UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended May 31, 2011
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 (IRS Employer Identification Number)
incorporation or organization)
400 KATO TERRACE, FREMONT, CA 94539
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 623-9400
Securities registered pursuant to Section 12(b) of the Act:
Common stock, $0.01 par value
Name of each exchange on which registered: The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Act.
Yes [ ] No [X]
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 that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained to the best of the registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [X]
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 [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the registrant's common stock, par value
$0.01 per share, held by non-affiliates of the registrant, based upon the
closing price of $0.93 on November 30, 2010, as reported on the NASDAQ Global
Market, was $6,753,177. For purposes of this disclosure, shares of common
stock held by persons who hold more than 5% of the outstanding shares of
common stock (other than such persons of whom the Registrant became aware only
through the filing of a Schedule 13G filed with the Securities and Exchange
Commission) and shares held by officers and directors of the Registrant have
been excluded because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive for other
purposes.
The number of shares of registrant's common stock, par value $0.01 per
share, outstanding at July 31, 2011 was 8,931,728.
Documents Incorporated By Reference
Certain information required by Part III of this report on Form 10-K is
incorporated by reference from the Registrant's proxy statement for the Annual
Meeting of Shareholders to be held on October 25, 2011 (the "Proxy
Statement"), which will be filed with the Securities and Exchange Commission
within 120 days after the close of the registrant's fiscal year ended May 31,
2011.
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AEHR TEST SYSTEMS
FORM 10-K
FISCAL YEAR ENDED MAY 31, 2011
TABLE OF CONTENTS
PART I
Item 1. Business................................................... 4
Item 1A. Risk Factors............................................... 9
Item 1B. Unresolved Staff Comments.................................. 15
Item 2. Properties................................................. 15
Item 3. Legal Proceedings.......................................... 15
Item 4. (Removed and Reserved)..................................... 15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........ 16
Item 6. Selected Consolidated Financial Data....................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 27
Item 8. Financial Statements and Supplementary Data................ 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................. 53
Item 9A(T). Controls and Procedures.................................... 53
Item 9B. Other Information ......................................... 53
PART III
Item 10. Directors, Executive Officers and Corporate Governance..... 54
Item 11. Executive Compensation..................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters............... 54
Item 13. Certain Relationships and Related Transactions............. 54
Item 14. Principal Accountant Fees and Services..................... 54
PART IV
Item 15. Exhibits and Financial Statement Schedules................. 55
Signatures................................................ 58
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This Annual Report on Form 10-K contains forward-looking statements within
the meaning of the Private Securities Litigation Act of 1995 which involve
risks and uncertainties. Unless the context requires otherwise, references in
this Form 10-K to "Aehr Test," the "Company," "we," "us" and "our" refer to
Aehr Test Systems. The Company's actual results may differ materially from
the results discussed in the forward-looking statements due to a number of
factors, including those described herein and the documents incorporated
herein by reference, and those factors described in Part I, Item 1A under
"Risk Factors." 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.
All forward-looking statements included in this document are based on our
current expectations, and we assume no obligation to update any of these
forward-looking statements. We note that a variety of factors could cause
actual results and experience to differ materially from the anticipated
results or other expectations expressed in these forward-looking statements,
including the risks and uncertainties that may affect the operations,
performance, development and results of our businesses. These risks include
but are not limited to those factors identified in "Risk Factors" beginning on
page 9 of this Annual Report on Form 10-K, those factors that we may from time
to time identify in our periodic filings with the Securities and Exchange
Commission, as well as other factors beyond our control.
PART I
Item 1. Business
THE COMPANY
Aehr Test was incorporated in the state of California on May 25, 1977. We
develop, manufacture and sell systems which are designed to reduce the cost of
testing flash, dynamic random access memory, or DRAM, and other memory
devices, and to perform reliability screening, or burn-in, of complex logic
and memory devices. These systems can be used to simultaneously perform
parallel testing and burn-in of packaged integrated circuits, or ICs,
singulated bare die or ICs still in wafer form. Leveraging its expertise as a
long-time leading provider of burn-in equipment, with over 2,500 systems
installed worldwide, the Company has developed and introduced several
innovative product families, including the ABTSTM, FOXTM and MAX systems, the
WaferPakTM cartridge and the DiePak(R) carrier. The new ABTS family of systems
can perform test during burn-in on both logic and memory packaged ICs. The
FOX systems are full wafer contact parallel test and burn-in systems designed
to make contact with all pads of a wafer simultaneously, thus enabling full
wafer parallel test and burn-in. The MAX system can effectively burn-in and
functionally test complex devices, such as digital signal processors,
microprocessors, microcontrollers and systems-on-a-chip. The WaferPak
cartridge includes a full-wafer probe card for use in testing wafers in FOX
systems. The DiePak carrier is a reusable, temporary package that enables IC
manufacturers to perform cost-effective final test and burn-in of bare die.
INDUSTRY BACKGROUND
Semiconductor manufacturing is a complex, multi-step process, and defects
or weaknesses that may result in the failure of an integrated circuit may be
introduced at any process step. Failures may occur immediately or at any time
during the operating life of an IC, sometimes after several months of normal
use. Semiconductor manufacturers rely on testing and reliability screening to
identify and eliminate defects that occur during the manufacturing process.
Testing and reliability screening involve multiple steps. The first set
of tests is typically performed by IC manufacturers before the processed
semiconductor wafer is cut into individual die, in order to avoid the cost of
packaging defective die into their packages. This "wafer probe" testing can
be performed on one or many die at a time, including testing the entire wafer
at once. After the die are packaged and before they undergo reliability
screening, a short test is typically performed to detect packaging defects.
Most leading-edge microprocessors, microcontrollers, digital signal
processors, and memory ICs then undergo an extensive reliability screening and
stress testing procedure known as "burn-in." The burn-in process screens for
early failures by operating the IC at elevated voltages and temperatures, up
to 150 degrees Celsius (302 degrees Fahrenheit), for periods typically ranging
from 2 to 48 hours. A typical burn-in system can process thousands of ICs
simultaneously. After burn-in, the ICs undergo a final test process using
automatic test equipment, or testers. Traditional memory testers can test up
to 768 ICs simultaneously and perform a variety of tests at multiple
temperatures.
PRODUCTS
The Company manufactures and markets full wafer contact test systems,
monitored burn-in systems, massively parallel test systems, test fixtures, die
carriers and related accessories.
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All of the Company's systems are modular, allowing them to be configured
with optional features to meet customer requirements. Systems can be
configured for use in production applications, where capacity, throughput and
price are most important, or for reliability engineering and quality assurance
applications, where performance and flexibility, such as extended temperature
ranges, are essential.
FULL WAFER CONTACT SYSTEMS
The FOX-1 full wafer parallel test system, introduced in June 2005, is
designed for massively parallel test in wafer sort. The FOX-1 system is
designed to make electrical contact to and test all of the die on a wafer in a
single touchdown. The FOX-1 test head and WaferPak contactor are compatible
with industry-standard 300 mm wafer probers which provide the wafer handling
and alignment automation for the FOX-1 system. The FOX-1 pattern generator is
designed to functionally test industry-standard memories such as flash and
DRAMs, plus it is optimized to test memory or logic ICs that incorporate
design for testability, or DFT, and built-in self-test, or BIST. The FOX-1
pin electronics and per-device power supplies are tailored to full-wafer
functional test. The Company believes that the FOX-1 system can significantly
reduce the cost of testing IC wafers.
The FOX-15 full wafer contact test and burn-in system, introduced in
October 2007, is designed for use with wafers that require test and burn-in
times typically measured in hours. The FOX-15 is focused on parallel testing
and burning-in up to 15 wafers at a time. For high reliability applications,
such as automotive, the FOX-15 system is a cost-effective solution for
producing tested and burned-in die for use in multi-chip packages. Using
Known-Good Die, or KGD, which are fully burned-in and tested die, in multi-
chip packages helps assure the reliability of the final product and lowers
costs by increasing the yield of high-cost multi-chip packages. Wafer-level
burn-in and test enables lower cost production of KGD for multi-chip modules,
3-D stacked packages and systems-in-a-package.
One of the key components of the FOX systems is the patented WaferPak
cartridge system. The WaferPak cartridge contains a full-wafer single-
touchdown probe card which is easily removable from the system. Traditional
probe cards contact only a portion of the wafer, requiring multiple touchdowns
to test the entire wafer. The unique design is intended to accommodate a wide
range of contactor technologies so that the contactor technology can evolve
along with the changing requirements of the customer's wafers.
The full wafer contact systems product category accounted for
approximately 66%, 65% and 82% of the Company's net sales in fiscal 2011, 2010
and 2009, respectively.
SYSTEMS FOR PACKAGED PARTS
Monitored burn-in and massively parallel test systems consist of several
subsystems: pattern generation and test electronics, control software, network
interface and environmental chamber. Massively parallel test systems include
a test pattern generator which allows them to duplicate most of the functional
tests performed by a traditional tester. Pin electronics at each burn-in
board, or BIB, position are designed to provide accurate signals to the ICs
being tested and detect whether a device is failing the test.
Devices being tested are placed on BIBs and loaded into environmental
chambers which typically operate at temperatures from 25 degrees Celsius (77
degrees Fahrenheit) up to 150 degrees Celsius (302 degrees Fahrenheit)
(optional chambers can produce temperatures as low as -55 degrees Celsius (-67
degrees Fahrenheit)). A single BIB can hold up to several hundred ICs, and a
production chamber holds up to 72 BIBs, resulting in thousands of memories or
logic devices being tested in a single system.
The Advanced Burn-in and Test System, or ABTS, was introduced in fiscal
2008. The ABTS family of products is based on a completely new hardware and
software architecture that is intended to address not only today's devices,
but also future devices for many years to come. The ABTS system can test and
burn-in memory as well as both high-power logic and low-power logic devices.
It can be configured to provide individual device temperature control for
devices up to 50W or more and with up to 320 I/O channels. ABTS systems can
be configured for both monitored burn-in and massively parallel test
applications.
The MAX3 system, which was introduced by the Company in fiscal 1999, is
designed for monitored burn-in of memory and logic devices. It has 96
channels and holds 64 burn-in boards, each of which may hold up to 350 or more
devices, resulting in a system capacity of up to 22,400 or more devices. The
MAX3 system was designed for today's low voltage ICs. The MAX3 also has
extended stored test program capability for more complete exercise and output
monitoring of complex logic devices such as digital signal processors. The
output monitor feature allows the MAX3 to perform functional tests of devices
and it also supports BIST or other scan features. The MAX4 system was
introduced in 2001. The MAX4 extends the MAX3 system to target devices that
require better voltage accuracy and higher current.
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It can provide up to 227 amps of current per BIB position. All systems
feature multi-tasking software which includes lot tracking and reporting
software that are needed for production and military applications.
This packaged part systems product category accounted for approximately
31%, 35% and 17% of the Company's net sales in fiscal 2011, 2010 and 2009,
respectively.
TEST FIXTURES
The Company sells, and licenses others to manufacture and sell, custom-
designed test fixtures for its systems. The test fixtures include BIBs for
the ABTS parallel test and burn-in system and for the MAX monitored burn-in
system. These test fixtures hold the devices undergoing test or burn-in and
electrically connect the devices under test to the system electronics. The
capacity of each test fixture depends on the type of device being tested or
burned-in, ranging from several hundred in memory production to as few as
eight for high pin-count complex Application Specific Integrated Circuits, or
ASICs, or microprocessor devices. Test fixtures are sold both with new Aehr
Test systems and for use with the Company's installed base of systems.
The Company's DiePak product line includes a family of reusable, temporary
die carriers and associated sockets that enable the test and burn-in of bare
die using the same test and burn-in systems used for packaged ICs. DiePak
carriers offer cost-effective solutions for providing KGD for most types of
ICs, including memory, microcontroller and microprocessor devices. The DiePak
carrier was introduced in fiscal 1995. The DiePak carrier consists of an
interconnect substrate, which provides an electrical connection between the
die pads and the socket contacts, and a mechanical support system. The
substrate is customized for each IC product. The DiePak carrier comes in
several different versions, designed to handle ICs ranging from 54 pin-count
memories up to 320 pin-count microprocessors. A new lower cost 54/66 pin
DiePak solution was introduced in July 2004.
The Company has received patents or applied for patents on certain
features of the FOX, ABTS and MAX4 test fixtures. The Company has licensed or
authorized several other companies to provide MAX4 BIBs from which the Company
receives royalties. Royalties and revenue for the test fixtures product
category accounted for less than 5% of net sales in fiscal 2011, 2010 and
2009.
CUSTOMERS
The Company markets and sells its products throughout the world to
semiconductor manufacturers, semiconductor contract assemblers, electronics
manufacturers and burn-in and test service companies.
Sales to the Company's five largest customers accounted for approximately
85%, 85%, and 95% of its net sales in fiscal 2011, 2010 and 2009,
respectively. During fiscal 2011, Spansion Inc., or Spansion, and Texas
Instruments Incorporated accounted for approximately 61% and 11%,
respectively, of the Company's net sales. During fiscal 2010, Spansion,
Micronas Semiconductor Holding AG and Texas Instruments Incorporated accounted
for approximately 55%, 12% and 11%, respectively, of the Company's net sales.
During fiscal 2009 one customer, Spansion, accounted for approximately 80% of
the Company's net sales. No other customers accounted for more than 10% of
the Company's net sales for any of these periods. The Company expects that
sales of its products to a limited number of customers will continue to
account for a high percentage of net sales for the foreseeable future. In
addition, sales to particular customers may fluctuate significantly from
quarter to quarter. Such fluctuations may result in changes in utilization of
the Company's facilities and resources. The loss of or reduction or delay in
orders from a significant customer or a delay in collecting or failure to
collect accounts receivable from a significant customer could materially and
adversely affect the Company's business, financial condition and operating
results.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company has sales and service operations in the United States, Japan,
Germany and Taiwan, and has established a network of distributors and sales
representatives in certain key parts of the world. See "REVENUE RECOGNITION"
in Item 7 under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a further discussion of the Company's
relationship with distributors, and its effects on revenue recognition.
