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, 2009.
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, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act
(Check one):
Large accelerated filer Accelerated filer
--- ---
Non-accelerated filer X Smaller reporting company
--- ---
(Do not check if a smaller reporting company)
1
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
--- ---
Number of shares of common stock, $0.01 par value, outstanding
at March 31, 2009 was 8,450,000.
2
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 28, 2009
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of
February 28, 2009 and May 31, 2008 . . . . . . . . . . . 4
Condensed Consolidated Statements of Operations for the three
months and nine months ended February 28, 2009 and
February 29, 2008. . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 2009 and
February 29, 2008. . . . . . . . . . . . . . . . . . . . 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. . 30
ITEM 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 30
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . 30
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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,
2009 2008
----------- -----------
(1)
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . $ 7,399 $15,648
Accounts receivable, net of allowances for
doubtful accounts of $13,743 and $183 at
February 28, 2009 and May 31, 2008,
respectively . . . . . . . . . . . . . . . . 1,075 10,927
Inventories . . . . . . . . . . . . . . . . . . 5,927 10,209
Deferred income taxes . . . . . . . . . . . . . -- 3,043
Prepaid expenses and other. . . . . . . . . . . 884 396
----------- -----------
Total current assets . . . . . . . . . . . . 15,285 40,223
Property and equipment, net . . . . . . . . . . . 2,792 2,278
Goodwill. . . . . . . . . . . . . . . . . . . . . -- 274
Deferred income taxes . . . . . . . . . . . . . . -- 1,900
Other assets. . . . . . . . . . . . . . . . . . . 525 524
----------- -----------
Total assets . . . . . . . . . . . . . . . . $18,602 $45,199
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . $ 1,703 $ 2,981
Accrued expenses. . . . . . . . . . . . . . . . 2,666 3,694
Deferred revenue. . . . . . . . . . . . . . . . 125 186
----------- -----------
Total current liabilities . . . . . . . . . . 4,494 6,861
Income tax payable. . . . . . . . . . . . . . . . 320 297
Deferred lease commitment . . . . . . . . . . . . 309 269
----------- -----------
Total liabilities . . . . . . . . . . . . . . 5,123 7,427
----------- -----------
Shareholders' equity:
Common stock, $0.01 par value:
Issued and outstanding: 8,450 shares and
8,359 shares at February 28, 2009 and
May 31, 2008, respectively. . . . . . . . . . 85 84
Additional paid-in capital. . . . . . . . . . . 44,191 42,796
Accumulated other comprehensive income. . . . . 2,649 2,395
Accumulated deficit . . . . . . . . . . . . . . (33,446) (7,503)
----------- -----------
Total shareholders' equity . . . . . . . . . 13,479 37,772
----------- -----------
Total liabilities and shareholders' equity. . $18,602 $45,199
=========== ===========
(1) The condensed consolidated balance sheet at May 31, 2008 has been derived
from the audited consolidated financial statements at that date.
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 Nine Months Ended
-------------------- --------------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2009 2008 2009 2008
--------- --------- --------- ---------
Net sales. . . . . . . . . . . . . . . $ 1,235 $10,792 $20,167 $28,127
Cost of sales. . . . . . . . . . . . . 8,049 5,262 17,471 13,532
--------- --------- --------- ---------
Gross (loss) profit. . . . . . . . . . (6,814) 5,530 2,696 14,595
--------- --------- --------- ---------
Operating expenses:
Selling, general and administrative. 15,328 2,001 19,243 5,664
Research and development . . . . . . 1,596 1,826 4,651 4,919
Impairment of goodwill . . . . . . . 274 -- 274 --
--------- --------- --------- ---------
Total operating expenses . . . . 17,198 3,827 24,168 10,583
--------- --------- --------- ---------
(Loss) income from operations. . . . . (24,012) 1,703 (21,472) 4,012
Interest income . . . . . . . . . . . 26 55 136 213
Other income (expense), net. . . . . . 7 38 384 (70)
--------- --------- --------- ---------
(Loss) income before income tax
expense (benefit). . . . . . . . . . (23,979) 1,796 (20,952) 4,155
Income tax expense (benefit) . . . . . 3,701 (130) 4,991 84
--------- --------- --------- ---------
Net (loss) income. . . . . . . . . . . $(27,680) $ 1,926 $(25,943) $ 4,071
========= ========= ========= =========
Net (loss) income per share - basic. . $ (3.28) $ 0.24 $ (3.08) $ 0.51
Net (loss) income per share - diluted. $ (3.28) $ 0.23 $ (3.08) $ 0.48
Shares used in per share calculations:
Basic. . . . . . . . . . . . . . . . 8,450 8,025 8,424 7,919
Diluted. . . . . . . . . . . . . . . 8,450 8,476 8,424 8,398
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
---------------------
Feb. 28, Feb. 29,
2009 2008
--------- ---------
Cash flows from operating activities:
Net (loss) income............................. $(25,943) $4,071
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Stock compensation expense.................. 947 612
Provision for doubtful accounts............. 13,573 13
Loss on disposal of assets.................. -- 6
Impairment of goodwill...................... 274 --
Depreciation and amortization............... 396 332
Deferred income taxes....................... 4,943 --
Changes in operating assets and liabilities:
Accounts receivable....................... (3,647) (11,376)
Inventories............................... 3,950 270
Deferred lease commitment................. 40 (75)
Accounts payable.......................... (1,278) 5
Income tax payable........................ 23 --
Accrued expenses and deferred revenue..... (1,089) 1,052
Prepaid expenses and other................ (488) 12
--------- ---------
Net cash used in
operating activities.................. (8,299) (5,078)
--------- ---------
Cash flows from investing activities:
Purchase of investments..................... -- (500)
Proceeds from sales and maturity
of investments............................ -- 3,188
Purchase of property and equipment.......... (578) (417)
--------- ---------
Net cash (used in) provided by
investing activities.................. (578) 2,271
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options............. 450 1,053
--------- ---------
Net cash provided by
financing activities.................. 450 1,053
--------- ---------
Effect of exchange rates on cash................ 178 964
--------- ---------
Net decrease in cash and
cash equivalents...................... (8,249) (790)
Cash and cash equivalents, beginning of period.. 15,648 6,564
--------- ---------
Cash and cash equivalents, end of period........ $ 7,399 $5,774
========= =========
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 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 Annual Report on Form 10-K for the fiscal year ended
May 31, 2008. 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 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. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under6 the circumstances. Actual results may
differ from those estimates. To the extent that there are material
differences between these estimates and our actual results, our future
financial statements will be affected.
2. STOCK-BASED COMPENSATION
The Company accounts for stock options and employee stock purchase plan
("ESPP") shares under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004),"Share-Based Payment" ("SFAS No.
123(R)") which requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing model. 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. See Notes 9 and 10 in
the Company's Annual Report on Form 10-K for fiscal 2008 filed on August 29,
2008 for further information regarding the stock option plan and the ESPP.
