.8
million in the nine months ended February 28, 2007 from $4.3 million in the
nine months ended February 28, 2006, an increase of 10.4%. The increase in
SG&A expenses was primarily due to stock compensation expense of approximately
$285,000. As a percentage of net sales, SG&A expenses decreased slightly to
25.0% in the nine months ended February 28, 2007 from 25.8% in the nine months
ended February 28, 2006.
RESEARCH AND DEVELOPMENT. R&D expenses increased to $4.5 million in the
nine months ended February 28, 2007 from $3.1 million in the nine months ended
February 28, 2006, an increase of 48.7%. The increase in R&D expenses was
primarily due to increases in project material expenses of $587,000, project
related professional service expenses of $449,000 and stock compensation
expense of approximately $194,000. As a percentage of net sales, R&D expenses
increased to 23.8% in the nine months ended February 28, 2007 from 18.2% in
the nine months ended February 28, 2006, reflecting the previously detailed
expense increases.
INTEREST INCOME. Interest income increased to $390,000 in the nine months
ended February 28, 2007 from $157,000 in the nine months ended February 28,
2006, an increase of 148.4%. The increase in interest income was primarily
the result of higher invested balances.
OTHER INCOME, NET. Other income, net increased to $937,000 in the nine
months ended February 28, 2007 from $116,000 in the nine months ended February
28, 2006. The increase in other income, net was primarily due to the
recognition of an earn-out payment of $644,000 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 $32,000 in the nine
months ended February 28, 2007, from $45,000 in the nine months ended February
28, 2006. The income tax expense in the nine months ended February 28, 2007
was primarily attributable to alternative minimum tax requirements on the
Company's U.S. operations. The income tax expense in the nine months ended
February 28, 2006 was primarily related to the tax expense recorded as a
result of income earned in the Company's German subsidiary.
19
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $979,000 for the
nine months ended February 28, 2007 and net cash provided by operating
activities was approximately $965,000 for the nine months ended February 28,
2006. For the nine months ended February 28, 2007, net cash used in operating
activities was primarily due to a decrease in accrued expenses and deferred
revenue of $2.1 million, and an increase in accounts receivable of $1.5
million, partially offset by net income of $1.5 million and stock compensation
expense of $521,000. Accrued expenses and deferred revenue decreased
primarily due to revenue recognized from deferrals made in prior periods which
were earned in this nine month period. The increase in accounts receivable in
the nine months period was primarily a timing issue as many of the Company's
shipments were made closer to the end of the quarter in 2007. The Company
recorded stock compensation expense of approximately $521,000 for the nine
months ended February 28, 2007, associated with the adoption of SFAS No. 123
(R) in fiscal 2007. For the nine months ended February 28, 2006, net cash
provided by operating activities was primarily due to an increase in accrued
expenses and deferred revenues of $875,000. This increase was primarily
related to an increase in deferred revenue.
Net cash used in investing activities was approximately $2.3 million for
the nine months ended February 28, 2007 and net cash provided by investing
activities was approximately $1.9 million for the nine months ended February
28, 2006. The net cash used in investing activities during the nine months
ended February 28, 2007 was primarily attributable to $12.4 million in
purchases of investments, partially offset by $10.7 million in net proceeds
from sales and maturities of investments. The net cash provided by investing
activities during the nine months ended February 28, 2006 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 $666,000 in the nine
months ended February 28, 2007 and $71,000 in the nine months ended February
28, 2006. Net cash provided by financing activities during the nine months
ended February 28, 2007 and 2006 was due to proceeds from issuance of common
stock from the exercise of stock options.
As of February 28, 2007, the Company had working capital of $19.7 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 nine months ended February 28, 2007, 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
20
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 calendar year 2007. After calendar
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.
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, which are
not considered material. As such, EITF 06-03 will not impact the method for
recording these sales taxes in the condensed 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, if any, 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. The Company is
currently assessing the impact of adopting SAB 108, but the Company does not
expect that it will have a material effect on its 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
21
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, if any, of SFAS 158 on
its condensed consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 provides companies with an option to
report selected financial assets and liabilities at fair value. SFAS 159's
objective is to reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related assets and
liabilities differently. SFAS 159 is effective as of the beginning of an
entity's first fiscal year beginning after November 15, 2007. The Company is
currently evaluating the potential impact, if any, that the adoption of SFAS
159 will have 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 February 28, 2007.
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 or increase in
22
the value of the Yen as compared with the U.S. dollar would not be expected to
result in a significant change in the Company's 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.
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 70.7% of its net sales in the nine
months ended February 28, 2007. 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.
23
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 all of 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
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
24
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 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 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 FOX, MAX, and MTX 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
25
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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
26
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, 2007 /s/ RHEA J. POSEDEL
-------------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 13, 2007 /s/ GARY L. LARSON
------------------------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
27
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.
28