The Company's customer service and support program includes system
installation, system repair, applications engineering support, spare parts
inventories, customer training and documentation. The Company has both
applications engineering and field service personnel located at the corporate
headquarters in Fremont, California and at the Company's subsidiaries in
Japan, Germany and Taiwan. The Company's distributors provide applications
and field service support in other parts of the world. The Company
customarily provides a warranty on its products. The
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Company offers service contracts on its systems directly and through its
subsidiaries, distributors and representatives. The Company maintains
customer support personnel in the Philippines and China. The Company believes
that maintaining a close relationship with customers and providing them with
ongoing engineering support improves customer satisfaction and will provide
the Company with a competitive advantage in selling its products to the
Company's customers.
BACKLOG
At May 31, 2011, the Company's backlog was $5.8 million compared with $2.5
million at May 31, 2010. The Company's backlog consists of product orders for
which confirmed purchase orders have been received and which are scheduled for
shipment within 12 months. Due to the possibility of customer changes in
delivery schedules or cancellations and potential delays in product shipments
or development projects, the Company's backlog as of a particular date may not
be indicative of net sales for any succeeding period.
RESEARCH AND PRODUCT DEVELOPMENT
The Company historically has devoted a significant portion of its
financial resources to research and development programs and expects to
continue to allocate significant resources to these efforts. The Company's
research and development expenses during fiscal 2011, 2010 and 2009 were $4.6
million, $4.8 million and $5.8 million, respectively.
The Company conducts ongoing research and development to design new
products and to support and enhance existing product lines. Building upon the
expertise gained in the development of its existing products, the Company has
developed the FOX family of systems for performing test and burn-in of entire
processed wafers, rather than individual die or packaged parts. The Company
is completing development of the ABTS family of products, intended to improve
the capability and performance for testing and burn-in of future generation
ICs and provide the flexibility in a wide variety of applications from logic
to memories.
MANUFACTURING
The Company assembles its products from components and parts manufactured
by others, including environmental chambers, power supplies, metal
fabrications, printed circuit assemblies, ICs, burn-in sockets, high-density
interconnects, wafer contactors and interconnect substrates. Final assembly
and testing are performed within the Company's facilities. The Company's
strategy is to use in-house manufacturing only when necessary to protect a
proprietary process or when a significant improvement in quality, cost or
leadtime can be achieved. The Company's principal manufacturing facility is
located in Fremont, California. The Company's facilities in Tokyo, Japan and
Utting, Germany provide limited manufacturing and product customization.
The Company relies on subcontractors to manufacture many of the components
and subassemblies used in its products. The Company's ABTS, FOX and MAX
systems and DiePak carriers contain several components, including
environmental chambers, power supplies, high-density interconnects, wafer
contactors, signal distribution substrates and certain ICs, that are currently
supplied by only one or a limited number of suppliers. The Company's reliance
on subcontractors and single source suppliers involves a number of significant
risks, including the loss of control over the manufacturing process, the
potential absence of adequate capacity and reduced control over delivery
schedules, manufacturing yields, quality and costs. In the event that any
significant subcontractor or single source supplier becomes unable or
unwilling to continue to manufacture subassemblies, components or parts in
required volumes, the Company will have to identify and qualify acceptable
replacements. The process of qualifying subcontractors and suppliers could be
lengthy, and no assurance can be given that any additional sources would be
available to the Company on a timely basis. Any delay, interruption or
termination of a supplier relationship could adversely affect our ability to
deliver products, which would harm our operating results.
COMPETITION
The semiconductor equipment industry is intensely competitive.
Significant competitive factors in the semiconductor equipment market include
price, technical capabilities, quality, flexibility, automation, cost of
ownership, reliability, throughput, product availability and customer service.
In each of the markets it serves, the Company faces competition from
established competitors and potential new entrants, many of which have greater
financial, engineering, manufacturing and marketing resources than the
Company.
The Company's FOX full wafer contact systems are expected to face
competition from larger systems manufacturers that have significant
technological know-how and manufacturing capability. Competing suppliers of
full wafer contact
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systems include Advantest Corporation, Micronics Japan Co., Ltd., Matsushita
Electric Industrial Co., Ltd. and Delta V Instruments, Incorporated.
The Company's ABTS parallel test and burn-in systems face intense
competition from burn-in system suppliers and traditional memory tester
suppliers because the Company's ABTS systems perform burn-in and many of the
functional tests performed by memory testers. Competing suppliers of burn-in
and functional test systems include Advantest Corporation, Dong-Il Corporation
and UniTest Inc.
The Company's ABTS and MAX monitored burn-in systems have faced and are
expected to continue to face increasingly severe competition, especially from
several regional, low-cost manufacturers and from systems manufacturers that
offer higher power dissipation per device under test. Some users of such
systems, such as independent test labs, build their own burn-in systems, while
others, particularly large IC manufacturers in Asia, acquire burn-in systems
from captive or affiliated suppliers. The market for burn-in systems is
highly fragmented, with many domestic and international suppliers. Competing
suppliers of burn-in and functional test systems include Dong-Il Corporation
and Micro Control Company.
The Company expects that its WaferPak products will face significant
competition. The Company believes that several companies have developed or
are developing full-wafer and single-touchdown probe cards. As the full-wafer
test market develops, the Company expects that other competitors will emerge.
The Company expects that the primary competitive factors in this market will
be cost, performance, reliability and assured supply. Competing suppliers of
full-wafer probe cards include FormFactor, Inc., Advantest Corporation and
Micronics Japan Co., Ltd.
The Company's test fixture products face numerous regional competitors.
There are limited barriers to entry into the BIB market, and as a result, many
companies design and manufacture BIBs, including BIBs for use with the
Company's ABTS and MAX systems. The Company has granted royalty-bearing
licenses to several companies to make BIBs for use with the Company's MAX4
systems and the Company may grant additional licenses as well. Sales of MAX4
BIBs by licensees result in royalties to the Company.
The Company expects that its DiePak products will face significant
competition. The Company believes that several companies have developed or
are developing products which are intended to enable test and burn-in of bare
die. As the bare die market develops, the Company expects that other
competitors will emerge. The DiePak products also face severe competition
from other alternative test solutions. The Company expects that the primary
competitive factors in this market will be cost, performance, reliability and
assured supply. Competing suppliers of DiePak products include Yamaichi
Electronics Co., Ltd.
The Company expects its competitors to continue to improve the performance
of their current products and to introduce new products with improved price
and performance characteristics. New product introductions by the Company's
competitors or by new market entrants could cause a decline in sales or loss
of market acceptance of the Company's products. The Company has observed
price competition in the systems market, particularly with respect to its less
advanced products. Increased competitive pressure could also lead to
intensified price-based competition, resulting in lower prices which could
adversely affect the Company's operating margins and results. The Company
believes that to remain competitive it must invest significant financial
resources in new product development and expand its customer service and
support worldwide. There can be no assurance that the Company will be able to
compete successfully in the future.
PROPRIETARY RIGHTS
The Company relies primarily on the technical and creative ability of its
personnel, its proprietary software, and trade secrets and copyright
protection, rather than on patents, to maintain its competitive position. The
Company's proprietary software is copyrighted and licensed to the Company's
customers. The Company currently holds thirty five issued United States
patents with expiration date ranges from 2012 to 2029 and has several
additional United States patent applications and foreign patent applications
pending.
The Company's ability to compete successfully is dependent in part upon
its ability to protect its proprietary technology and information. Although
the Company attempts to protect its proprietary technology through patents,
copyrights, trade secrets and other measures, there can be no assurance that
these measures will be adequate or that competitors will not be able to
develop similar technology independently. Further, there can be no assurance
that claims allowed on any patent issued to the Company will be sufficiently
broad to protect the Company's technology, that any patent will be issued to
the Company from any pending application or that foreign intellectual property
laws will protect the Company's intellectual property. Litigation may be
necessary to enforce or determine the validity and scope of the Company's
proprietary rights, and there can be no assurance that the Company's
intellectual property rights, if
8
challenged, will be upheld as valid. Any such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and operating results,
regardless of the outcome of the litigation. In addition, there can be no
assurance that any of the patents issued to the Company will not be
challenged, invalidated or circumvented or that the rights granted thereunder
will provide competitive advantages to the Company. Also, there can be no
assurance that the Company will have the financial resources to defend its
patents from infringement or claims of invalidity.
There are currently no pending claims against the Company regarding
infringement of any patents or other intellectual property rights of others.
However, the Company may receive communications from third parties asserting
intellectual property claims against the Company. Such claims could include
assertions that the Company's products infringe, or may infringe, the
proprietary rights of third parties, requests for indemnification against such
infringement or suggest the Company 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 result in litigation, which could involve significant
expense to the Company, and, if the Company is required or deems it
appropriate to obtain a license relating to one or more products or
technologies, there can be no assurance that the Company would be able to do
so on commercially reasonable terms, or at all.
EMPLOYEES
As of May 31, 2011, the Company, including its two foreign subsidiaries,
employed 82 persons collectively, on a full-time basis, of whom 26 were
engaged in research, development and related engineering, 20 were engaged in
manufacturing, 25 were engaged in marketing, sales and customer support and 11
were engaged in general administration and finance functions. In addition,
the Company from time to time employs a number of contractors and part-time
employees, particularly to perform customer support and manufacturing. The
Company's success is in part dependent on its ability to attract and retain
highly skilled workers, who are in high demand. None of the Company's
employees are represented by a union and the Company has never experienced a
work stoppage. The Company's management considers its relations with its
employees to be good.
GEOGRAPHIC AREAS
The Company operates in several geographic areas. Selected financial
information, including net sales and property and equipment, net for each of
the last three fiscal years, is included in Part II, Item 8, Note 12 "Segment
Information" and certain risks related to such operations are discussed in
Part I, Item 1A, under the heading "We sell our products and services
worldwide, and our business is subject to risks inherent in conducting
business activities in geographic regions outside of the United States."
AVAILABLE INFORMATION
The Company's common stock trades on the NASDAQ Capital Market under the
symbol "AEHR." The Company's annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to these reports that
are filed with the United States Securities and Exchange Commission, or SEC,
pursuant to Section 13(a) or 15 (d) of the Exchange Act, are available free of
charge through the Company's website at www.aehr.com as soon as reasonably
practicable after we electronically file them with, or furnish them to the
SEC.
The public may read and copy any materials filed by the Company with the
SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operations of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site, http://www.sec.gov, that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the SEC.
In addition, information regarding the Company's code of conduct and
ethics and the charters of its Audit, Compensation and Nominating and
Governance Committees, are available free of charge on the Company's website
listed above.
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 occur, 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 Annual Report on Form 10-K or presented elsewhere by management
from time to time.
9
Periodic economic and semiconductor industry downturns could negatively affect
our business, results of operations and financial condition.
The recent and historical global economic and semiconductor industry
downturns negatively affected and could continue to negatively affect our
business, results of operations, and financial condition. The recent
financial turmoil affected the banking system and financial markets resulting
in a tightening of the credit markets, disruption in the financial markets and
global economy downturn. These events contributed to significant slowdowns in
the industries in which we operate. Difficulties in obtaining capital and
deteriorating market conditions can pose the 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. For example, Spansion
declared bankruptcy in Japan and the U.S. during fiscal 2009; as a result the
Company subsequently recorded a $13.7 million provision for bad debts. A
recurrence of these conditions may also similarly affect our key suppliers,
which could impact their ability to deliver parts and result in delays in
deliveries of our products.
Turmoil in the international 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 have historically
declined, 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 calendar 2009, and that the
uncertainty of the memory market may cause some manufacturers in the future to
again delay capital spending plans. Economic conditions may also affect the
ability of our customers to meet their payment obligations, resulting in
cancellations or deferrals of existing orders and limiting additional orders.
In addition, some governments have subsidized portions of fabrication facility
construction, and 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.
The recent economic conditions and uncertainty about future economic
conditions made 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 such conditions recur, and
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 sufficiently during
periods of weak revenue, or if we utilize significant amounts of cash to
support operating losses, we may erode our cash resources and may not have
sufficient cash to operate our business.
In the face of the recent sustained downturn in our business and decline
in our net sales, 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 then weak market for test
and burn-in equipment. While we took significant steps in fiscal 2009 to
minimize our expense levels and to increase the likelihood that we would have
sufficient cash to support operations during the downturn, during fiscal 2009,
2010 and fiscal 2011 we experienced operating losses. Due primarily to these
operating losses in fiscal 2009, 2010 and fiscal 2011, we experienced cash
outflows. Should our business downturn be prolonged, and if we are unable to
reduce our operating expenses sufficiently, we may require additional debt or
equity financing to meet working capital or capital expenditure needs. While
we believe our cash balances together with cash flows from operations will be
sufficient to satisfy our cash requirements through the next twelve months, we
cannot determine with certainty that, if needed, we will 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 generate a large portion of our sales from a small number of customers. If
we were to lose one or more of our large customers, operating results could
suffer dramatically.
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 85% of its net sales in fiscal 2011 and 2010.
During fiscal 2011, Spansion and Texas Instruments Incorporated accounted for
approximately 61% and 11%, respectively, of the Company's net sales. During
fiscal 2010, Spansion, Micronas Semiconductor Holding AG and Texas Instruments
Incorporated accounted for approximately 55%, 12% and 11%, respectively, of
the Company's net sales. No other customers represented more than 10% of the
Company's net sales for either fiscal 2011 or fiscal 2010.
10
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, during fiscal 2009 Spansion Inc., our largest customer at the time,
declared bankruptcy in Japan and in the U.S. and subsequently placed lower
levels of orders with the Company, which caused our net sales to drop
dramatically and impacted the Company's ability to collect on accounts
receivable.
A substantial portion of our net sales is generated by relatively small
volume, high value transactions.
We derive a substantial portion of our net sales from the sale of a
relatively small number of systems which typically range in purchase price
from approximately $200,000 to over $1 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 or rescheduling. Certain contracts contain provisions that
require customer acceptance prior to recognition of revenue. The delay in
customer acceptance could have a material adverse effect on our operating
results. A substantial portion of net sales typically are 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.
The Company's business operations could be negatively impacted by earthquakes
or other natural disasters.