The following table summarizes compensation costs related to the Company's
stock-based compensation for the three and nine months ended February 28, 2009
and February 29, 2008, respectively (in thousands, except per share data):
7
Three Months Ended Nine Months Ended
------------------ ------------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2009 2008 2009 2008
-------- -------- -------- --------
Stock-based compensation in the form of employee
stock options and ESPP shares, included in:
Cost of sales . . . . . . . . . . . . . . . $ 79 $ 25 $160 $ 56
Selling, general and administrative . . . . 155 120 488 349
Research and development . . . . . . . . . . 97 71 299 207
-------- -------- -------- --------
Total stock-based compensation . . . . . . . 331 216 947 612
Tax effect on stock-based compensation . . . 255 (4) -- (12)
-------- -------- -------- --------
Net effect on net (loss) income. . . . . . . $586 $212 $947 $600
======== ======== ======== ========
Effect on net (loss) income per share:
Basic . . . . . . . . . . . . . . . . . . $0.07 $0.03 $0.11 $0.08
Diluted . . . . . . . . . . . . . . . . . $0.07 $0.03 $0.11 $0.07
As of February 28, 2009, stock-based compensation costs of $31,000 are
capitalized as part of inventory.
During the three months ended February 28, 2009 and February 29, 2008, the
Company recorded stock-based compensation related to stock options of $300,000
and $181,000, respectively. During the nine months ended February 28, 2009
and February 29, 2008, the Company recorded stock-based compensation related
to stock options of $835,000 and $507,000, respectively.
As of February 28, 2009, the total unrecognized stock based compensation
cost related to unvested stock-based awards under the Company's 1996 Stock
Option Plan and 2006 Equity Incentive Plan was approximately $2,713,000, which
is net of estimated forfeitures of $55,000. This cost will be amortized over
the remaining service period of the underlying options. The weighted average
period is approximately 3.0 years.
During the three months ended February 28, 2009 and February 29, 2008, the
Company recorded stock-based compensation related to its ESPP of $31,000 and
$35,000, respectively. During the nine months ended February 28, 2009 and
February 29, 2008, the Company recorded stock-based compensation related to
its ESPP of $112,000 and $105,000, respectively.
As of February 28, 2009, the total compensation cost related to options to
purchase the Company's common stock under the ESPP but not yet recognized was
approximately $94,000. 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 model 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 period 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 period 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 the Company's stock-
based awards.
8
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 its 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 model.
Risk-Free Interest Rate. The Company bases the risk-free interest rate
used in the Black-Scholes option valuation model 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,
2009 and February 29, 2008 were estimated using the following weighted average
assumptions in the Black-Scholes option valuation model consistent with the
provisions of SFAS No. 123(R) and Securities and Exchange Commission Staff
Accounting Bulletin No. 107.
The fair value of our stock options granted to employees for the three and
nine months ended February 28, 2009 and February 29, 2008, respectively, was
estimated using the following weighted-average assumptions:
Three months ended Nine Months Ended
------------------ -----------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2009 2008 2009 2008
------- ------- ------- -------
Option Plan Shares
Expected Term (in years).................... 5 5 5 5
Volatility.................................. 0.77 0.71 0.74 0.74
Expected Dividend........................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates.................... 1.68% 2.87% 2.99% 4.60%
Estimated Forfeiture Rate................... 2% 4% 2% 4%
Weighted Average Grant Date Fair Value...... $0.89 $4.24 $3.67 $3.93
The fair value of our ESPP shares for the three and nine months ended
February 28, 2009 and February 29, 2008, respectively, was estimated using the
following weighted-average assumptions:
Three months ended Nine Months Ended
------------------- ------------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2009 2008 2009 2008
--------- --------- --------- ---------
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
Volatility................................ 0.64-0.88 0.51-0.63 0.62-0.88 0.43-0.69
Expected Dividend......................... $0.00 $0.00 $0.00 $0.00
Risk-free Interest Rates.................. 1.2%-1.6% 2.8%-4.4% 1.2%-2.6% 2.8%-4.9%
Estimated Forfeiture Rate................. 0% 4% 0% 4%
Weighted Average Grant Date Fair Value.... $1.35 $2.12 $1.60 $2.15
9
The following table summarizes the stock option transactions during the
three and nine months ended February 28, 2009 (in thousands, except per share
data):
Outstanding Options
---------------------------------------------
Weighted
Number Average Aggregate
Available of Exercise Intrinsic
Shares Shares Price Value
---------- -------- --------- ----------
Balances, May 31, 2008........ 350 1,266 $5.05 $4,632
Options granted............. (268) 268 $10.03
Options terminated.......... 2 (2) $5.17
Options exercised........... -- (44) $4.35
---------- --------
Balances, August 31, 2008..... 84 1,488 $5.97 $604
Additional shares reserved.. 600 --
Options granted............. (279) 279 $2.27
Options terminated.......... 5 (5) $4.72
---------- --------
Balances, November 30, 2008... 410 1,762 $5.38 --
Options granted............. (8) 8 $1.42
Options terminated.......... 65 (65) $5.91
---------- --------
Balances, February 28, 2009... 467 1,705 $5.35 --
========== ========
Options exercisable and expected to be
exercisable at February 28, 2009 1,671 $5.35 --
========
The options outstanding and exercisable at February 28, 2009 were in the
following exercise price ranges (in thousands, except per share data):
Options Outstanding Options Exercisable
at February 28, 2009 at February 28, 2009
-------------------------------- --------------------------------------
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
----------- ----------- ----------- -------- ------- -------- ----------- ---------
$1.29-$3.63 687 3.43 $2.76 419 $3.05 2.68
$3.66-$4.08 129 1.89 $3.91 129 $3.91 1.88
$4.35-$4.60 53 0.79 $4.45 53 $4.45 0.79
$5.91-$7.00 403 3.24 $6.12 190 $6.11 3.09
$7.28-$10.93 433 4.25 $9.29 159 $8.73 4.20
----------- -------
$1.29-$10.93 1,705 3.40 $5.35 950 $4.81 2.80 --
=========== =======
The total intrinsic value of options exercised for the three and nine
months ended February 28, 2009 was $0 and $219,000, respectively. The
weighted average remaining contractual life of the options exercisable and
expected to be exercisable at February 28, 2009 was 3.4 years.
10
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
------------------ ------------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2009 2008 2009 2008
-------- -------- -------- --------
(in thousands, except per share amounts)
Numerator: Net (loss) income............... $(27,680) $1,926 $(25,943) $4,071
-------- -------- -------- --------
Denominator for basic net (loss) income per
share:
Weighted-average shares outstanding ..... 8,450 8,025 8,424 7,919
-------- -------- -------- --------
Shares used in basic net (loss) income per
share calculation........................ 8,450 8,025 8,424 7,919
Effect of dilutive securities.............. -- 451 -- 479
-------- -------- -------- --------
Denominator for diluted net (loss) income
per share.............................. 8,450 8,476 8,424 8,398
-------- -------- -------- --------
Basic net (loss) income per share.......... $(3.28) $ 0.24 $(3.08) $ 0.51
======== ======== ======== ========
Diluted net (loss) income per share........ $(3.28) $ 0.23 $(3.08) $ 0.48
======== ======== ======== ========
Stock options to purchase 1,705,000 shares of common stock were
outstanding on February 28, 2009, but were not included in the computation of
diluted net loss per share, because the inclusion of such shares would be
anti-dilutive. Stock options to purchase 252,635 shares of common stock were
outstanding on February 29, 2008, but not included in the computation of
diluted net income per share, because the inclusion of such shares would be
anti-dilutive.
4. CASH EQUIVALENTS AND INVESTMENTS
On June 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements" ("SFAS No. 157") which defines fair value, establishes a
framework for using fair value to measure assets and liabilities, and expands
disclosures about fair value measurements. SFAS No. 157 applies whenever
other statements require or permit assets or liabilities to be measured at
fair value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007, except for nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis, for which application has been deferred for one year. In
February 2008, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP
157-2"). FSP 157-2 defers the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), to fiscal years, and interim periods within those fiscal
years, beginning after November 15, 2008. The adoption of SFAS No. 157 did
not have a material impact on our consolidated financial statements.