The March 2011 Japanese earthquake and resulting tsunami seriously
affected many companies in Japan, including some of our customers. Besides
direct impact to their employees and facilities, they were affected by, among
other things, the rolling electrical blackouts and industry wide shutdowns as
well as the impact of the nuclear power plant disaster. Some of our customers
have delayed capital equipment purchases as a result of the disaster. The
disaster in Japan may also result in a downturn in the Japanese economy as a
whole, which could further impact the Company's business prospects in Japan.
Natural disasters may impact our ability to manufacture products in the
event our facility is damaged, or if operations are disrupted at a major
supplier. The demand for our products may be negatively affected if a natural
disaster impacts one of our significant customers. These events may seriously
damage our ability to conduct business.
We rely on increasing market acceptance for our FOX system, and we may not be
successful in attracting new customers 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 designed to simultaneously burn-in and
functionally test all of the die on a wafer. The market for the FOX systems
is in the 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 used for
these qualifications and for engineering studies. Market acceptance of the
FOX system also may be affected by a reluctance of IC manufacturers to rely on
relatively small suppliers such as Aehr Test Systems. 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 increased market acceptance would have a material
adverse effect on our future operating results, long-term prospects and our
stock price.
We rely on increasing 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.
Since the introduction of the ABTS product in fiscal 2008, the Company has
shipped a limited number of ABTS systems. Market acceptance of the ABTS
system is subject to a number of risks. We must complete engineering
development of certain necessary hardware and software features. In
addition, it is important that we achieve customer satisfaction and acceptance
of the ABTS products. Additional customers must then be found who are willing
to place
11
orders for ABTS systems in sufficient quantities to allow it to be produced
economically. The failure of the ABTS system to achieve increased market
acceptance would have a material adverse effect on our future operating
results, long-term prospects and our stock price.
We depend upon continued market acceptance for our MAX system and we may
experience a limited burn-in system market.
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 experience significant long-term
growth in the future. In general, process control improvements in the
semiconductor industry have tended to reduce burn-in times. In addition, as a
given IC product generation matures and yields increase, the required burn-in
time may be reduced or eliminated. IC manufacturers, which historically have
been our primary customer base, increasingly outsource test and burn-in to
independent test labs, which often build their own systems. Our ABTS system
may cannibalize the business that would previously have been addressed by the
MAX system. Our success depends upon some 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, or that sales of our MAX burn-in
products will not decline.
We sell our products and services worldwide, and our business is subject to
risks inherent in conducting business activities in geographic regions outside
of the United States.
Approximately 39%, 29% and 72% of our net sales for fiscal 2011, 2010 and
2009, 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 net sales. 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.
Approximately 92%, 7% and 1% of our net sales for fiscal 2011 were
denominated in U.S. Dollars, Japanese Yen and Euros, respectively. Although
a large percentage of net sales to European customers are 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 change and our ability to
remain competitive depends on 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 by 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.
12
Because of the complexity of our products, significant delays can occur
between a product's introduction and the commencement of the 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 our products and may experience delays and technical and
manufacturing difficulties in future introductions or volume production of our
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 increased costs associated with new product introductions.
As is common with new complex products incorporating leading-edge
technologies, 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 the ability of us to address such issues promptly. This process
in the past required and in the future is likely to require us to incur un-
reimbursed engineering expenses and to experience larger than anticipated
warranty claims which could result in product returns. In the early stages of
product development there can be no assurance that we will discover any
reliability, design and manufacturing issues or, that if such issues arise,
that 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.
Our dependence on subcontractors and sole source suppliers may prevent us from
delivering our products on a timely basis and expose us to intellectual
property infringement.
We rely on subcontractors to manufacture many of the components or
subassemblies used in its products. Our FOX, ABTS and MAX systems, WaferPak
contactors and DiePak carriers contain several components, including
environmental chambers, power supplies, high-density interconnects, wafer
contactors, signal distribution substrates and certain ICs that are currently
supplied by only one or a limited number of suppliers. Our reliance on
subcontractors and single source suppliers involves a number of significant
risks, including the loss of control over the manufacturing process, the
potential absence of adequate capacity and reduced control over delivery
schedules, manufacturing yields, quality and costs. In the event that any
significant subcontractor or single source supplier becomes unable or
unwilling to continue to manufacture subassemblies, components or parts in
required volumes, we will have to identify and qualify acceptable
replacements. The process of qualifying subcontractors and suppliers could be
lengthy, and no assurance can be given that any additional sources would be
available to us on a timely basis. Any delay, interruption or termination of
a supplier relationship could adversely affect our ability to deliver
products, which would harm our operating results.
Our suppliers manufacture components, tooling, and provide engineering
services which allows access to intellectual property of the Company. While
the Company maintains patents to protect from intellectual property
infringement, there can be no assurance that technological information gained
in the manufacture of our products will not be used to develop a new product,
improve processes or techniques which compete against our products.
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.
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 built-in self-test, or 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 which could have a material adverse affect on
our operating results.
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 ICs. 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 or rescheduling of purchase
orders. A significant increase in purchase order cancellations was recognized
in the third quarter of fiscal 2009 as a result of the Spansion bankruptcy
filing. There can
13
be no assurance that we will not be materially adversely affected by future
cancellations or rescheduling of purchase orders.
Our stock price may fluctuate.
The price of 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 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, have experienced extreme price
fluctuations which have often been unrelated to the operating performance of
the affected companies. Such fluctuations could adversely affect the market
price of our common stock.
The Company may not meet the listing requirements of the NASDAQ markets which
could cause our stock to be delisted.
Pursuant to the requirements of NASDAQ, if a company's stock price is
below $1 per share for 30 consecutive trading days (the "Bid Price Rule"),
NASDAQ will notify the company that it is no longer in compliance with the
NASDAQ listing qualifications. If a company is not in compliance with the Bid
Price Rule, the company will have 180 calendar days to regain compliance. On
September 18, 2009, the Company received notice from NASDAQ that it was no
longer in compliance with the Bid Price Rule. The Company regained compliance
on September 30, 2009.
On January 18, 2011 the Company received notice from NASDAQ that it was
no longer in compliance with NASDAQ's Listing Rule 5450(b)(1)(A), which
specifies that an issuer must maintain stockholders' equity of at least $10
million. On March 21, 2011 the Company submitted an application to NASDAQ to
transfer the listing of its company stock from the NASDAQ Global Market to the
NASDAQ Capital Market. On March 24, 2011 the Company received a letter from
NASDAQ informing it that the NASDAQ Listing Qualifications Staff had granted
the Company's request to transfer the listing of its common stock to the
NASDAQ Capital Market, effective at the opening of business on March 28, 2011.
There can be no assurance that the Company will continue to meet the
listing requirements of the NASDAQ Capital Market or that it will not be
delisted.
We depend on our key personnel and our success depends on our ability to
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 are 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 use our proprietary information to 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.
14
There are no pending claims against us regarding infringement of any
patents or other intellectual property rights of others. However, in the
future we may receive 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 will not 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.
While we believe we have complied with all applicable environmental laws, our
failure to do so could adversely affect our business as a result of having to
pay substantial amounts in damages or fees.
Federal, state and local regulations impose various controls on the use,
storage, discharge, handling, emission, generation, manufacture and disposal
of toxic and 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 we have obtained environmental permits necessary to
conduct our 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.
While we believe we currently have adequate internal control over financial
reporting, we are required to assess our internal control over financial
reporting on an annual basis and any future adverse results from such
assessment could result in a loss of investor confidence in our financial
reports and have an adverse effect on our stock.
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, we could be subject to
regulatory sanctions and the investing public's perception of the Company may
decline.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company's principal administrative and production facilities are
located in Fremont, California, in a 51,289 square foot building. The term of
the Company's current lease ends on June 30, 2015. The Company has an option
to extend the lease for an additional period at rates to be determined. The
Company's facility in Japan is located in Tokyo in a 4,294 square foot
building under a lease which expires in September, 2013. The Company leases a
sales and support office in Utting, Germany. The lease, which began February
1, 1992 and expires on January 31, 2012, contains an automatic twelve months
renewal, at rates to be determined, if no notice is given prior to six months
from expiry. The Company's and its subsidiaries' annual rental payments
currently aggregate $680,000. The Company periodically evaluates its global
operations and facilities to bring its capacity in line with demand and to
provide cost efficient services for its customers. In prior years, through
this process, the Company has moved from certain facilities that exceeded the
capacity required to satisfy its needs. The Company believes that its
existing facilities are adequate to meet its current and reasonably
foreseeable requirements. The Company regularly evaluates its expected future
facilities requirements and believes that alternate facilities would be
available if needed.
Item 3. Legal Proceedings
None.
Item 4. (Removed and Reserved)
15
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
The Company's common stock has been publicly traded on the NASDAQ Global
Market under the symbol "AEHR" from August 1997, the date of our initial
public offering, through March 2011, at which time the stock began trading on
the NASDAQ Capital Market. The following table sets forth, for the periods
indicated, the high and low sale prices for the common stock on such markets.
These quotations represent prices between dealers and do not include retail
markups, markdowns or commissions and may not necessarily represent actual
transactions.
High Low
--------- ---------
Fiscal 2011:
First quarter ended August 31, 2010................ $2.49 $1.13
Second quarter ended November 30, 2010............. 1.75 0.91
Third quarter ended February 28, 2011.............. 1.89 0.92
Fourth quarter ended May 31, 2011.................. 2.39 1.27
Fiscal 2010:
First quarter ended August 31, 2009................ $1.13 $0.75
Second quarter ended November 30, 2009............. 1.70 0.83
Third quarter ended February 28, 2010.............. 2.55 1.06
Fourth quarter ended May 31, 2010.................. 3.34 2.06
At August 4, 2011, the Company had 130 holders of record of its common
stock. The Company estimates the number of beneficial owners of the Company's
common stock at August 4, 2011 to be 1,789.
The market price of the Company's common stock has been volatile. For a
discussion of the factors affecting the Company's stock price, see "Risk
Factors - Our stock price may fluctuate."
The Company has not paid cash dividends on its common stock or other
securities. The Company currently anticipates that it will retain its future
earnings, if any, for use in the expansion and operation of its business and
does not anticipate paying any cash dividends on its common stock in the
foreseeable future.
The Company did not repurchase any of its common stock during the fiscal
year ended May 31, 2011.
EQUITY COMPENSATION PLAN INFORMATION
The information required by this item is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters" of the Proxy Statement and
Part III, Item 12 of this Annual Report on Form 10-K.
PERFORMANCE MEASUREMENT COMPARISON
The following graph shows a comparison of total shareholder return for
holders of the Company's common stock for the last five fiscal years ended May
31, 2011, compared with the NASDAQ Composite Index and the Philadelphia
Semiconductor Index. The graph assumes that $100 was invested in the
Company's common stock, in the NASDAQ Composite Index and the Philadelphia
Semiconductor Index on May 31, 2006, and that all dividends were reinvested.
The Company believes that while total shareholder return can be an important
indicator of corporate performance, the stock prices of semiconductor
equipment companies like Aehr Test Systems are subject to a number of market-
related factors other than company performance, such as competitive
announcements, mergers and acquisitions in the industry, the general state of
the economy and the performance of other semiconductor equipment company
stocks. Stock prices and shareholder returns over the indicated period should
not be considered indicative of future stock prices or shareholder returns.
16
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Aehr Test Systems, the NASDAQ Composite Index
and the PHLX Semiconductor Index
[The following table was depicted as a line chart in the printed material]
Cumulative Total Return
-----------------------------------------------------
5/06 5/07 5/08 5/09 5/10 5/11
-------- -------- -------- -------- -------- --------
Aehr Test Systems........... 100.00 94.09 135.30 14.46 36.39 23.02
NASDAQ Composite............ 100.00 121.55 118.74 83.47 106.84 135.48
PHLX Semiconductor ......... 100.00 112.60 110.44 77.17 99.99 123.77
-------- -------- -------- -------- -------- --------
* $100 invested on 5/31/06 in stock or index, including reinvestment of
dividends.
Fiscal year ending May 31.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and
related notes included elsewhere in this Form 10-K.
17
Fiscal Year Ended May 31,
------------------------------------------------------
2011 2010 2009 2008 2007
---------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS:
Net sales
Product sales............................... $13,737 $ 8,934 $21,407 $39,041 $27,351
Cancellation charges........................ -- 2,740 -- -- --
---------- ---------- ---------- ---------- ----------
Total net sales........................... 13,737 11,674 21,407 39,041 27,351
Cost of sales................................. 8,225 5,571 20,223 19,072 13,438
---------- ---------- ---------- ---------- ----------
Gross profit.................................. 5,512 6,103 1,184 19,969 13,913
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 5,964 6,094 20,623 7,657 6,538
Research and development.................... 4,567 4,758 5,762 6,501 6,324
Impairment of goodwill...................... -- -- 274 -- --
Gain on bankruptcy claim.................... (832) (3,993) -- -- --
---------- ---------- ---------- ---------- ----------
Total operating expenses.................. 9,699 6,859 26,659 14,158 12,862
---------- ---------- ---------- ---------- ----------
(Loss) income from operations................. (4,187) (756) (25,475) 5,811 1,051
Interest income............................... 3 5 142 231 491
Other income (expense), net................... 762 131 277 (71) 961
---------- ---------- ---------- ---------- ----------
(Loss) income before income tax expense
(benefit).... .............................. (3,422) (620) (25,056) 5,971 2,503
Income tax (benefit) expense.................. (49) (139) 4,915 (4,602) 75
---------- ---------- ---------- ---------- ----------
Net (loss) income............................. $(3,373) $ (481) $(29,971) $10,573 $ 2,428
========== ========== ========== ========== ==========
Net (loss) income per share:
Basic ...................................... $ (0.38) $ (0.06) $ (3.55) $ 1.32 $ 0.31
Diluted .................................... $ (0.38) $ (0.06) $ (3.55) $ 1.24 $ 0.30
Shares used in per share calculations
Basic....................................... 8,776 8,563 8,436 8,013 7,751
Diluted..................................... 8,776 8,563 8,436 8,508 8,225
May 31,
------------------------------------------------------
2011 2010 2009 2008 2007
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEETS:
Cash and cash equivalents..................... $ 4,020 $ 7,766 $ 4,360 $15,648 $ 6,564
Working capital............................... 8,031 9,827 7,299 33,362 20,370
Total assets.................................. 12,083 14,474 13,911 45,199 28,675
Long-term obligations, less current portion... 442 578 605 566 185
Total shareholders' equity.................... 9,101 11,281 9,963 37,772 22,668
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial
statements and related notes included elsewhere in this Annual Report on Form
10-K.