SFAS No. 157 includes a fair value hierarchy that is intended to increase
the consistency and comparability in fair value measurements and related
disclosures. The fair value hierarchy is based on inputs to valuation
techniques that are used to measure fair value that are either observable or
unobservable. Observable inputs reflect assumptions market participants would
use in pricing an asset or liability based on market data obtained from
11
independent sources while unobservable inputs reflect a reporting entity's
pricing based upon their own market assumptions. The fair value hierarchy
consists of the following three levels:
Level 1 - instrument valuations are obtained from real-time quotes for
transactions in active exchange markets involving identical assets.
Level 2 - instrument valuations are obtained from readily-available pricing
sources for comparable instruments.
Level 3 - instrument valuations are obtained without observable market values
and require a high level of judgment to determine the fair value.
The following table summarizes the Company's financial assets and
liabilities measured at fair value on a recurring basis in accordance with
SFAS No. 157 as of February 28, 2009 (in thousands):
Balance as of
February 28, 2009 Level 1 Level 2
----------------- ---------- ----------
Money market funds................ $6,393 $6,393 $ --
----------------- ---------- ----------
$6,393 $6,393 $ --
================= ========== ==========
----------------- ---------- ----------
Liabilities....................... $ -- $ -- $ --
================= ========== ==========
As of February 28, 2009, the Company did not have any assets or
liabilities without observable market values that would require a high level
of judgment to determine fair value (Level 3 assets).
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 No. 159) which is effective for fiscal years
beginning after November 15, 2007. SFAS No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. Unrealized gains and
losses on items for which the fair value option is elected would be reported
in earnings. On June 1, 2008, the Company adopted SFAS No. 159 and has elected
not to measure any additional financial instruments and other items at fair
value.
5. INVENTORIES
Inventories are comprised of the following (in thousands):
February 28, May 31,
2009 2008
----------- -----------
Raw materials and sub-assemblies........ $ 380 $ 5,482
Work in process......................... 4,628 4,462
Finished goods.......................... 919 265
----------- -----------
$5,927 $10,209
=========== ===========
12
6. 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):
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
Three months ended February 28, 2009:
Net sales........................... $ 1,605 $ 382 $ 159 $( 911) $ 1,235
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 1,133 -- -- -- 1,133
Loss from operations................ (20,164) (3,206) (37) (605) (24,012)
Identifiable assets................. 30,523 2,650 1,520 (16,091) 18,602
Property and equipment, net......... 2,711 70 11 -- 2,792
Nine months ended February 28, 2009:
Net sales........................... $20,325 $4,877 $ 638 $( 5,673) $20,167
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 14,627 -- -- -- 14,627
Loss from operations................ (17,908) (3,053) (22) (489) (21,472)
Identifiable assets................. 30,523 2,650 1,520 (16,091) 18,602
Property and equipment, net......... 2,711 70 11 -- 2,792
Three months ended February 29, 2008:
Net sales........................... $11,290 $10,251 $ 56 $(10,805) $10,792
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 10,766 -- -- -- 10,766
Income (loss) from operations....... 2,736 (813) (152) (68) 1,703
Identifiable assets................. 42,679 18,741 1,139 (26,147) 36,412
Property and equipment, net......... 1,700 71 8 -- 1,779
Nine months ended February 29, 2008:
Net sales........................... $26,479 $17,769 $ 155 $(16,276) $28,127
Portion of U.S. net sales
from export sales, including sales
to subsidiaries................... 17,723 -- -- -- 17,723
Income (loss) from operations....... 3,896 612 (442) (54) 4,012
Identifiable assets................. 42,679 18,741 1,139 (26,147) 36,412
Property and equipment, net......... 1,700 71 8 -- 1,779
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.
Sales to the Company's five largest customers accounted for approximately
89.7% and 96.0% of its net sales in the three and nine months ended February
28, 2009, respectively. Three customers accounted for approximately 40.9%,
20.6% and 15.4% of the Company's net sales in the three months ended February
28, 2009. One customer, Spansion Inc., accounted for approximately 85.0% of
the Company's net sales in the nine months ended February 28, 2009. Sales to
the Company's five largest customers accounted for approximately 99.6% and
98.4% of its net sales in the three and nine months ended February 29,2008,
respectively. One customer, Spansion Inc., accounted for approximately 94.3%
and 87.7% of the Company's net sales in the three and nine months ended
February 29,2008, respectively.
7. 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
13
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 and nine months ended February 28, 2009 and
February 29, 2008 (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2009 2008 2009 2008
-------- -------- -------- --------
Balance at the beginning of the period.... $261 $271 $387 $153
Accruals for warranties issued
during the period....................... 237 198 535 559
Reversals of warranties issued
during the period....................... -- -- -- --
Settlement made during the period
(in cash or in kind).................... (71) (149) (495) (392)
-------- ------- -------- --------
Balance at the end of the period.......... $427 $320 $427 $320
======== ======= ======== ========
The accrued warranty balance is included in accrued expenses on the
accompanying condensed consolidated balance sheets.
8. OTHER COMPREHENSIVE (LOSS) INCOME
Other comprehensive (loss) income, net of tax is comprised of the
following (in thousands):
Three Months Ended Nine Months Ended
------------------ ------------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2009 2008 2009 2008
-------- -------- -------- --------
Net (loss) income ....................... $(27,680) $1,926 $(25,943) $4,071
Foreign currency translation
adjustments expense.................... 65 460 254 898
Unrealized holding gains (losses) arising
during period....................... (3) (1) -- 1
-------- -------- --------- --------
Comprehensive (loss) income.............. $(27,618) $2,385 $(25,689) $4,970
======== ======== ========= ========
9. INCOME TAXES
The Company accounts for uncertain tax positions in accordance with the
provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109" ("FIN No. 48").
FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized
in the Company's financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). This interpretation
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. The Company does not expect any material change in
its unrecognized tax benefits over the next twelve months. In accordance with
FIN No. 48, the Company recognizes interest and penalties related to
unrecognized tax benefits as a component of income taxes.
For the three and nine months ended February 28, 2009, the Company had
recorded tax expenses of $3,701,000 and $4,991,000, respectively. For the
14
three and nine months ended February 29, 2008, the Company had recorded tax
(benefits) expenses of ($130,000) and $84,000, respectively.
Although the Company files U.S. federal, various state, and foreign tax
returns, the Company's only major tax jurisdictions are the United States,
California, Germany and Japan. Tax years 1993 - 2007 remain subject to
examination by the appropriate governmental agencies due to tax loss
carryovers from those years.
10. EMPLOYEE BENEFIT PLANS
The Company maintains stock option plans, an employee stock purchase plan
and an equity incentive plan. The employee benefit plans are discussed in
Notes 9 and 10 to the consolidated financial statements in the Company's 2008
Annual Report on Form 10-K.
The purpose of these plans is to attract and retain the services of
qualified and talented persons to serve as employees, directors and/or
consultants of the Company by providing equity ownership and compensation
opportunities in the Company. These 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 (collectively, the "2006 Plans") were approved by
the Company's 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 otherwise
have 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, 2009, out of the 2,172,000 shares authorized for grant
under the 1996 Stock Option Plan and 2006 Equity Incentive Plan, approximately
1,705,000 shares are outstanding. As of February 28, 2009, 73,000 shares had
been issued from the 200,000 shares authorized for grant under the 2006
Employee Stock Purchase Plan.
11. IMPAIRMENT OF GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of tangible and identifiable intangible net assets acquired in the Company's
acquisition of its Japanese subsidiary. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill is reviewed annually or
whenever events or circumstances indicate that a decline in value may have
occurred. Based on the fair market value of the Company's common stock
relative to its book value and revised estimates for its future cash flow and
revenue projections, the Company determined that indicators of impairment for
its goodwill were present during the third quarter of 2009. As a result, the
Company tested the goodwill for impairment, determined that it was impaired
and recorded a non-cash impairment of goodwill charge of $274,000 for the
three months ended February 28, 2009.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2008, the FASB issued FASB Staff Position No. 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That
Asset is Not Active" ("FSP 157-3"). FSP 157-3 clarifies the application of
SFAS No. 157 in a market that is not active and it is effective upon the
issuance date. The application of FSP 157-3 did not have a material impact on
the Company's 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 report and with our Annual Report on Form 10-K for the
fiscal year ended May 31, 2008 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, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. 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 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.
OVERVIEW
The Company was founded in 1977 to develop and manufacture burn-in and
test equipment for the semiconductor industry. Since its inception, the
Company has sold more than 2,500 systems to semiconductor manufacturers,
semiconductor contract assemblers and burn-in and test service companies
worldwide. The Company's principal products currently are the MAX burn-in
system, the Advanced Burn-in and Test System, the FOX full wafer contact
parallel test and burn-in system and the MTX massively parallel test system,
the DiePak carrier and test fixtures.
The Company's net sales consist primarily of sales of systems, test
fixtures, die carriers, upgrades and spare parts and revenues from service
contracts. The Company's selling arrangements may include contractual
customer acceptance provisions and installation of the product occurs after
shipment and transfer of title.
Approximately 49.3%, 49.1% and 1.6% of our net sales for fiscal 2008 were
denominated in U.S. Dollars, Japanese Yen and Euros, respectively. Although a
large percentage of net sales to European customers is denominated in U.S.
Dollars, substantially all sales to Japanese customers are denominated in Yen.
Because a substantial portion of our net sales is from sales of products for
delivery outside the United States, an increase in the value of the U.S.
Dollar relative to foreign currencies would increase the cost of our products
compared to products sold by local companies in such markets. In addition,
since the price is determined at the time a purchase order is accepted, we are
exposed to the risks of fluctuations in the U.S. Dollar exchange rate during
the lengthy period from the date a purchase order is received until payment is
made. This exchange rate risk is partially offset to the extent our foreign
operations incur expenses in the local currency. To date, we have not
invested in instruments designed to hedge currency risks. Our operating
results could be adversely affected by fluctuations in the value of the U.S.
Dollar relative to other currencies.
16
Global demand for semiconductor equipment has been severely impacted by
the current negative global economic environment. As a result, in the third
quarter of fiscal 2009 we experienced a significant decline in sales. In the
third quarter of fiscal 2009, the Company's financial results reflected the
impact of the bankruptcy filing of its largest customer, Spansion Inc.
("Spansion"). Due to the bankruptcy filing and the current very weak market
for the Company's products, we recorded $13.7 million provision for bad debts,
$5.7 million provision for excess and obsolete inventory, $4.9 million
increase in the valuation allowance against the Company's deferred tax assets,
$0.5 million charge related to cancellation costs, $0.3 million goodwill
impairment charge and $0.2 million severance charges. The Company has
significantly reduced its headcount and initiated other expense reduction
measures. The Company intends to take additional actions as necessary to
maintain sufficient cash to manage through this economic downturn.
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 and Estimates" in the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 2008.
17
RESULTS OF OPERATIONS
The following table sets forth items in the Company's unaudited condensed
consolidated statements of operation as a percentage of net sales for the
periods indicated.
Three Months Ended Nine Months Ended
-------------------- -------------------
Feb. 28, Feb. 29, Feb. 28, Feb. 29,
2009 2008 2009 2008
-------- --------- -------- --------
Net sales. . . . . . . . . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales. . . . . . . . . . . . . . 651.7 48.8 86.6 48.1
-------- --------- -------- --------
Gross (loss) profit. . . . . . . . . . . (551.7) 51.2 13.4 51.9
-------- --------- -------- --------
Operating expenses:
Selling, general and administrative. . 1,241.1 18.5 95.4 20.1
Research and development . . . . . . . 129.2 16.9 23.1 17.5
Impairment of goodwill . . . . . . . . 22.2 -- 1.4 --
-------- --------- -------- --------
Total operating expenses . . . . . 1,392.5 35.4 119.9 37.6
-------- --------- -------- --------
(Loss) income from operations. . . . . . (1,944.2) 15.8 (106.5) 14.3
Interest income. . . . . . . . . . . . . 2.1 0.5 0.7 0.8
Other income (expense), net. . . . . . . 0.5 0.3 1.9 (0.3)
-------- --------- -------- --------
(Loss) income before income tax expense
(benefit). . . . . . . . . . . . . . . (1,941.6) 16.6 (103.9) 14.8
Income tax expense (benefit) . . . . . . 299.7 (1.2) 24.7 0.3
-------- --------- -------- --------
Net (loss)income . . . . . . . . . . . . (2,241.3)% 17.8 % (128.6)% 14.5 %
======== ========= ======== ========
THREE MONTHS ENDED FEBRUARY 28, 2009 COMPARED TO THREE MONTHS ENDED FEBRUARY
29, 2008
NET SALES. Net sales decreased to $1.2 million for the three months ended
February 28, 2009 from $10.8 million for the three months ended February 29,
2008, a decrease of 88.6%. The decrease in net sales for the three months
ended February 28, 2009 resulted primarily from decreases in net sales of the
Company's wafer-level products and MTX products, partially offset by an
increase in sales of the Company's MAX monitored burn-in products. Net sales
of the Company's wafer-level products for the three months ended February 28,
2009 were $6,000, and decreased approximately $10.1 million from the three
months ended February 29, 2008. The decline in net sales of wafer-level
products was primarily due to the fact that no net sales were recorded to
Spansion. in the three months ended February 28, 2009. During the preceding
two years, Spansion had been our largest customer. Spansion declared
bankruptcy in February and March 2009, and has not subsequently placed any
orders with the Company. If Spansion places future orders for the Company's
products, payment will be expected in advance of shipment. Net sales of the
Company's MTX products for the three months ended February 28, 2009 were
$43,000, and decreased approximately $181,000 from the three months ended
February 29, 2008. Net sales of the Company's MAX monitored burn-in products
for the three months ended February 28, 2009 were $1.2 million, and increased
approximately $724,000 from the three months ended February 29, 2008.
GROSS (LOSS) PROFIT. Gross (loss) 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 loss was $6.8 million for
the three months ended February 28, 2009, compared with gross profit of $5.5
million for the three months ended February 29, 2008. The decrease in gross
profit was primarily the result of the significant decline in net sales, and
18
the $5.7 million provision for excess and obsolete inventory reserves. The
majority of the reserves were taken as a result of Spansion's bankruptcy.
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 $15.3 million in
the three months ended February 28, 2009 increased from $2.0 million in the
three months ended February 29, 2008. The significant increase in SG&A
expense was primarily due to the $13.7 million increase in the provision for
bad debts, related to Spansion's bankruptcy filing.
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
decreased to $1.6 million for the three months ended February 29, 2009 from
$1.8 million for the three months ended February 29, 2008, a decrease of
12.6%. This decrease was primarily attributable to decreases in employment
related expenses of $116,000 and project material related costs of $40,000.