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 Advanced Burn-
in and Test System, the FOX full wafer contact parallel test and burn-in
system, the MAX burn-in system, WaferPak contactors, 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.
18
SIGNIFICANT ITEMS IMPACTING COMPARABILITY OF FINANCIAL STATEMENTS
Spansion, the Company's largest customer in fiscal 2009, 2010 and 2011,
filed for bankruptcy in Japan in February 2009 and in the United States in
March 2009. Due to the bankruptcy filing and the impact of the weak global
economic environment on demand for the Company's products, in the third
quarter of fiscal 2009, we recorded a $13.7 million provision for bad debts in
selling, general and administrative expenses, a $7.2 million provision for
excess and obsolete inventory and a $0.3 million charge for cancellation
charges to cost of sales, a $4.9 million charge to income tax expense related
to the reinstatement of the valuation allowance against the Company's deferred
tax assets, a $0.3 million charge to operating expenses related to goodwill
impairment and a $0.4 million expense related to severance charges.
The Company filed a claim in the Spansion U.S. bankruptcy action. In the
first quarter of fiscal 2010, the Company sold a portion, $11.4 million, of
its Spansion U.S. bankruptcy claim to a third party for net proceeds of $3.3
million and recorded the amount as a reduction of operating expenses. In the
third quarter of fiscal 2010, the Company sold the remaining balance, $7.1
million, of its Spansion U.S. bankruptcy claim to a third party for net
proceeds of $4.6 million and recorded $2.7 million as net sales related to
cancellation charges, $1.3 million as deferred revenue and $0.6 million as a
reduction of operating expenses. In the fourth quarter of fiscal 2010, the
Company received the remaining payment of $0.1 million due from its bankruptcy
claim sale completed in the first quarter of fiscal 2010 and recognized the
amount as a reduction of operating expenses. The $1.3 million deferred
revenue at the end of the third quarter of fiscal 2010 was recognized as
product sales during the fourth quarter of fiscal 2010 in connection with the
delivery of products.
In the first quarter of fiscal 2011, the Company's Japanese subsidiary
received approximately $0.2 million in proceeds from the Spansion Japan
bankruptcy claim and recorded the amount as a reduction of operating expenses.
In the fourth quarter of fiscal 2011, the Company's Japanese subsidiary
received approximately $0.7 million in proceeds from the Spansion Japan
bankruptcy claim and recorded the amount as a reduction of operating expenses.
The Company significantly reduced its headcount and initiated other
expense reduction measures in fiscal 2009. The Company intends to take
actions as necessary to maintain sufficient cash to manage through this period
of slow business activity.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
consolidated 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, 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.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
REVENUE RECOGNITION
The Company's selling arrangements may include contractual customer
acceptance provisions. The Company recognizes revenue upon the shipment of
products or the performance of services when: (1) persuasive evidence of the
arrangement exists; (2) services have been rendered; (3) the price is fixed or
determinable; and (4) collectibility is reasonably assured. The Company
defers recognition of revenue for any amounts subject to acceptance until such
acceptance occurs. When multiple elements exist, the Company allocates the
purchase price based on vendor specific objective evidence or third-party
evidence of fair value and defers revenue recognition on the undelivered
portion. Historically, these multiple deliverables have included items such
as extended support provisions, training to be supplied after delivery of the
systems, and test programs specific to customers' routine applications. The
test programs can be written either by the customer, other firms, or the
Company. The amount of revenue deferred is the greater of the fair value of
the undelivered element or the contractually agreed to amounts. Sales tax
collected from customers is not included in net sales but rather recorded as a
liability due to the respective taxing authorities. Provisions for the
estimated future cost of warranty and installation are recorded at the time
the products are shipped.
19
Royalty-based revenue related to licensing income from performance test
boards and burn-in boards is recognized upon the earlier of the receipt by the
Company of the licensee's report related to its usage of the licensed
intellectual property or upon payment by the licensee.
The Company's terms of sales with distributors are generally Free on
Board, or FOB, shipping point with payment due within 60 days. All products
go through in-house testing and verification of specifications before
shipment. Apart from warranty reserves, credits issued have not been material
as a percentage of net sales. The Company's distributors do not generally
carry inventories of the Company's products. Instead, the distributors place
orders with the Company at or about the time they receive orders from their
customers. The Company's shipment terms to our distributors do not provide
for credits or rights of return. Because the Company's distributors do not
generally carry inventories of our products, they do not have rights to price
protection or to return products. At the time the Company ships products to
the distributors, the price is fixed. Subsequent to the issuance of the
invoice, there are no discounts or special terms. The Company does not give
the buyer the right to return the product or to receive future price
concessions. The Company's arrangements do not include vendor consideration.
The Company capitalizes its systems software development costs incurred
after a system achieves technological feasibility and before first commercial
shipment. Such costs typically represent a small portion of total research
and development costs. No system software development costs were capitalized
or amortized in fiscal 2011, 2010 or 2009.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts to reserve for
potentially uncollectible trade receivables. The Company also reviews its
trade receivables by aging category to identify specific customers with known
disputes or collection issues. The Company exercises judgment when
determining the adequacy of these reserves as the Company evaluates historical
bad debt trends, general economic conditions in the United States and
internationally and changes in customer financial conditions. Uncollectible
receivables are recorded as bad debt expense when all efforts to collect have
been exhausted and recoveries are recognized when they are received.
WARRANTY OBLIGATIONS
The Company provides and records the estimated cost of product warranties
at the time revenues are recognized on products shipped. While the Company
engages in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of its component suppliers, the
Company's warranty obligation is affected by product failure rates, material
usage and service delivery costs incurred in correcting a product failure.
The Company's estimate of warranty reserve is based on management's assessment
of future warranty obligations and on historical warranty obligations. 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, which could affect how the Company accounts for expenses.
INVENTORY OBSOLESCENCE
In each of the last three fiscal years, the Company has written down its
inventory for estimated obsolescence or unmarketable inventory by an amount
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about future demand and market conditions. If
future market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.
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. The Company reviews goodwill 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 fiscal year 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 fiscal
year ended May 31, 2009 bringing the net value to zero. Both gross goodwill
and accumulated impairment were each $274,000 at May 31, 2011, 2010 and 2009.
20
INVESTMENT IMPAIRMENT
The Company records an investment impairment charge when it believes an
investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future.
INCOME TAXES
Income taxes have been provided using the liability method whereby
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and net
operating loss and tax credit carryforwards measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse or the carryforwards are utilized. Valuation allowances are
established when it is determined that it is more likely than not that such
assets will not be realized.
During the fiscal year ended May 31, 2008 a partial release of the
valuation allowance previously established was made based upon the Company's
current level of profitability and the level of forecasted future earnings.
During fiscal 2009, a full valuation allowance was established against all
deferred tax assets as management determined that it is more likely than not
that certain deferred tax assets will not be realized.
The Company accounts for uncertain tax positions consistent with
authoritative guidance. The guidance prescribes a "more likely than not"
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. The Company recognizes
interest and penalties related to unrecognized tax benefits as a component of
income taxes.
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 1996 - 2010 remain subject to
examination by the appropriate governmental agencies due to tax loss
carryovers from those years.
STOCK-BASED COMPENSATION EXPENSE
Stock-based compensation expense consists of expenses for stock options
and employee stock purchase plan, or ESPP, shares. Stock-based compensation
cost is measured at each grant date, based on the fair value of the award
using the Black-Scholes option valuation model, and is recognized as expense
over the employee's requisite service period. This model was developed for
use in estimating the value of publicly traded options that have no vesting
restrictions and are fully transferable. The Company's employee stock options
have characteristics significantly different from those of publicly traded
options. All of the Company's stock compensation is accounted for as an
equity instrument.
The fair value of each option grant and the right to purchase shares under
the Company's stock purchase plan are estimated on the date of grant using the
Black-Scholes option valuation model with assumptions concerning expected
term, stock price volatility, expected dividend yield, risk-free interest rate
and the expected life of the award. In the second quarter of fiscal 2010, the
seven officers of the Company elected to forfeit certain stock options
previously granted. The forfeiture of these options resulted in the immediate
recognition of the unamortized portion of stock compensation expense of $0.5
million. See Note 1 for additional information relating to stock-based
compensation. See Notes 8 and 9 for detailed information regarding the stock
option plan and the ESPP.
21
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a
percentage of net sales for the periods indicated.
Year Ended May 31,
----------------------------
2011 2010 2009
--------- --------- --------
Net sales
Product sales ......................... 100.0 % 76.5 % 100.0 %
Cancellation charges................... -- 23.5 --
--------- --------- --------
Total net sales...................... 100.0 100.0 100.0
Cost of sales ........................... 59.9 47.7 94.5
--------- --------- --------
Gross profit ............................ 40.1 52.3 5.5
--------- --------- --------
Operating expenses:
Selling, general and administrative.... 43.4 52.2 96.3
Research and development............... 33.2 40.8 26.9
Impairment of goodwill................. -- -- 1.3
Gain on bankruptcy claim............... (6.0) (34.2) --
--------- --------- --------
Total operating expenses............. 70.6 58.8 124.5
--------- --------- --------
Loss from operations................. (30.5) (6.5) (119.0)
Interest income.......................... -- 0.1 0.7
Other income, net........................ 5.6 1.1 1.3
--------- --------- --------
Loss before income tax
(benefit) expense.................... (24.9) (5.3) (117.0)
Income tax (benefit) expense............. (0.3) (1.2) 23.0
--------- --------- --------
Net loss ................................ (24.6)% (4.1)% (140.0)%
========= ========= ========
FISCAL YEAR ENDED MAY 31, 2011 COMPARED TO FISCAL YEAR ENDED MAY 31, 2010
NET SALES. Net sales consist primarily of sales of systems, test
fixtures, die carriers, upgrades and spare parts as well as revenues from
service contracts. Net sales increased to $13.7 million for the fiscal year
ended May 31, 2011 from $11.7 million for the fiscal year ended May 31, 2010,
an increase of 17.7%. Net sales for the fiscal year ended May 31, 2010
included $8.9 million of product sales and $2.7 million of cancellation
charges, resulting from the Spansion bankruptcy. No similar cancellation
charges were recorded in fiscal 2011. The increase in net sales in fiscal
2011 resulted primarily from an increase in net sales of the Company's wafer-
level products. Net sales of the Company's wafer-level products in fiscal
2011 were $9.1 million, and increased $1.5 million from fiscal 2010.
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit decreased to $5.5 million
for the fiscal year ended May 31, 2011 from $6.1 million for the fiscal year
ended May 31, 2010. Gross profit margin decreased to 40.1% for the fiscal
year ended May 31, 2011 from 52.3% for the fiscal year ended May 31, 2010,
primarily because the cancellation charges resulting from the Spansion
bankruptcy, recorded in fiscal 2010, had no related cost of sales. No similar
cancellation charges were recorded in fiscal 2011.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative,
or SG&A, expenses consist primarily of salaries and related costs of
employees, customer support costs, commission expenses to independent sales
representatives, product promotion, other professional services and bad debt
expenses. SG&A expenses were $6.0 million for the fiscal year ended May 31,
2011, compared with $6.1 million for the fiscal year ended May 31, 2010, a
decrease of $0.1 million. The decrease in SG&A expenses was primarily due to
a decrease in employment related expenses. The decrease in employment related
expenses was primarily due to a decrease of $0.4 million in stock
22
compensation expense which included the impact from the $0.5 million forfeited
options in fiscal 2010, offset by an increase in salary expense of $0.2
million from the elimination of certain cost reduction initiatives previously
implemented.
RESEARCH AND DEVELOPMENT. Research and development, or 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 $4.6 million for the fiscal year ended May 31, 2011 from $4.8
million for the fiscal year ended May 31, 2010, a decrease of $0.2 million.
This decrease was primarily attributable to the inclusion of a $0.2 million
write-down of capital equipment in fiscal 2010.
GAIN ON BANKRUPTCY CLAIM. Spansion, the Company's largest customer in
fiscal 2009, 2010 and 2011, filed for bankruptcy in Japan in February 2009 and
in the United States in March 2009. The Company filed a claim in the Spansion
U.S. bankruptcy action. In the first quarter of fiscal 2010, the Company sold
a portion of its bankruptcy claim to a third party for net proceeds of $3.3
million and recorded the amount as a reduction of operating expenses. In the
third quarter of fiscal 2010, the Company sold the remaining balance of its
Spansion U.S. bankruptcy claim to a third party for net proceeds of $4.6
million and recorded $0.6 million as a reduction of operating expenses. The
portion of the claim representing cancellation charges and product shipments
were recorded as revenue in fiscal 2010. In the fourth quarter of fiscal
2010, the Company received the remaining payment of $0.1 million due from its
bankruptcy claim sale completed in the first quarter of fiscal 2010 and
recognized the amount as a reduction of operating expenses. In the first
quarter of fiscal 2011, the Company's Japanese subsidiary received
approximately $155,000 in proceeds from the Spansion Japan bankruptcy claim
and recorded the amount as a reduction of operating expenses. In the fourth
quarter of fiscal 2011, the Company's Japanese subsidiary received
approximately $677,000 in proceeds from the Spansion Japan bankruptcy claim
and recorded the amount as a reduction of operating expenses.
INTEREST INCOME. Interest income decreased to $3,000 for the fiscal year
ended May 31, 2011 from $5,000 for the fiscal year ended May 31, 2010, a
decrease of $2,000.
OTHER INCOME, NET. Other income, net increased to $762,000 for the fiscal
year ended May 31, 2011 from $131,000 for the fiscal year ended May 31, 2010.
The increase in other income, net was primarily attributable to the receipt of
a $575,000 dividend payment in the second quarter of fiscal 2011 related to a
long-term investment.