IMPAIRMENT OF GOODWILL. Goodwill represents the excess of the purchase
price over the fair value of tangible and identifiable intangible net assets
acquired in the Company's acquisition of its Japanese subsidiary. In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", goodwill
is reviewed annually or whenever events or circumstances indicate that a
decline in value may have occurred. Based on the fair market value of the
Company's common stock relative to its book value and revised estimates for
its future cash flow and revenue projections, the Company determined that
indicators of impairment for our goodwill were present during the third
quarter of 2009. As a result, the Company tested the goodwill for impairment,
determined that it was impaired and recorded a non-cash impairment of goodwill
charge of $274,000 for the three months ended February 28, 2009.
INTEREST INCOME. Interest income decreased to $26,000 for the three
months ended February 28, 2009 from $55,000 for the three months ended
February 29, 2008. The decrease in net interest income for the three months
ended February 28, 2009 was primarily related to lower interest rates.
INCOME TAX EXPENSE (BENEFIT). Income tax expense was $3.7 million for the
three months ended February 28, 2009, compared with income tax benefit of
$130,000 for the three months ended February 29, 2008. Income tax expense
recognized in the third quarter of fiscal 2009 included $4.9 million of tax
expense related to the recognition of a valuation allowance for deferred tax
assets, partially offset by tax benefits during the quarter of $1.2 million,
reflecting the reversal of tax expenses recorded earlier in fiscal 2009 based
on the Company's expected annual income tax expense (benefit).
NINE MONTHS ENDED FEBRUARY 28, 2009 COMPARED TO NINE MONTHS ENDED FEBRUARY 29,
2008
NET SALES. Net sales decreased to $20.2 million for the nine months ended
February 28, 2009 from $28.1 million for the nine months ended February 29,
2008, a decrease of 28.3%. The decrease in net sales for the nine months
ended February 28, 2009 resulted primarily from a decrease in net sales of the
Company's wafer-level products. Net sales of the Company's wafer-level
products for the nine months ended February 28, 2009 were $17.0 million, and
decreased approximately $7.5 million from the nine months ended February 29,
2008.
GROSS PROFIT. Gross profit decreased to $2.7 million for the nine months
ended February 28, 2009 from $14.6 million for the nine months ended February
29, 2008, a decrease of 81.5%. Gross profit margin decreased to 13.4% for the
nine months ended February 28, 2009 from 51.9% for the nine months ended
February 29, 2008. The decrease in gross profit margin was primarily the
result of the increase in the provision for excess and obsolete inventory
19
reserves and a significant decline in net sales in the third quarter of fiscal
2009.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $19.2
million for the nine months ended February 28, 2009 from $5.7 million for the
nine months ended February 29, 2008, an increase of 239.7%. The significant
increase in SG&A expenses was primarily due to the $13.7 million increase in
the provision for bad debts related to Spansion's bankruptcy filing.
RESEARCH AND DEVELOPMENT. R&D expenses slightly decreased to $4.7 million
in the nine months ended February 28, 2009 from $4.9 million in the nine
months ended February 29, 2008, a decrease of 5.4%. As a percentage of net
sales, R&D expenses increased to 23.1% for the nine months ended February 28,
2009 from 17.5% for the nine months ended February 29, 2008, reflecting lower
net sales.
IMPAIRMENT OF GOODWILL. The Company recorded non-cash impairment of
goodwill charge of $274,000 for the nine months ended February 28, 2009.
INTEREST INCOME. Interest income decreased to $136,000 for the nine
months ended February 28, 2009 from $213,000 for the nine months ended
February 29, 2008, a decrease of 36.2%. The decrease in interest income for
the nine months ended February 28, 2009 was primarily related to lower
interest rates.
OTHER INCOME (EXPENSE), NET. Other income (expense), net increased to
$384,000 for the nine months ended February 28, 2009 from ($70,000) for the
nine months ended February 29, 2008. The increase in other income (expense),
net was primarily attributable to our Japan subsidiary's recording of a
foreign exchange gain of $396,000 on settlement of transactions in the second
quarter period of fiscal 2009.
INCOME TAX EXPENSE. Income tax expense increased to $5.0 million for the
nine months ended February 28, 2009, from $84,000 for the nine months ended
February 29, 2008. A low effective tax rate was recognized for the nine
months ended February 29, 2008 as the Company maintained a valuation allowance
and recorded tax expense at the alternative minimum tax rate. During the
fiscal year ended May 31, 2008 a partial release of the valuation allowance
was made based upon the Company's current level of profitability and the level
of forecasted future earnings. The nine-month period of fiscal 2009 reflects
a $4.9 million tax expense related to the reinstatement of the valuation
allowance for deferred tax assets as the Company no longer believes that the
deferred tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $8.3 million for
the nine months ended February 28, 2009 and $5.1 million for the nine months
ended February 29, 2008. For the nine months ended February 28, 2009, net
cash used in operating activities was primarily driven by net loss of $25.9
million, partially offset by increases of $13.6 million in the provision for
doubtful accounts and $4.9 million of deferred income taxes. During the nine
months ended February 28, 2009, the Company recorded bad debt expense of $13.7
million as a result of Spansion's bankruptcy filing. The increase in the
deferred income taxes for the nine month period was primarily due to tax
expense related to the recording of a valuation allowance for the Company's
deferred tax assets as the Company no longer believes that the deferred tax
assets will be realized. For the nine months ended February 29, 2008, net
cash used in operating activities was primarily related to an increase in
accounts receivable of $11.4 million, partially offset by net income of $4.1
million. The increase in accounts receivable in the nine month period was
primarily attributable to the higher level of sales, as well as an increase in
the proportion of receivables in Japan, which typically have longer payment
terms.
20
Net cash used in investing activities was approximately $578,000 for the
nine months ended February 28, 2009 and net cash provided by investing
activities was approximately $2.3 million for the nine months ended February
29, 2008. The net cash used in investing activities during the nine months
ended February 28, 2009 was primarily due to the purchase of property and
equipment. The net cash provided by investing activities during the nine
months ended February 29, 2008 was primarily due to $3.2 million in net
proceeds from sales and maturity of investments, partially offset by $500,000
in purchase of investments.
Financing activities provided cash of approximately $450,000 for the nine
months ended February 28, 2009 and approximately $1.1 million for the nine
months ended February 29, 2008. Net cash provided by financing activities
during the nine months ended February 28, 2009 and February 29, 2008 was
primarily due to proceeds from issuance of common stock from the exercise of
stock options.
As of February 28, 2009, the Company had working capital of $10.8 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. The Company has not repurchased any of its outstanding common
stock since May 31, 2006.
The Company leases most of its manufacturing and office space under
operating leases. The term of the Company's current lease ends on June 30,
2015 for its United States manufacturing and office facilities. 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 balances together with cash
provided by operations, if any, are adequate to meet its working capital and
capital equipment requirements through calendar year 2009. After calendar
year 2009, 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
21
commitments as disclosed in the Company's Annual Report on Form 10-K for the
year ended May 31, 2008.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2008, the FASB issued FASB Staff Position No. 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That
Asset is Not Active" ("FSP 157-3"). FSP 157-3 clarifies the application of
SFAS No. 157 in a market that is not active and it is effective upon the
issuance date. The application of FSP 157-3 did not have a material impact on
the Company's 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." As of February 28, 2009, the Company had no holdings of
derivative financial or commodity instruments.
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 or 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 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, and that such
information is accumulated and communicated to management as appropriate to
allow for timely decisions regarding required disclosure.