INCOME TAX (BENEFIT) EXPENSE. Income tax benefit was $49,000 for the
fiscal year ended May 31, 2011, compared with income tax benefit of $139,000
for the fiscal year ended May 31, 2010. The income tax benefit for the fiscal
year ended May 31, 2010 was related to the increase in the net operating loss
carry-back period from two to five years and the inclusion of alternative
minimum taxes paid in the carry-back calculation. The income tax benefit for
the fiscal year ended May 31, 2011 was due to the expiration of the statute
limitation related to the adoption of FIN-48.
FISCAL YEAR ENDED MAY 31, 2010 COMPARED TO FISCAL YEAR ENDED MAY 31, 2009
NET SALES. Net sales consist primarily of sales of systems, test
fixtures, die carriers, upgrades and spare parts and revenues from service
contracts. Net sales decreased to $11.7 million for the fiscal year ended May
31, 2010 from $21.4 million for the fiscal year ended May 31, 2009, a decrease
of 45.5%. Net sales for the fiscal year ended May 31, 2010 included $8.9
million of product sales and $2.7 million of cancellation charges. The
decrease in net sales in fiscal 2010 resulted primarily from a decrease in net
sales of the Company's wafer-level products. Net sales of the Company's
wafer-level products in fiscal 2010 were $7.6 million, and decreased $10.1
million from fiscal 2009.
GROSS PROFIT. Gross profit consists of net sales less cost of sales.
Cost of sales consists primarily of the cost of materials, assembly and test
costs, and overhead from operations. Gross profit increased to $6.1 million
for the fiscal year ended May 31, 2010 from $1.2 million for the fiscal year
ended May 31, 2009. Gross profit margin increased to 52.3% for the fiscal
year ended May 31, 2010 from 5.5% for the fiscal year ended May 31, 2009.
Spansion declared bankruptcy in Japan in February 2009 and in the U.S. in
March 2009. Spansion's bankruptcy filing led to the Company recording a $7.2
million provision for excess and obsolete inventory and cancellation charges
of $0.3 million in fiscal 2009. Similar charges were not recognized in fiscal
2010 which resulted in an increase in gross profit margin from fiscal 2009 to
fiscal 2010.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative,
or SG&A, expenses consist primarily of salaries and related costs of
employees, customer support costs, commission expenses to independent sales
representatives, product promotion, other professional services and bad debt
expenses. SG&A expenses were $6.1 million for the fiscal year ended May 31,
2010, compared with $20.6 million for the fiscal year ended May 31, 2009, a
decrease of 70.5%. As a result of Spansion's bankruptcy filing, the Company
recorded a $13.7 million provision for bad debts in fiscal 2009. Similar
charges were not recognized in fiscal 2010 which resulted in a significant
decline in SG&A
23
expenses from fiscal 2009 to fiscal 2010. As a percentage of net sales, SG&A
expenses decreased to 52.2% for the fiscal year ended May 31, 2010 from 96.3%
for the fiscal year ended May 31, 2009.
RESEARCH AND DEVELOPMENT. Research and development, or 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 $4.8 million for the fiscal year ended May 31, 2010 from $5.8
million for the fiscal year ended May 31, 2009, a decrease of 17.4%. The
decrease in R&D expenses was primarily attributable to a decrease in
employment related expenses. As a percentage of net sales, R&D expenses
increased to 40.8% for the fiscal year ended May 31, 2010 from 26.9% for the
fiscal year ended May 31, 2009, reflecting lower net sales.
IMPAIRMENT OF GOODWILL. The Company reviews goodwill 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 fiscal year 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 fiscal
year ended May 31, 2009. The Company had no goodwill recorded in fiscal 2010.
GAIN ON BANKRUPTCY CLAIM. Spansion, the Company's largest customer in
fiscal 2008, 2009 and 2010, filed for bankruptcy in Japan in February 2009 and
in the United States in March 2009. The Company filed a claim in the Spansion
U.S. bankruptcy action. In the first quarter of fiscal 2010, the Company sold
a portion of its bankruptcy claim to a third party for net proceeds of $3.3
million and recorded the amount as a reduction of operating expenses. In the
third quarter of fiscal 2010, the Company sold the remaining balance of its
Spansion U.S. bankruptcy claim to a third party for net proceeds of $4.6
million and recorded $0.6 million as a reduction of operating expenses. The
portion of the claim representing cancellation charges and product shipments
were recorded as revenue in fiscal 2010. In the fourth quarter of fiscal
2010, the Company received the remaining payment of $0.1 million due from its
bankruptcy claim sale completed in the first quarter of fiscal 2010 and
recognized the amount as a reduction of operating expenses.
INTEREST INCOME. Interest income decreased to $5,000 for the fiscal year
ended May 31, 2010 from $142,000 for the fiscal year ended May 31, 2009, a
decrease of 96.5%. The decrease in interest income in fiscal 2010 was
primarily related to lower interest rates and lower average cash and cash
equivalent balances.
OTHER INCOME, NET. Other income, net decreased to $131,000 for the fiscal
year ended May 31, 2010, compared with $277,000 for the fiscal year ended May
31, 2009, a decrease of 52.7%. The decrease in other income, net was
primarily related to a lower level of foreign exchange gains in fiscal 2010
than in fiscal 2009.
INCOME TAX (BENEFIT) EXPENSE. Income tax benefit was $139,000 for the
fiscal year ended May 31, 2010, compared with income tax expense of $4.9
million for the fiscal year ended May 31, 2009. The income tax benefit for
the fiscal year ended May 31, 2010 was related to the increase in the net
operating loss carry-back period from two to five years and the inclusion of
alternative minimum taxes paid in the carry-back calculation. Income tax
expense for the fiscal year ended May 31, 2009 included $4.9 million of tax
expense related to the reinstatement of the valuation allowance for deferred
tax assets, following a determination by management that it is more likely
than not that certain deferred tax assets will not be realized.
LIQUIDITY AND CAPITAL RESOURCES
We consider cash and cash equivalents as liquid and available for use. As
of May 31, 2011, the Company had $4.0 million in cash and cash equivalents,
compared to $7.8 million as of May 31, 2010. This decrease resulted
primarily from our operating loss.
Net cash used in operating activities was $4.1 million for the fiscal year
ended May 31, 2011 and net cash provided by operating activities was $3.2
million for the fiscal year ended May 31, 2010. For the fiscal year ended May
31, 2011, net cash used in operating activities was primarily the result of
the net loss of $3.4 million as adjusted to exclude the effect of non-cash
charges including stock-based compensation expense of $0.9 million and
depreciation and amortization of $0.6 million, as well as the increase in
inventories of $1.3 million. The increase in inventories is intended to
support future shipments for customer orders. For the fiscal year ended May
31, 2010, net cash provided by operating activities was primarily the result
of the net loss of $0.5 million as adjusted to exclude the effect of non-cash
charges including stock-based compensation expense of $1.7 million and
depreciation and amortization of $0.7 million, as well as the decrease in
24
inventories of $0.8 million. The decrease in inventories was primarily due to
the sale of certain goods from existing stock on hand, without subsequent
purchases of replacement raw materials in fiscal 2010.
Net cash used in investing activities was $15,000 for the fiscal year
ended May 31, 2011 as compared to $69,000 for the fiscal year ended May 31,
2010. Net cash used in investing activities during the fiscal years ended May
31, 2011 and 2010 was primarily due to the purchase of property and equipment.
Financing activities provided cash of $343,000 for the fiscal year ended
May 31, 2011 as compared to $176,000 for the fiscal year ended May 31, 2010.
Net cash provided by financing activities during the fiscal years ended May
31, 2011 and 2010 was primarily due to proceeds from issuance of common stock
and exercise of stock options.
As of May 31, 2011, the Company had working capital of $8.0 million.
Working capital consists of cash and cash equivalents, accounts receivable,
inventories and prepaid expenses and other current assets, less current
liabilities.
As of May 31, 2010, the Company had $7.8 million in cash and cash
equivalents, compared to $4.4 million as of May 31, 2009. This increase
resulted primarily from the cash received in the Company's sales of Spansion
bankruptcy claims to third parties, partially offset by operating spending.
For the fiscal year ended May 31, 2009, net cash used in operating
activities was primarily driven by net loss of $30.0 million, partially offset
by increases of $13.7 million in the provision for bad debts and a decrease of
$4.9 million in deferred income tax assets. During the fiscal year ended May
31, 2009, the Company recorded bad debts of $13.7 million as a result of
Spansion's bankruptcy filing. The decrease in deferred income tax assets was
primarily due to tax expense related to the reinstatement of the valuation
allowance for deferred tax assets, following a determination by management
that it is more likely than not that certain deferred tax assets will not be
realized.
Net cash used in investing activities was $1.1 million for the fiscal year
ended May 31, 2009. Net cash used in investing activities during the fiscal
year ended May 31, 2009 was primarily due to the purchase of property and
equipment.
Financing activities provided cash of $503,000 for the fiscal year ended
May 31, 2009. Net cash provided by financing activities during the fiscal
year ended May 31, 2009 was primarily due to proceeds from issuance of common
stock and exercise of stock options.
As of May 31, 2010, the Company had working capital of $9.8 million.
The Company leases its manufacturing and office space under operating
leases. The Company entered into a non-cancelable operating lease agreement
for its United States manufacturing and office facilities, which commenced in
April 2008 and expires in June 2015. Under the lease agreement, the Company
is responsible for payments of utilities, taxes and insurance.
From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
Any such transactions, if consummated, may use a portion of the Company's
working capital or require the issuance of equity. The Company has no present
understandings, commitments or agreements with respect to any material
acquisitions.
The Company anticipates that the existing cash balance together with cash
flows from operations and proceeds from the sale in June 2011 of its shares of
ESA Electronics PTE Ltd., as well as funds available through the working
capital credit facility entered into in August 2011, are adequate to meet its
working capital and capital equipment requirements through fiscal 2012. After
fiscal 2012, 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 FINANCING
The Company has not entered into any off-balance sheet financing
arrangements and has not established any special purpose entities.
25
OVERVIEW OF CONTRACTUAL OBLIGATIONS
The following table provides a summary of such arrangements, or
contractual obligations.
Payments Due by Period (in thousands)
---------------------------------------------------------
Less than 1-3 3-5 5
Total 1 year years years years
--------- ---------- ---------- ---------- ----------
Operating Leases............. $2,386 $ 585 $1,752 $49 $--
Purchases(1)................. 908 908 -- -- --
--------- ---------- ---------- ---------- ----------
Total........................ $3,294 $1,493 $1,752 $49 $--
========= ========== ========== ========== ==========
(1) Shown above are the Company's binding purchase obligations. The large
majority of the Company's purchase orders are cancelable by either party,
which if canceled may result in a negotiation with the vendor to determine if
there shall be any restocking or cancellation fees payable to the vendor.
In the normal course of business to facilitate sales of its products, the
Company indemnifies other parties, including customers, with respect to
certain matters. The Company has agreed to hold the other party harmless
against losses arising from a breach of representations or covenants, or from
intellectual property infringement or other claims. These agreements may
limit the time period within which an indemnification claim can be made and
the amount of the claim. In addition, the Company has entered into
indemnification agreements with its officers and directors, and the Company's
bylaws contain similar indemnification obligations to the Company's agents.
It is not possible to determine the maximum potential amount under these
indemnification agreements due to the limited history of prior indemnification
claims and the unique facts and circumstances involved in each particular
agreement. To date, payments made by the Company under these agreements have
not had a material impact on the Company's operating results, financial
position or cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS:
In October 2009, the Financial Accounting Standards Board, or FASB, issued
authoritative guidance for revenue recognition with multiple deliverables.
This authoritative guidance defines the criteria for identifying individual
deliverables in a multiple-element arrangement and the manner in which
revenues are allocated to individual deliverables. In absence of vendor-
specific objective evidence, or VSOE, or other third party evidence, or TPE,
of the selling price for the deliverables in a multiple-element arrangement,
guidance requires companies to use an estimated selling price, or ESP, for the
individual deliverables. Companies shall apply the relative-selling price
model for allocating an arrangement's total consideration to its individual
elements. Under this model, the ESP is used for both the delivered and
undelivered elements that do not have VSOE or TPE of the selling price. This
guidance is effective for fiscal years beginning on or after June 15, 2010,
and will be applied prospectively to revenue arrangements entered into or
materially modified after the effective date. The Company will adopt this
guidance in the first quarter of fiscal year 2012. The implementation of this
authoritative guidance is not expected to have a material impact on the
Company's financial position or results of operations.
In October 2009, the FASB issued authoritative guidance for the accounting
for certain revenue arrangements that include software elements. This
authoritative guidance amends the scope of pre-existing software revenue
guidance by removing from the guidance non-software components of tangible
products and certain software components of tangible products. This guidance
is effective for fiscal years beginning on or after June 15, 2010, and will be
applied prospectively to revenue arrangements entered into or materially
modified after the effective date. The Company will adopt this guidance in
the first quarter of fiscal year 2012. The implementation of this
authoritative guidance is not expected to have a material impact on the
Company's financial position or results of operations.
In January 2010, the FASB issued amended standards that require additional
fair value disclosures. These amended standards require disclosures for
significant transfers in and out of Level 1 and Level 2 fair value
measurements and the reasons for the transfers and activity. For Level 3 fair
value measurements, purchases, sales, issuances and settlements must be
reported on a gross basis. Further, additional disclosures are required by
class of assets or liabilities, as well as
26
inputs used to measure fair value and valuation techniques. The Company
adopted these standards in the first quarter of 2010. These standards did not
have a material impact on the Company's consolidated financial statements.
In May 2011 updated authoritative guidance to amend existing requirements
for fair value measurements and disclosures was issued. The guidance expands
the disclosure requirements around fair value measurements categorized in
Level 3 of the fair value hierarchy and requires disclosure of the level in
the fair value hierarchy of items that are not measured at fair value but
whose fair value must be disclosed. It also clarifies and expands upon
existing requirements for fair value measurements of financial assets and
liabilities as well as instruments classified in shareholders' equity. The
guidance will be effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011, and are to be applied prospectively.
The Company will adopt this guidance in the first quarter of fiscal 2013. The
implementation of this authoritative guidance is not expected to have a
material impact on the Company's financial position or results of operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company had no holdings of derivative financial or commodity
instruments at May 31, 2011.