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
22
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
You should carefully consider the risks described below. These risks are
not the only risks that we may face. Additional risks and uncertainties that
we are unaware of, or that we currently deem immaterial, also may become
important factors that affect us. If any of the following risks occurs, our
business, financial condition or results of operations could be materially and
adversely affected which could cause our actual operating results to differ
materially from those indicated or suggested by forward-looking statements
made in this Quarterly Report on Form 10-Q and in other documents we file with
the U.S. Securities and Exchange Commission, including without limitation our
most recently filed Annual Report on Form 10-K or presented elsewhere by
management from time to time.
Current economic conditions could materially adversely affect the Company's
operations and performance.
Our operations and performance depend significantly on worldwide economic
conditions. The current financial turmoil affecting the banking system and
financial markets has resulted in a tightening of the credit markets and a
weakening global economy which are contributing to slowdowns in the
semiconductor manufacturing industry in which we operate. Specifically, we
have experienced a lengthening of the sales cycle and we have also received
requests by our customers to defer delivery of equipment. Difficulties in
obtaining capital and deteriorating market conditions pose a risk that some of
our customers may not be able to obtain necessary financing on reasonable
terms which could result in lower sales for the Company. Customers with
liquidity issues may lead to additional bad debt expense for the Company.
These conditions may also similarly affect key suppliers, which could affect
their ability to deliver parts and result in delays on our products.
The current economic conditions and uncertainty about future economic
conditions make it challenging for us to forecast our operating results, make
business decisions, and identify the risks that may affect our business,
financial condition and results of operations. If we are not able to timely
and appropriately adapt to changes resulting from the difficult macroeconomic
environment, our business, financial condition or results of operations may be
materially and adversely affected.
If we are not able to reduce our operating expenses during periods of weak
demand, or if we utilize significant amounts of cash to support operating
losses, we will erode our cash resources and may not have sufficient cash to
operate our business.
In recent months, we implemented a variety of cost controls and
restructured our operations with the goal of reducing our operating costs to
position ourselves to more effectively meet the needs of the currently weak
market for test and burn-in equipment. In the third quarter of fiscal 2009,
however, we experienced operating losses and cash outflows and our cash and
cash equivalents as of February 28, 2009 were approximately $7.4 million. We
intend to take the necessary actions to ensure that we have sufficient cash to
support operations during this downturn. We continue to explore methods to
further reduce our costs, and we will likely incur additional restructuring
charges in future periods, however, we cannot predict the amount of such
charges at this time. Should the current downturn be prolonged and we are
unable to reduce our operating expenses sufficiently, we may require
23
additional debt or equity financing to meet working capital or capital
expenditure needs. While we believe our cash balances will be sufficient to
satisfy our cash requirements for at least the next twelve months, we cannot
determine with certainty that, if needed, we would be able to raise additional
funding through either equity or debt financing under these circumstances or
on what terms such financing would be available.
We depend on a small number of key customers in the semiconductor
manufacturing industry for a large portion of our revenues.
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 89.7% and 96.0% of its net sales in the three and
nine months ended February 28, 2009, respectively. Three customers accounted
for approximately 40.9%, 20.6% and 15.4% of the Company's net sales in the
three months ended February 28, 2009, respectively. One customer, Spansion
Inc., accounted for approximately 85.0% of the Company's net sales in the nine
months ended February 28, 2009. Sales to the Company's five largest customers
accounted for approximately 99.6% and 98.4% of its net sales in the three and
nine months ended February 29, 2008, respectively. One customer, Spansion
Inc., accounted for approximately 94.3% and 87.7% of the Company's net sales
in the three and nine months ended February 29, 2008, respectively. No other
customers represented more than 10% of the Company's net sales for either
fiscal 2009 or fiscal 2008. We expect that sales of our 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 our business, financial condition and
operating results. For example, Spansion Inc. declared bankruptcy in February
and March 2009, and has not subsequently placed any orders with the Company,
which has caused our revenues to drop dramatically.
Our operating results could be adversely affected by substantial quarterly and
annual fluctuations.
We have experienced and expect to continue to experience significant
fluctuations in our quarterly and annual operating results. During fiscal
years 2009, 2008, 2007 and 2006, quarterly net sales have been as low as $1.2
million and as high as $10.9 million, and gross margins for quarterly net
sales have fluctuated between (551.7%) and 58.3%. Our future operating
results will depend upon a variety of factors, including sales volume, the
timing of significant orders, the mix of products sold, changes in pricing by
us, our competitors, customers or suppliers, the length of sales cycles for
our products, timing of new product announcements and releases by us and our
competitors, market acceptance of new products and enhanced versions of our
products, capital spending patterns by customers, manufacturing inefficiencies
associated with our new product introductions, our ability to produce systems
and products in volume and meet customer requirements, product returns and
customer acceptance of product shipments, volatility in our targeted markets,
political and economic instability, natural disasters, regulatory changes,
possible disruptions caused by expanding existing facilities or moving into
new facilities, expenses associated with acquisitions and alliances, and
various competitive factors, including price-based competition, competition
from vendors employing other technologies, and the amount of products sold
under volume purchase arrangements, which tend to have lower selling prices.
Accordingly, past performance may not be indicative of future performance.
A substantial portion of our revenues is generated by relatively small volume,
high value transactions.
We derive a substantial portion of our revenues from the sale of a
relatively small number of systems which typically range in purchase price
24
from approximately $300,000 to over $1.0 million per system. As a result, the
loss or deferral of a limited number of system sales could have a material
adverse effect on our net sales and operating results in a particular period.
All customer purchase orders are subject to cancellation or rescheduling by
the customer with limited penalties, and, therefore, backlog at any particular
date is not necessarily indicative of actual sales for any succeeding period.
From time to time, cancellations and rescheduling of customer orders have
occurred, and delays by our suppliers in providing components or subassemblies
to us have caused delays in our shipments of our own products. There can be
no assurance that we will not be materially adversely affected by future
cancellations and rescheduling. A substantial portion of our net sales is
typically realized near the end of each quarter. A delay or reduction in
shipments near the end of a particular quarter, due, for example, to
unanticipated shipment rescheduling, cancellations or deferrals by customers,
customer credit issues, unexpected manufacturing difficulties experienced by
us, or delays in deliveries by suppliers, could cause net sales in a
particular quarter to fall significantly below our expectations.
We rely on continued market acceptance for our FOX system, and may not be
successful in attracting new or maintaining our existing customers.
A principal element of our business strategy is to capture an increasing
share of the test equipment market through sales of our FOX wafer-level test
and burn-in system. The FOX system is newly designed to simultaneously burn-
in and functionally test all of the die on a wafer. The WaferPak contactor is
an interface device which enables contact between the FOX wafer-level system
and all of the die on a wafer, with a single touchdown. The market for the
FOX systems is in the very early stages of development. Market acceptance of
the FOX system is subject to a number of risks. Before a customer will
incorporate the FOX system into a production line, lengthy qualification and
correlation tests must be performed. We anticipate 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 are expected to be
limited to systems or to WaferPak contactors used for these qualifications and
for engineering studies. Market acceptance of the FOX system also may be
affected by a reluctance of integrated circuit manufacturers to rely on
relatively small suppliers such as the Company. As is common with new complex
products incorporating leading-edge technologies, we may encounter
reliability, design and manufacturing issues as we begin volume production and
initial installations of FOX systems at customer sites. The failure of the
FOX system to achieve market acceptance would have a material adverse effect
on our future operating results, long-term prospects and our stock price.