The Company is exposed to financial market risks, including changes in
interest rates and foreign currency exchange rates. The Company only invests
its short-term excess cash in government-backed securities with maturities of
18 months or less. The Company maintains a cost basis equity investment in a
privately held company, ESA Electronics PTE Ltd. 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. However, the Company 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 consolidated 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 to the Company's net income or loss.
27
Item 8. Financial Statements and Supplementary Data
INDEX
Consolidated Financial Statements of Aehr Test Systems
Report of Independent Registered Public Accounting Firm ............ 29
Consolidated Balance Sheets at May 31, 2011 and 2010................ 30
Consolidated Statements of Operations for the years
ended May 31, 2011, 2010 and 2009................................. 31
Consolidated Statements of Shareholders' Equity and
Comprehensive Income (Loss) for the years ended
May 31, 2011, 2010 and 2009....................................... 32
Consolidated Statements of Cash Flows for the years ended
May 31, 2011, 2010 and 2009....................................... 33
Notes to Consolidated Financial Statements.......................... 34
Selected Quarterly Consolidated Financial Data (unaudited).......... 52
Financial statement schedules not listed above are either omitted because
they are not applicable or the required information is shown in the
Consolidated Financial Statements or in the Notes thereto.
28
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Aehr Test Systems
We have audited the accompanying consolidated balance sheets of Aehr Test
Systems and its subsidiaries (the "Company") as of May 31, 2011 and 2010, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended May 31, 2011. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
Company is not required to have, nor have we been engaged to perform, an audit
of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aehr Test
Systems and its subsidiaries as of May 31, 2011 and 2010, and the results of
their operations and their cash flows for each of the three years in the
period ended May 31, 2011 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Burr Pilger Mayer, Inc.
San Jose, California
August 26, 2011
29
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
May 31,
-------------------------
2011 2010
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 4,020 $ 7,766
Accounts receivable, net ........................... 1,432 596
Inventories, net ................................... 4,958 3,635
Prepaid expenses and other ......................... 161 445
---------- ----------
Total current assets ........................... 10,571 12,442
Property and equipment, net .......................... 954 1,504
Other assets ......................................... 558 528
---------- ----------
Total assets ................................... $12,083 $14,474
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 885 $ 703
Accrued expenses ................................... 1,434 1,626
Deferred revenue ................................... 221 286
---------- ----------
Total current liabilities ...................... 2,540 2,615
Income tax payable ................................... 204 298
Deferred lease commitment ............................ 238 280
---------- ----------
Total liabilities .............................. 2,982 3,193
---------- ----------
Commitments and contingencies (Note 14)
Shareholders' equity:
Preferred stock, $0.01 par value:
Authorized: 10,000 shares;
Issued and outstanding: none ..................... -- --
Common stock, $0.01 par value:
Authorized: 75,000 shares;
Issued and outstanding: 8,932 shares and 8,664
shares at May 31, 2011 and 2010, respectively .. 89 87
Additional paid-in capital ......................... 47,747 46,459
Accumulated other comprehensive income ............. 2,593 2,690
Accumulated deficit ................................ (41,328) (37,955)
---------- ----------
Total shareholders' equity ..................... 9,101 11,281
---------- ----------
Total liabilities and shareholders' equity ..... $12,083 $14,474
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
30
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended May 31,
--------------------------------
2011 2010 2009
---------- ---------- ----------
Net sales
Product sales............................... $13,737 $8,934 $21,407
Cancellation charges........................ -- 2,740 --
---------- ---------- ----------
Total net sales........................... 13,737 11,674 21,407
Cost of sales................................. 8,225 5,571 20,223
---------- ---------- ----------
Gross profit.................................. 5,512 6,103 1,184
---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 5,964 6,094 20,623
Research and development.................... 4,567 4,758 5,762
Impairment of goodwill...................... -- -- 274
Gain on bankruptcy claim.................... (832) (3,993) --
---------- ---------- ----------
Total operating expenses.................. 9,699 6,859 26,659
---------- ---------- ----------
Loss from operations.......................... (4,187) (756) (25,475)
Interest income............................... 3 5 142
Other income, net............................. 762 131 277
---------- ---------- ----------
Loss before income tax
(benefit) expense........................... (3,422) (620) (25,056)
Income tax (benefit) expense.................. (49) (139) 4,915
---------- ---------- ----------
Net loss...................................... $(3,373) $(481) $(29,971)
========== ========== ==========
Net loss per share - basic ................... $ (0.38) $ (0.06) $ (3.55)
Shares used in per share calculation - basic.. 8,776 8,563 8,436
Net loss per share - diluted ................. $ (0.38) $ (0.06) $ (3.55)
Shares used in per share calculation - diluted 8,776 8,563 8,436
The accompanying notes are an integral part of these consolidated financial
statements.
31
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
Accumulated
Other
Comprehensive
Income
-------------
Common Stock Additional Cumulative
---------------- Paid-in Translation Accumulated
Shares Amount Capital Adjustment Deficit Total
------- ------- ---------- ------------- ----------- -------
Balances, May 31, 2008 8,359 $84 $42,796 $2,395 $ (7,503) $37,772
Issuance of common stock
under employee plans...... 137 1 502 -- -- 503
Stock-based compensation.... 1,254 -- -- 1,254
Net loss.................... -- -- -- -- (29,971) (29,971)
Foreign currency
translation adjustment.... -- -- -- 405 -- 405
-------
Comprehensive loss.......... (29,566)
------- ------- ---------- ------------- ----------- -------
Balances, May 31, 2009 8,496 85 44,552 2,800 (37,474) 9,963
Issuance of common stock
under employee plans...... 168 2 174 -- -- 176
Stock-based compensation.... 1,733 -- -- 1,733
Net loss.................... -- -- -- -- (481) (481)
Foreign currency
translation adjustment.... -- -- -- (110) -- (110)
-------
Comprehensive loss.......... (591)
------- ------- ---------- ------------- ----------- -------
Balances, May 31, 2010 8,664 87 46,459 2,690 (37,955) 11,281
Issuance of common stock
under employee plans...... 268 2 341 -- -- 343
Stock-based compensation.... 947 -- -- 947
Net loss.................... -- -- -- -- (3,373) (3,373)
Foreign currency
translation adjustment.... -- -- -- (97) -- (97)
-------
Comprehensive loss.......... (3,470)
------- ------- ---------- ------------- ----------- -------
Balances, May 31, 2011 8,932 $89 $47,747 $2,593 $(41,328) $ 9,101
======= ======= ========== ============= =========== =======
The accompanying notes are an integral part of these consolidated financial
statements.
32
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended May 31,
---------------------------------
2011 2010 2009
--------- --------- ---------
Cash flows from operating activities:
Net loss....................................... $(3,373) $ (481) $(29,971)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Stock-based compensation expense............. 947 1,733 1,270
Provision for doubtful accounts.............. 15 59 13,655
Loss on disposal of property and equipment... 1 301 6
Impairment of goodwill....................... -- -- 274
Depreciation and amortization................ 573 690 644
Deferred income taxes........................ -- -- 4,943
Changes in operating assets and liabilities:
Accounts receivable........................ (501) 267 (3,612)
Inventories................................ (1,322) 837 5,721
Deferred lease commitment ................. (42) (26) 37
Accounts payable........................... (353) (446) (1,986)
Income tax payable......................... (94) 28 2
Accrued expenses and deferred revenue...... (280) (138) (1,532)
Prepaid expenses and other................. 287 423 (487)
--------- --------- ---------
Net cash provided by (used in)
operating activities................... (4,142) 3,247 (11,036)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment .......... (15) (69) (1,113)
--------- --------- ---------
Net cash used in
investing activities................... (15) (69) (1,113)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock
and exercise of stock options.............. 343 176 503
--------- --------- ---------
Net cash provided by
financing activities................... 343 176 503
--------- --------- ---------
Effect of exchange rates on cash and
cash equivalents............................. 68 52 358
--------- --------- ---------
Net (decrease) increase in cash and
cash equivalents....................... (3,746) 3,406 (11,288)
Cash and cash equivalents, beginning of year..... 7,766 4,360 15,648
--------- --------- ---------
Cash and cash equivalents, end of year........... $4,020 $7,766 $ 4,360
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes ............................ $51 $-- $223
The accompanying notes are an integral part of these consolidated financial
statements.
33
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
Aehr Test Systems (the "Company") was incorporated in California in May
1977 and primarily designs, engineers and manufactures test and burn-in
equipment used in the semiconductor industry. The Company's principal
products are the Advanced Burn-In and Test System, or ABTS, the FOX full wafer
contact parallel test and burn-in systems, the MAX burn-in system, WaferPak
full wafer contactor, the DiePak carrier and test fixtures.
LIQUIDITY:
Since inception, the Company has incurred substantial cumulative losses
and negative cash flows from operations. During the second half of fiscal
2009, and in fiscal 2010 and fiscal 2011, the Company experienced a
substantial decrease in its net sales as a result of a major customer filing
bankruptcy and the slowdown in the semiconductor manufacturing industry. In
response to the low levels of net sales, the Company took significant steps to
minimize expense levels and to increase the likelihood that it will have
sufficient cash to support operations during the slow business periods. Those
steps included reductions in headcount, reduced compensation for officers and
other salaried employees, a Company-wide shutdown for one week each month and
lower fees paid to the Board of Directors, among other spending cuts. The
Company has subsequently eliminated most of these cuts. The Company will
continue to explore methods to reduce its costs.
The Company filed a claim in the Spansion Inc., or Spansion, U.S.
bankruptcy action. In the first quarter of fiscal 2010, the Company sold a
portion, $11,364,000, of its Spansion U.S. bankruptcy claim to a third party
for a net proceeds of $3,289,000 and recorded the amount as a reduction of
operating expenses. In the third quarter of fiscal 2010, the Company sold the
remaining balance, $7,117,000, of its Spansion U.S. bankruptcy claim to a
third party for net proceeds of $4,626,000 and recorded $2,740,000 as net
sales related to cancellation charges, $1,302,000 as deferred revenue and
$584,000 as a reduction of operating expenses. In the fourth quarter of
fiscal 2010, the Company received the remaining payment of $120,000 due from
it's bankruptcy claim sale completed in the first quarter of fiscal 2010 and
recognized the amount as a reduction of operating expenses. The $1,302,000
deferred at the end of the third quarter of fiscal 2010 was recognized as
product sales during the fourth quarter of fiscal 2010 in connection with the
delivery of products.
In the first quarter of fiscal 2011, the Company's Japanese subsidiary
received $155,000 in proceeds from the Spansion Japan bankruptcy claim and
recorded the amount as a reduction of operating expenses. In the fourth
quarter of fiscal 2011, the Company's Japanese subsidiary received $677,000 in
proceeds from the Spansion Japan bankruptcy claim and recorded the amount as a
reduction of operating expenses.
In August 2011, the Company entered into a working capital credit facility
agreement with Silicon Valley Bank allowing the Company to borrow up to $1.5
million based upon qualified U.S. based and foreign customer receivables, and
export-related inventory.
The Company anticipates that the existing cash balance together with cash
flows from operations and proceeds from the sale in June 2011 of its shares of
ESA Electronics PTE Ltd., as well as funds available through the working
capital credit facility entered into in August 2011, are adequate to meet its
working capital and capital equipment requirements through fiscal 2012. After
fiscal 2012, 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.
CONSOLIDATION AND EQUITY INVESTMENTS:
The consolidated financial statements include the accounts of the Company
and both its wholly-owned and majority-owned foreign subsidiaries.
Intercompany accounts and transactions have been eliminated. Equity
investments in which the Company holds an equity interest less than 20 percent
and over which the Company does not have significant influence are accounted
for using the cost method. Dividends received from investees accounted for
using the cost method are included in Other income on the statement of
operations.
34
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
Assets and liabilities of the Company's foreign subsidiaries and branch
office are translated into U.S. Dollars from their functional currencies of
Japanese Yen, Euros and New Taiwan Dollars using the exchange rate in effect
at the balance sheet date. Additionally, their net sales and expenses are
translated using exchange rates approximating average rates prevailing during
the fiscal year. Translation adjustments that arise from translating their
financial statements from their local currencies to U.S. Dollars are
accumulated and reflected as a separate component of shareholders' equity.
Transaction gains and losses that arise from exchange rate changes
denominated in currencies other than the local currency are included in the
statements of operations as incurred. See Note 11 for the detail of foreign
exchange transaction gains for all periods presented.
USE OF 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, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates in the Company's consolidated financial
statements include allowance for doubtful accounts, valuation of inventory at
the lower of cost or market, and warranty reserves.
CASH EQUIVALENTS AND INVESTMENTS:
Cash equivalents consist of money market instruments, commercial paper and
other highly liquid investments purchased with an original maturity of three
months or less. Short-term investments not classified as cash equivalents are
classified as available-for-sale. These investments are reported at fair
value with unrealized gains and losses, net of tax, if any, included as a
component of shareholders' equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
On June 1, 2008, the Company adopted authoritative guidance for fair value
measurements and the fair value option for financial assets and liabilities.
This authoritative guidance defines fair value, establishes a framework for
using fair value to measure assets and liabilities, and expands disclosures
about fair value measurements.
In the first quarter of fiscal 2010, the Company adopted revised
accounting guidance for the fair value measurements and disclosure for non-
financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually).
The guidance establishes 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
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 as of May 31, 2011 (in
thousands):
35
Balance as of
May 31, 2011 Level 1 Level 2
-------------- -------- ---------
Money market funds........... $1,236 $1,236 $ --
-------------- -------- ---------
$1,236 $1,236 $ --
============== ======== =========
Liabilities.................. $ -- $ -- $ --
============== ======== =========
The following table summarizes the Company's financial assets and
liabilities measured at fair value on a recurring basis as of May 31, 2010 (in
thousands):
Balance as of
May 31, 2010 Level 1 Level 2
-------------- -------- ---------
Money market funds........... $6,428 $6,428 $ --
-------------- -------- ---------
$6,428 $6,428 $ --
============== ======== =========
Liabilities.................. $ -- $ -- $ --
============== ======== =========
As of May 31, 2011 and 2010, 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).