In future periods, we may rely on market acceptance for our ABTS system and we
may not be able to achieve sufficient market acceptance to allow our ABTS
system to be commercially viable.
In June 2008, we announced shipment of an ABTS beta site system to
Integrated Service Technology in Taiwan. Market acceptance of the ABTS
system is subject to a number of risks. In order for our ABTS system to
become commercially accepted, we must complete engineering development of
necessary hardware and software. In addition, the first system, ordered by
Integrated Service Technology, must successfully complete customer acceptance.
Other customers must then be found who are willing to place orders for ABTS
systems in sufficient quantities to allow it to be produced economically.
We may experience a limited Burn-In System market and we depend upon continued
market acceptance for our MAX system.
We have historically derived a substantial portion of our net sales from
the sale of dynamic burn-in systems. We believe that the market for burn-in
systems is mature and is not expected to have significant long-term growth.
In general, process control improvements in the semiconductor industry have
tended to reduce burn-in times. In addition, as a given integrated circuit
product generation matures and yields increase, the required burn-in time may
be reduced or eliminated. Integrated circuit manufacturers, which
25
historically have been our primary customer base, increasingly outsource test
and burn-in to independent test labs, which often build their own systems.
Our success depends upon the continued acceptance of our MAX burn-in products
within these markets. There can be no assurance that the market for burn-in
systems will grow, and sales of our MAX burn-in products could decline.
Our sales cycles can be long and unpredictable, which may harm our ability to
forecast demand and our future operating performance.
Sales of our systems depend, in significant part, upon the decision of a
prospective customer to increase manufacturing capacity or to restructure
current manufacturing facilities, either of which typically involves a
significant commitment of capital. In addition, the approval process for FOX,
ABTS and MTX systems and DiePak carrier sales may require lengthy
qualification and correlation testing. In view of the significant investment
or strategic issues that may be involved in a decision to purchase FOX, ABTS
and MTX systems or DiePak carriers, we may experience delays following initial
qualification of our systems as a result of delays in a customer's approval
process. For these reasons, our systems typically have a lengthy sales cycle
during which we may expend substantial funds and management effort in securing
a sale. Lengthy sales cycles subject us to a number of significant risks,
including inventory obsolescence and fluctuations in operating results, over
which we have little or no control. The loss of individual orders due to the
lengthy sales and evaluation cycle, or delays in the sale of even a limited
number of systems impairs our ability to plan future operating levels and
could have a material adverse effect on our business, operating results and
financial condition and, in particular, could contribute to significant
fluctuations in operating results on a quarterly basis.
Our business may suffer due to risks associated with international sales and
operations.
Approximately 61.3% and 42.4% of our net sales for fiscal 2008 and 2007,
respectively, were attributable to sales to customers for delivery outside of
the United States. We operate sales, service and limited manufacturing
organizations in Japan and Germany and a sales and support organization in
Taiwan. We expect that sales of products for delivery outside of the United
States will continue to represent a substantial portion of our future
revenues. Our future performance will depend, in significant part, upon our
ability to continue to compete in foreign markets which in turn will depend,
in part, upon a continuation of current trade relations between the United
States and foreign countries in which semiconductor manufacturers or
assemblers have operations. A change toward more protectionist trade
legislation in either the United States or such foreign countries, such as a
change in the current tariff structures, export compliance or other trade
policies, could adversely affect our ability to sell our products in foreign
markets. In addition, we are subject to other risks associated with doing
business internationally, including longer receivable collection periods and
greater difficulty in accounts receivable collection, the burden of complying
with a variety of foreign laws, difficulty in staffing and managing global
operations, risks of civil disturbance or other events which may limit or
disrupt markets, international exchange restrictions, changing political
conditions and monetary policies of foreign governments.
A substantial portion of our net sales has been in Asia. Turmoil in the
Asian financial markets has resulted, and may result in the future, in
dramatic currency devaluations, stock market declines, restriction of
available credit and general financial weakness. In addition, flash, DRAM,
and other memory device prices in Asia have recently declined dramatically,
and will likely do so again in the future. These developments may affect us
in several ways. We believe that many international semiconductor
manufacturers limited their capital spending in fiscal year 2008, and that the
uncertainty of the memory market may cause some manufacturers in the future to
again delay capital spending plans. The economic conditions in Asia may also
affect the ability of our customers to meet their payment obligations,
resulting in cancellations or deferrals of existing orders and the limitation
26
of additional orders. In addition, Asian governments have subsidized some
portion of fabrication construction. Financial turmoil may reduce these
governments' willingness to continue such subsidies. Such developments could
have a material adverse affect on our business, financial condition and
results of operations.
Approximately 49.3%, 49.1% and 1.6% of our net sales for fiscal 2008 were
denominated in U.S. Dollars, Japanese Yen and Euros, respectively. Although a
large percentage of net sales to European customers is denominated in U.S.
Dollars, substantially all sales to Japanese customers are denominated in Yen.
Because a substantial portion of our net sales is from sales of products for
delivery outside the United States, an increase in the value of the U.S.
Dollar relative to foreign currencies would increase the cost of our products
compared to products sold by local companies in such markets. In addition,
since the price is determined at the time a purchase order is accepted, we are
exposed to the risks of fluctuations in the U.S. Dollar exchange rate during
the lengthy period from the date a purchase order is received until payment is
made. This exchange rate risk is partially offset to the extent our foreign
operations incur expenses in the local currency. To date, we have not
invested in instruments designed to hedge currency risks. Our operating
results could be adversely affected by fluctuations in the value of the U.S.
Dollar relative to other currencies.
Our industry is subject to rapid technological changes. Our ability to
compete depends in part upon our ability to introduce new products in a timely
manner.
The semiconductor equipment industry is subject to rapid technological
change and new product introductions and enhancements. Our ability to remain
competitive will depend in part upon our ability to develop new products and
to introduce these products at competitive prices and on a timely and cost-
effective basis. Our success in developing new and enhanced products depends
upon a variety of factors, including product selection, timely and efficient
completion of product design, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. Because new product development commitments
must be made well in advance of sales, new product decisions must anticipate
both future demand and the technology that will be available to supply that
demand. Furthermore, introductions of new and complex products typically
involve a period in which design, engineering and reliability issues are
identified and addressed by our suppliers and us. There can be no assurance
that we will be successful in selecting, developing, manufacturing and
marketing new products that satisfy market demand. Any such failure would
materially and adversely affect our business, financial condition and results
of operations.
Because of the complexity of our products, significant delays can occur
between a product's introduction and the commencement of volume production of
such product. We have experienced, from time to time, significant delays in
the introduction of, and technical and manufacturing difficulties with,
certain of its products and may experience delays and technical and
manufacturing difficulties in future introductions or volume production of new
products. Our inability to complete new product development, or to
manufacture and ship products in time to meet customer requirements would
materially adversely affect our business, financial condition and results of
operations.
We may experience product delays and increased costs associated with new
product introductions.
As is common with new complex and software-intensive products, we have
encountered reliability, design and manufacturing issues as we began volume
production and initial installations of certain products at customer sites.
Certain of these issues in the past have been related to components and
subsystems supplied to us by third parties who have in some cases limited our
ability to address such issues promptly. This process in the past required,
27
and in the future is likely to require, us to incur un-reimbursed engineering
expenses, and from time to time to experience larger than anticipated warranty
claims and could result in product returns. In the early stages of product
development, there can be no assurance that reliability, design and
manufacturing issues will not be discovered or, that if such issues arise,
they can be resolved to the customers' satisfaction or that the resolution of
such problems will not cause us to incur significant development costs or
warranty expenses or to lose significant sales opportunities.
Future changes in semiconductor technologies may make our products obsolete.
Future improvements in semiconductor design and manufacturing technology
may reduce or eliminate the need for our products. For example, improvements
in BIST technology, and improvements in conventional test systems, such as
reduced cost or increased throughput, may significantly reduce or eliminate
the market for one or more of our products. If we are not able to improve our
products or develop new products or technologies quickly enough to maintain a
competitive position in our markets, we may not be able to grow our business.
Semiconductor business cycles are unreliable and there is always the risk of
cancellations and rescheduling.
Our operating results depend primarily upon the capital expenditures of
semiconductor manufacturers, semiconductor contract assemblers and burn-in and
test service companies worldwide, which in turn depend on the current and
anticipated market demand for integrated circuits. The semiconductor and
semiconductor equipment industries in general, and the market for flash
memories, DRAMs and other memory devices in particular, historically have been
highly volatile and have experienced periodic downturns and slowdowns, which
have had severe, negative effects on the semiconductor industry's demand for
semiconductor capital equipment, including test and burn-in systems
manufactured and marketed by the Company. These downturns and slowdowns have
adversely affected our operating results in the past. In addition, the
purchasing patterns of our customers are also highly cyclical because most
customers purchase our products for use in new production facilities or for
upgrading existing test lines for the introduction of next generation
products. Construction of new facilities and upgrades of existing facilities
have in some cases been delayed or canceled during the most recent
semiconductor industry downturn. A large portion of our net sales is
attributable to a few customers and therefore a reduction in purchases by one
or more customers could materially adversely affect our financial results.
There can be no assurance that the semiconductor industry will grow in the
future at the same rates as it has grown historically. Any downturn or
slowdown in the semiconductor industry would have a material adverse effect on
our business, financial condition and operating results. In addition, the
need to maintain investment in research and development and to maintain
customer service and support will limit our ability to reduce our expenses in
response to any such downturn or slowdown period.
The semiconductor equipment manufacturing industry has historically been
subject to a relatively high rate of purchase order cancellation by customers
as compared to other high technology industry sectors. Manufacturing
companies that are the customers of semiconductor equipment companies
frequently revise, postpone and cancel capital facility expansion plans. In
such cases, semiconductor equipment companies may experience a significant
rate of cancellations and rescheduling of purchase orders. There can be no
assurance that we will not be materially adversely affected by future
cancellations and rescheduling.
Our stock price may vary.
The price for our common stock has fluctuated in the past and may
fluctuate significantly in the future. We believe that factors such as
announcements of developments related to our business, fluctuations in our
operating results, failure to meet securities analysts' expectations, general
conditions in the semiconductor and semiconductor equipment industries and the
28
worldwide economy, announcement of technological innovations, new systems or
product enhancements by us or our competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in our relationships with customers and suppliers could cause the
price of our common stock to fluctuate substantially. In addition, in recent
years the stock market in general, and the market for small capitalization and
high technology stocks in particular, has experienced extreme price
fluctuations which have often been unrelated to the operating performance of
affected companies. Such fluctuations could adversely affect the market price
of our common stock.
Any future growth may strain our operations and may require us to incur
additional expenses to support these expanded operations.
If we are to be successful, we must expand our operations. Such expansion
will place a significant strain on our administrative, operational and
financial resources. Further, such expansion will result in a continuing
increase in the responsibility placed upon management personnel and will
require development or enhancement of operational, managerial and financial
systems and controls. If we are unable to manage the expansion of our
operations effectively, our business, financial condition and operating
results will be materially and adversely affected.
We depend on our key personnel. We must attract and retain talented
employees.
Our success depends to a significant extent upon the continued service of
Rhea Posedel, our Chief Executive Officer, as well as other executive officers
and key employees. We do not maintain key person life insurance for our
benefit on any of our personnel, and none of our employees is subject to a
non-competition agreement with the Company. The loss of the services of any
of our executive officers or a group of key employees could have a material
adverse effect on our business, financial condition and operating results.
Our future success will depend in significant part upon our ability to attract
and retain highly skilled technical, management, sales and marketing
personnel. There is a limited number of personnel with the requisite skills
to serve in these positions, and it has become increasingly difficult for us
to hire such personnel. Competition for such personnel in the semiconductor
equipment industry is intense, and there can be no assurance that we will be
successful in attracting or retaining such personnel. Changes in management
could disrupt our operations and adversely affect our operating results.
We may be subject to litigation relating to intellectual property infringement
which would be time-consuming, expensive and a distraction from our business.
If we do not adequately protect our intellectual property, competitors may
be able to practice our technologies and erode our competitive advantage, and
our business and operating results could be harmed. Litigation may be
necessary to enforce or determine the validity and scope of our proprietary
rights, and there can be no assurance that our intellectual property rights,
if challenged, will be upheld as valid. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our operating results, regardless of the outcome of the litigation.
In addition, there can be no assurance that any of the patents issued to us
will not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to us.
There are no pending claims against us regarding infringement of any
patents or other intellectual property rights of others. However, we may
receive, in the future, communications from third parties asserting
intellectual property claims against us. Such claims could include assertions
that our products infringe, or may infringe, the proprietary rights of third
parties, requests for indemnification against such infringement or suggestions
that we may be interested in acquiring a license from such third parties.
There can be no assurance that any such claim made in the future will not
29
result in litigation, which could involve significant expense to us, and, if
we are required or deem it appropriate to obtain a license relating to one or
more products or technologies, there can be no assurance that we would be able
to do so on commercially reasonable terms, or at all.
We are subject to environmental regulations.
Federal, state and local regulations impose various controls on the use,
storage, discharge, handling, emission, generation, manufacture and disposal
of toxic or other hazardous substances used in our operations. We believe
that our activities conform in all material respects to current environmental
and land use regulations applicable to our operations and our current
facilities, and that it has obtained environmental permits necessary to
conduct its business. Nevertheless, the failure to comply with current or
future regulations could result in substantial fines being imposed on us,
suspension of production, alteration of our manufacturing processes or
cessation of operations. Such regulations could require us to acquire
expensive remediation equipment or to incur substantial expenses to comply
with environmental regulations. Any failure by us to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject us to significant liabilities.
We are subject to internal control evaluation requirements of Section 404 of
the Sarbanes-Oxley Act.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we must include
in our Annual Report on Form 10-K a report of management on the effectiveness
of our internal control over financial reporting. If we fail to maintain
effective internal control over financial reporting, or management does not
timely assess the adequacy of such internal control, or our independent
registered public accounting firm does not timely deliver an unqualified
opinion as to the effectiveness of our internal controls, we could be subject
to regulatory sanctions and the public's perception may decline. Our
independent registered public accounting firm will be required to attest to
the effectiveness of our internal control over financial reporting beginning
in fiscal 2010.
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 of, or incorporated by reference into, this report.
30
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 10, 2009 /s/ RHEA J. POSEDEL
---------------------------------
Rhea J. Posedel
Chief Executive Officer and
Chairman of the Board of Directors
Date: April 10, 2009 /s/ GARY L. LARSON
--------------------------------
Gary L. Larson
Vice President of Finance and
Chief Financial Officer
31
AEHR TEST SYSTEMS
INDEX TO EXHIBITS
Exhibit No. Description
---------- -----------------------------------------------------------
3.2 Amended and Restated Bylaws of the Company.
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.
32