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Accounts receivable are recorded at the invoiced amount and are not
interest bearing. The Company maintains an allowance for doubtful accounts to
reserve for potentially uncollectible trade receivables. The Company also
reviews its trade receivables by aging category to identify specific customers
with known disputes or collection issues. The Company exercises judgment when
determining the adequacy of these reserves as the Company evaluates historical
bad debt trends, general economic conditions in the United States and
internationally, and changes in customer financial conditions. Uncollectible
receivables are recorded as bad debt expense when all efforts to collect have
been exhausted and recoveries are recognized when they are received. During
the year ended May 31, 2009, the Company recorded a $13,558,000 increase in
its allowance for doubtful accounts as a result of its major customer filing
for bankruptcy. During the year ended May 31, 2010, the allowance for
doubtful accounts decreased by $12,330,000 due primarily to the write-off of
the Spansion U.S. accounts receivable reserved in the prior fiscal year. No
significant adjustments to the allowance for doubtful accounts were recorded
during the year ended May 31, 2011.
CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to semiconductor manufacturers in
North America, Asia, and Europe. As of May 31, 2011, approximately 49%, 12%
and 39% of gross accounts receivable are from customers located in the United
States, Asia and Europe, respectively. As of May 31, 2010, approximately 2%,
81% and 17% of gross accounts receivable are from customers located in the
United States, Asia and Europe, respectively. Three customers accounted for
41%, 17% and 11% of gross accounts receivable at May 31, 2011. Two customers
accounted for 71% and 14% of gross accounts receivable at May 31, 2010. Two
customers accounted for 16% and 11% of net sales in fiscal 2011. Three
customers accounted for 55%, 12% and 11% of net sales in fiscal 2010. The
Company performs ongoing credit evaluations of its customers and generally
does not require collateral. While the Company has historically maintained
reserves within management expectations, as a result of the bankruptcy filing
of a key customer during the fiscal year ended May 31, 2009, specific reserves
were established. The specific reserves established for this customer
accounted for virtually all the allowance for doubtful accounts at May 31,
2009. The Company uses letter of credit terms for some of its international
customers.
The Company's cash, cash equivalents, short-term cash deposits and short-
term investments are generally deposited with major financial institutions in
the United States, Japan, Germany and Taiwan. The Company invests its excess
cash in money market funds and short-term cash deposits. The money market
funds and short-term cash deposits bear the
36
risk associated with each fund. The money market funds have variable interest
rates, and the short-term cash deposits have fixed rates. The Company has not
experienced any material losses on its money market funds or short-term cash
deposits.
CONCENTRATION OF SUPPLY RISK:
The Company relies on subcontractors to manufacture many of the components
and subassemblies used in its products. Quality or performance failures of
the Company's products or changes in its manufacturers' financial or business
condition could disrupt the Company's ability to supply quality products to
its customers and thereby have a material and adverse effect on its business
and operating results. Some of the components and technologies used in the
Company's products are purchased and licensed from a single source or a
limited number of sources. The loss of any of these suppliers may cause the
Company to incur additional transition costs, result in delays in the
manufacturing and delivery of its products, or cause it to carry excess or
obsolete inventory and could cause it to redesign its products.
STRATEGIC INVESTMENTS:
The Company invests in debt and equity of private companies as part of its
business strategy. These available for sale investments are carried at cost
and are included in "Other Assets" in the consolidated balance sheets. The
investment has not been revalued at May 31, 2011 and 2010 as the fair value is
not readily determinable due to the investment being a privately held company
based in Singapore. The Company maintains less than 20% of the voting rights
of the company invested. If the Company determines that an other-than-
temporary decline exists in the fair value of an investment, the Company
writes down the investment to its fair value and records the related write-
down as an investment loss in "Other Income (Expense)" in its consolidated
statements of operations. At May 31, 2011 and 2010, the carrying value of the
strategic investments was $384,000.
In June 2011, the Company sold all of its shares of ESA for approximately
$1.4 million resulting in a gain of $1.0 million reported in the first quarter
of fiscal 2012.
INVENTORIES:
Inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out method) or market. Provisions for excess,
obsolete and unusable inventories are made after management's evaluation of
future demand and market conditions. The Company adjusts inventory balances
to approximate the lower of its manufacturing costs or market value. If
actual future demand or market conditions become less favorable than those
projected by management, additional inventory write-downs may be required, and
would be reflected in cost of product revenue in the period the revision is
made. During the year ended May 31, 2009, the Company recorded a $7,203,000
charge to cost of sales to reduce its inventory to net realizable value
primarily as a result of the bankruptcy filing of its major customer.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation
and amortization. Major improvements are capitalized, while repairs and
maintenance are expensed as incurred. Leasehold improvements are amortized
over the lesser of their estimated useful lives or the term of the related
lease. Furniture, fixtures, machinery and equipment are depreciated on a
straight-line basis over their estimated useful lives. The ranges of
estimated useful lives for furniture, fixtures, machinery and equipment are
generally as follows:
Furniture and fixtures.......................... 2 to 6 years
Machinery and equipment......................... 4 to 6 years
Test equipment.................................. 4 to 6 years
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. The Company reviews goodwill
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 fiscal year 2009. As a
result, the Company tested the goodwill for impairment, determined that it was
impaired and recorded a non-cash
37
impairment of goodwill charge of $274,000 for the fiscal year ended May 31,
2009 bringing the net value to zero. Both gross goodwill and accumulated
impairment were each $274,000 at May 31, 2011 and 2010.
REVENUE RECOGNITION:
The Company's selling arrangements may include contractual customer
acceptance provisions. Installation of products occurs after shipment and
transfer of title. The Company recognizes revenue upon the shipment of
products or the performance of services when: (1) persuasive evidence of the
arrangement exists; (2) services have been rendered; (3) the price is fixed or
determinable; and (4) collectibility is reasonably assured. The Company
defers recognition of revenue for any amounts subject to acceptance until such
acceptance occurs. When multiple elements exist, the Company allocates the
purchase price based on vendor specific objective evidence or third-party
evidence of fair value and defers revenue recognition on the undelivered
portion. Historically, these multiple deliverables have included items such
as extended support provisions, training to be supplied after delivery of the
systems, and test programs specific to customers' routine applications. The
test programs can be written either by the customer, other firms, or the
Company. The amount of revenue deferred is the greater of the fair value of
the undelivered element or the contractually agreed to amounts. Sales tax
collected from customers is not included in net sales but rather recorded as a
liability due to the respective taxing authorities. Provisions for the
estimated future cost of warranty and installation are recorded at the time
the products are shipped.
Royalty-based revenue related to licensing income from performance test
boards and burn-in boards is recognized upon the earlier of the receipt by the
Company of the licensee's report related to its usage of the licensed
intellectual property or upon payment by the licensee.
The Company's terms of sales with distributors are generally FOB shipping
point with payment due within 60 days. All products go through in-house
testing and verification of specifications before shipment. Apart from
warranty reserves, credits issued have not been material as a percentage of
net sales. The Company's distributors do not generally carry inventories of
the Company's products. Instead, the distributors place orders with the
Company at or about the time they receive orders from their customers. The
Company's shipment terms to our distributors do not provide for credits or
rights of return. Because the Company's distributors do not generally carry
inventories of our products, they do not have rights to price protection or to
return products. At the time the Company ships products to the distributors,
the price is fixed. Subsequent to the issuance of the invoice, there are no
discounts or special terms. The Company does not give the buyer the right to
return the product or to receive future price concessions. The Company's
arrangements do not include vendor consideration.
PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs incurred in the research and development of new products or systems
are charged to operations as incurred. Costs incurred in the development of
software programs for the Company's products are charged to operations as
incurred until technological feasibility of the software has been established.
Generally, technological feasibility is established when the software module
performs its primary functions described in its original specifications,
contains features required for it to be usable in a production environment, is
completely documented and the related hardware portion of the product is
complete. After technological feasibility is established, any additional
costs are capitalized. Capitalization of software costs ceases when the
software is substantially complete and is ready for its intended use.
Capitalized costs are amortized over the estimated life of the related
software product using the greater of the units of sales or straight-line
methods over ten years. No system software development costs were capitalized
or amortized in fiscal 2011, 2010 and 2009.
IMPAIRMENT OF LONG-LIVED ASSETS:
In the event that facts and circumstances indicate that the carrying value
of assets may be impaired, an evaluation of recoverability would be performed.
If an evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying value to
determine if a write-down is required.
ADVERTISING COSTS:
The Company expenses all advertising costs as incurred and the amounts
were not material for all periods presented.
SHIPPING AND HANDLING OF PRODUCTS:
Amounts billed to customers for shipping and handling of products are
included in net sales. Costs incurred related to shipping and handling of
products are included in cost of sales.
38
INCOME TAXES:
Income taxes have been provided using the liability method whereby
deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and net
operating loss and tax credit carryforwards measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse or the carryforwards are utilized. Valuation allowances are
established when it is determined that it is more likely than not that such
assets will not be realized.
During the fiscal year ended May 31, 2008 a partial release of the
valuation allowance previously established was made based upon the Company's
current level of profitability and the level of forecasted future earnings.
During fiscal 2009, a full valuation allowance was established against all
deferred tax assets as management determined that it is more likely than not
that certain deferred tax assets will not be realized.
The Company accounts for uncertain tax positions consistent with
authoritative guidance. The guidance prescribes a "more likely than not"
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. The Company recognizes
interest and penalties related to unrecognized tax benefits as a component of
income taxes.
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 1996 - 2010 remain subject to
examination by the appropriate governmental agencies due to tax loss
carryovers from those years.
STOCK-BASED COMPENSATION:
Stock-based compensation expense consists of expenses for stock options
and employee stock purchase plan, or ESPP, shares. Stock-based compensation
cost is measured at each grant date, based on the fair value of the award
using the Black-Scholes option valuation model, and is recognized as expense
over the employee's requisite service period. This model was developed for
use in estimating the value of publicly traded options that have no vesting
restrictions and are fully transferable. The Company's employee stock options
have characteristics significantly different from those of publicly traded
options. All of the Company's stock compensation is accounted for as an
equity instrument.
The following table summarizes compensation costs related to the Company's
stock-based compensation for the years ended May 31, 2011, 2010 and 2009,
respectively (in thousands, except per share data):
Year Ended
May 31,
--------------------
2011 2010 2009
------ ------ ------
Stock-based compensation in the form of employee
stock options and ESPP shares, included in:
Cost of sales................................... $108 $293 $230
Selling, general and administrative............. 488 901 640
Research and development........................ 351 539 400
------ ------ ------
Net effect on net loss.......................... $947 $1,733 $1,270
====== ====== ======
Effect on net loss per share:
Basic. . . . . . . . . . . . . . . . . $0.11 $0.20 $0.15
Diluted. . . . . . . . . . . . . . . . $0.11 $0.20 $0.15
During fiscal 2011, 2010 and fiscal 2009, the Company recorded stock-based
compensation related to stock options of $829,000, $1,511,000 and $1,115,000,
respectively.
In the second quarter of fiscal 2010, the seven officers of the Company
elected to forfeit certain stock options previously granted. The forfeiture
of these options resulted in the immediate recognition of the unamortized
portion of stock compensation expense of $465,000.
39
As of May 31, 2011, the total compensation cost related to unvested stock-
based awards under the Company's 1996 Stock Option Plan and 2006 Equity
Incentive Plan, but not yet recognized, was $779,000 which is net of estimated
forfeitures of $2,000. This cost will be amortized on a straight-line basis
over a weighted average period of approximately 2.65 years.
During fiscal 2011, 2010 and fiscal 2009, the Company recorded stock-based
compensation related to its ESPP of $118,000, $222,000 and $155,000,
respectively.
As of May 31, 2011, the total compensation cost related to options to
purchase the Company's common shares under the ESPP but not yet recognized was
$18,000. This cost will be amortized on a straight-line basis over a weighted
average period of approximately 0.6 years.
Valuation Assumptions
Valuation and Amortization Method. The Company estimates the fair value
of stock options granted using the Black-Scholes option valuation method and a
single option award approach for options granted after June 1, 2006. The
multiple option approach has been used for all options granted prior to June
1, 2006. The fair value under the single option approach is amortized on a
straight-line basis over the requisite service periods of the awards, which is
generally the vesting period. The fair value under the multiple option
approach is amortized on a weighted basis over the requisite service periods
of the awards, which is generally the vesting period.
Expected Term. The Company's expected term represents the period that the
Company's stock-based awards are expected to be outstanding and was determined
based on historical experience, giving consideration to the contractual terms
of the stock-based awards, vesting schedules and expectations of future
employee behavior as evidenced by changes to the terms of its stock-based
awards.
Expected Volatility. Volatility is a measure of the amounts by which a
financial variable such as stock price has fluctuated (historical volatility)
or is expected to fluctuate (expected volatility) during a period. The
Company uses the historical volatility for the past five years, which matches
the expected 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 does not anticipate paying any cash dividends in the foreseeable
future. Consequently, the Company uses an expected dividend yield of zero in
the Black-Scholes option valuation method.
Risk-Free Interest Rate. The Company bases the risk-free interest rate
used in the Black-Scholes option valuation method on the implied yield in
effect at the time of option grant on U.S. Treasury zero-coupon issues with a
remaining term equivalent to the expected term of the stock awards including
the ESPP.
Estimated Forfeitures. When estimating forfeitures, the Company considers
voluntary termination behavior as well as analysis of actual option
forfeitures.
Fair Value. The fair values of the Company's stock options granted to
employees and ESPP shares in fiscal 2011, 2010 and 2009 were estimated using
the following weighted average assumptions in the Black-Scholes option
valuation method.
The fair value of our stock options granted to employees in fiscal 2011,
2010 and 2009 was estimated using the following weighted-average assumptions:
Year Ended May 31,
----------------------------------
2011 2010 2009
---------- ---------- ----------
Option Plan Shares
Expected Term (in years)............... 5 5 5
Volatility............................. 0.80 0.78 0.74
Expected Dividend...................... $0.00 $0.00 $0.00
Risk-free Interest Rates............... 1.73% 2.53% 2.99%
Weighted Average Grant Date Fair Value. $1.19 $0.56 $3.67
40
The fair value of our ESPP purchase rights for the fiscal 2010 and 2009
was estimated using the following weighted-average assumptions:
Year Ended May 31,
----------------------------------
2010 2009
---------------- -----------------
Employee Stock Purchase Plan Shares
Expected Term (in years)................ 0.5 - 2.0 0.5 - 2.0
Volatility.............................. 0.89 - 1.01 0.62 - 1.08
Expected Dividend....................... $0.00 $0.00
Risk-free Interest Rates................ 0.2%-1.1% 0.4%-2.6%
Weighted Average Grant Date Fair Value.. $0.84 $1.28
There were no ESPP purchase rights granted during the ESPP periods in fiscal
2011.
EARNINGS PER SHARE ("EPS"):
Basic EPS is computed by dividing net income (loss) available to common
shareholders by the weighted average number of common shares outstanding for
the period. Diluted EPS is computed after giving effect to all dilutive
potential common shares that were outstanding during the period. Dilutive
potential common shares consist of the incremental common shares issuable upon
exercise of stock options for all periods.
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts):
Year Ended May 31,
--------------------------------
2011 2010 2009
---------- ---------- ----------
Numerator: Net loss......................... $(3,373) $(481) $(29,971)
---------- ---------- ----------
Denominator for basic net loss per share:
Weighted-average shares outstanding....... 8,776 8,563 8,436
---------- ---------- ----------
Shares used in basic net loss per share
calculation............................... 8,776 8,563 8,436
Effect of dilutive securities............... -- -- --
---------- ---------- ----------
Denominator for diluted net loss per share.. 8,776 8,563 8,436
---------- ---------- ----------
Basic net loss per share.................... $(0.38) $(0.06) $(3.55)
========== ========== ==========
Diluted net loss per share.................. $(0.38) $(0.06) $(3.55)
========== ========== ==========
For purposes of computing diluted earnings per share, weighted average
potential common shares do not include stock options with an exercise price
greater than the average fair value of the Company's common stock for the
period, as the effect would be anti-dilutive. Potential common shares have
not been included in the calculation of diluted net loss per share for the
fiscal years ended May 31, 2011, 2010 and 2009, as the effect would be anti-
dilutive due to the Company's net loss. As such the numerator and the
denominator used in computing both basic and diluted net loss per share for
fiscal years ended May 31, 2011, 2010 and 2009 are the same. Stock options to
purchase 2,083,000, 1,949,000 and 1,636,000 shares of common stock were
outstanding on May 31, 2011, 2010 and 2009, respectively, but not included in
the computation of diluted income per share, because the inclusion of such
shares would be anti-dilutive.
41
COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) generally represents all changes in
shareholders' equity except those resulting from investments or contributions
by shareholders. Unrealized gains (losses) on available-for-sale securities
and foreign currency translation adjustments are included in the Company's
components of comprehensive income (loss), which are excluded from net income
(loss). Comprehensive income (loss) is included in the statement of
shareholders' equity and comprehensive income (loss).
RECENT ACCOUNTING PRONOUNCEMENTS:
In October 2009, the Financial Accounting Standards Board, or FASB, issued
authoritative guidance for revenue recognition with multiple deliverables.
This authoritative guidance defines the criteria for identifying individual
deliverables in a multiple-element arrangement and the manner in which
revenues are allocated to individual deliverables. In absence of vendor-
specific objective evidence, or VSOE, or other third party evidence, or TPE,
of the selling price for the deliverables in a multiple-element arrangement,
guidance requires companies to use an estimated selling price, or ESP, for the
individual deliverables. Companies shall apply the relative-selling price
model for allocating an arrangement's total consideration to its individual
elements. Under this model, the ESP is used for both the delivered and
undelivered elements that do not have VSOE or TPE of the selling price. This
guidance is effective for fiscal years beginning on or after June 15, 2010,
and will be applied prospectively to revenue arrangements entered into or
materially modified after the effective date. The Company will adopt this
guidance in the first quarter of fiscal year 2012. The implementation of this
authoritative guidance is not expected to have a material impact on the
Company's financial position or results of operations.
In October 2009, the FASB issued authoritative guidance for the accounting
for certain revenue arrangements that include software elements. This
authoritative guidance amends the scope of pre-existing software revenue
guidance by removing from the guidance non-software components of tangible
products and certain software components of tangible products. This guidance
is effective for fiscal years beginning on or after June 15, 2010, and will be
applied prospectively to revenue arrangements entered into or materially
modified after the effective date. The Company will adopt this guidance in
the first quarter of fiscal year 2012. The implementation of this
authoritative guidance is not expected to have a material impact on the
Company's financial position or results of operations.
In January 2010, the FASB issued amended standards that require additional
fair value disclosures. These amended standards require disclosures for
significant transfers in and out of Level 1 and Level 2 fair value
measurements and the reasons for the transfers and activity. For Level 3 fair
value measurements, purchases, sales, issuances and settlements must be
reported on a gross basis. Further, additional disclosures are required by
class of assets or liabilities, as well as inputs used to measure fair value
and valuation techniques. The Company adopted these standards in the first
quarter of 2010. These standards did not have a material impact on the
Company's consolidated financial statements.
In May 2011 updated authoritative guidance to amend existing requirements
for fair value measurements and disclosures was issued. The guidance expands
the disclosure requirements around fair value measurements categorized in
Level 3 of the fair value hierarchy and requires disclosure of the level in
the fair value hierarchy of items that are not measured at fair value but
whose fair value must be disclosed. It also clarifies and expands upon
existing requirements for fair value measurements of financial assets and
liabilities as well as instruments classified in shareholders' equity. The
guidance will be effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011, and are to be applied prospectively.
The Company will adopt this guidance in the first quarter of fiscal 2013. The
implementation of this authoritative guidance is not expected to have a
material impact on the Company's financial position or results of operations.
2. ACCOUNTS RECEIVABLE:
Accounts receivable comprise (in thousands):
May 31,
----------------------
2011 2010
---------- ----------
Trade accounts receivable............... $1,455 $2,007
Less: Allowance for doubtful accounts... (23) (1,411)
---------- ----------
$1,432 $596
========== ==========
42
Additions
Balance at Charged to Balance
beginning costs and at end
of year expenses Deductions* of year
---------- ---------- ---------- ----------
Allowance for doubtful
accounts receivable:
May 31, 2011 $1,411 $15 $1,403 $23
========== ========== ========== ==========
May 31, 2010 $13,741 $59 $12,389 $1,411
========== ========== ========== ==========
May 31, 2009 $183 $13,655 $97 $13,741
========== ========== ========== ==========
* Deductions include write-offs of uncollectible accounts and collections of
amounts previously reserved.
3. INVENTORIES:
Inventories comprise (in thousands):
May 31,
-------------------------
2011 2010
------------ ------------
Raw materials and subassemblies......... $1,992 $ 754
Work in process......................... 2,699 2,633
Finished goods.......................... 267 248
------------ ------------
$4,958 $3,635
============ ============
4. PROPERTY AND EQUIPMENT:
Property and equipment comprise (in thousands):
May 31,
-------------------------
2011 2010
------------ ------------
Leasehold improvements.................. $1,105 $1,105
Furniture and fixtures.................. 1,246 1,186
Machinery and equipment................. 4,263 4,251
Test equipment.......................... 3,004 3,053
------------ ------------
9,618 9,595
Less: Accumulated depreciation
and amortization...................... (8,664) (8,091)
------------ ------------
$954 $1,504
============ ============
5. PRODUCT WARRANTIES:
The Company provides for the estimated cost of product warranties at the
time revenues are recognized on the products shipped. While the Company
engages in extensive product quality programs and processes, including
actively monitoring and evaluating the quality of its component suppliers, the
Company's warranty obligation is affected by product failure rates, material
usage and service delivery costs incurred in correcting a product failure.
Should actual product failure rates, material usage or service delivery costs
differ from the Company's estimates, revisions to the estimated warranty
liability would be required.
43
Following is a summary of changes in the Company's liability for product
warranties during the fiscal years ended May 31, 2011 and May 31, 2010 (in
thousands):
Year ended
May 31,
-------------------------
2011 2010
------------ ------------
Balance at the beginning of the year............ $174 $314
Accruals for warranties issued during the year.. 174 92
Accruals related to pre-existing warranties
(including changes in estimates)............... (88) (28)
Settlements made during the year
(in cash or in kind)........................... (157) (204)
------------ ------------
Balance at the end of the year.................. $103 $174
============ ============
The accrued warranty balance is included in accrued expenses on the
accompanying consolidated balance sheets.
6. ACCRUED EXPENSES:
Accrued expenses comprise (in thousands):
May 31,
-------------------------
2011 2010
------------ ------------
Payroll related......................... $ 736 $ 617
Professional services................... 159 171
Accrued cancellation charges............ 7 7
Commissions and bonuses................. 177 403
Taxes payable........................... 80 72
Warranty................................ 102 174
Other................................... 173 182
------------ ------------
$1,434 $1,626
============ ============
7. INCOME TAXES:
Domestic and foreign components of loss before income tax expense
(benefit) are as follows (in thousands):
Year Ended May 31,
--------------------------------------
2011 2010 2009
------------ ------------ ------------
Domestic......................... $(4,424) $(805) $(22,480)
Foreign.......................... 1,002 185 (2,576)
------------ ------------ ------------
$(3,422) $(620) $(25,056)
============ ============ ============
44
The income tax (benefit) expense consists of the following (in thousands):
Year Ended May 31,
--------------------------------------
2011 2010 2009
------------ ------------ ------------
Federal income taxes:
Current......................... -- $ (185) $ (57)
Deferred........................ -- -- 3,186
State income taxes:
Current......................... $ 30 4 (5)
Deferred........................ -- -- 453
Foreign income taxes:
Current......................... (79) 42 34
Deferred........................ -- -- 1,304
------------ ------------ ------------
$ (49) $ (139) $ 4,915
============ ============ ============
The Company's effective tax rate differs from the U.S. federal statutory
tax rate, as follows:
Year Ended May 31,
--------------------------------------
2011 2010 2009
------------ ------------ ------------
U.S. federal statutory tax rate... 34.0 % 34.0 % 34.0 %
State taxes, net of federal tax
effect.......................... (0.6) (0.6) (1.8)
Foreign rate differential......... 12.4 4.7 (8.9)
Stock-based compensation.......... (8.5) (92.6) (1.6)
Research and development credit... -- 13.2 1.0
Change in valuation allowance .... (35.7) 64.5 (42.1)
Other............................. (0.2) (0.8) (0.2)
------------ ------------ ------------
Effective tax rate................ 1.4 % 22.4 % (19.6)%
============ ============ ============
The components of the net deferred tax asset (liability) are as follows
(in thousands):
May 31,
-------------------------
2011 2010
------------ ------------
Net operating losses..................... $ 9,675 $ 8,281
Credit carryforwards..................... 3,548 3,577
Inventory reserves....................... 2,945 3,340
Reserves and accruals.................... 3,506 2,704
Other.................................... 725 636
------------ ------------
20,399 18,538
Less: Valuation allowance.................. (20,399) (18,538)
------------ ------------
Net deferred tax asset..................... $ -- $ --
============ ============
The valuation allowance increased by $1,861,000 during fiscal 2011,
$56,000 during fiscal 2010, and $14,599,000 during fiscal 2009. As of May 31,
2011 and 2010, the Company concluded that it is more likely than not that the
deferred tax assets will not be realized and therefore provided a full
valuation allowance against the deferred tax assets.
45
The Company will continue to evaluate the need for a valuation allowance
against its deferred tax assets on a quarterly basis.
At May 31, 2011, the Company had federal and state net operating loss
carryforwards of $24,127,000 and $24,011,000, respectively. These
carryforwards will begin to expire in 2024 and 2014, respectively. At May 31,
2011, the Company also had federal and state research and development tax
credit carryforwards of $1,685,000 and $3,957,000, respectively. The federal
credit carryforward will begin to expire in 2016, and the California credit
will carryforward indefinitely. These carryforwards may be subject to certain
limitations on annual utilization in case of a change in ownership, as defined
by tax law. The Company also has alternative minimum tax credit carryforwards
of $91,000 for federal tax purposes and $34,000 for state purposes. The
credits may be used to offset regular tax and do not expire.
The Company has made no provision for U.S. income taxes on undistributed
earnings of certain foreign subsidiaries because it is the Company's intention
to permanently reinvest such earnings in its foreign subsidiaries. If such
earnings were distributed, the Company would be subject to additional U.S.
income tax expense. Determination of the amount of unrecognized deferred
income tax liability related to these earnings is not practicable.
Foreign net operating loss carryforwards of $1,904,000 are available to
reduce future foreign taxable income. The foreign net operating losses will
begin to expire in 2012.
The Company maintains liabilities for uncertain tax positions. These
liabilities involve considerable judgment and estimation and are continuously
monitored by management based on the best information available. The Company
implemented new authoritative guidance for accounting for uncertain tax
positions in the first quarter of fiscal 2008. Upon adoption, the Company
recognized a cumulative effect adjustment of $127,000 decreasing its income
tax liability for unrecognized tax benefits and decreasing the May 31, 2007
accumulated deficit. The aggregate changes in the balance of gross
unrecognized tax benefits are as follows: (in thousands)
Beginning balance as of May 31, 2008..................... $1,143
Increases related to prior year tax positions............ 49
Increases related to current year tax positions ......... 5
Decreases related to lapse of statute of limitations..... (7)
------------
Balance at May 31, 2009.................................. $1,190
Decreases related to prior year tax positions............ (5)
Decreases related to lapse of statute of limitations..... (4)
------------
Balance at May 31, 2010.................................. $1,181
Decreases related to prior year tax positions............ --
Decreases related to lapse of statute of limitations..... (88)
------------
Balance at May 31, 2011.................................. $1,093
============
If the ending balance of $1,093,000 of unrecognized tax benefits at May
31, 2011 were recognized, $204,000 would affect the effective income tax rate.
In accordance with the Company's accounting policy, it recognizes accrued
interest and penalties related to unrecognized tax benefits in the provision
for income taxes. The Company had accrued interest and penalties of $24,000
at May 31, 2011.
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 1996 - 2010 remain subject to
examination by the appropriate governmental agencies due to tax loss
carryovers from those years.
8. CAPITAL STOCK:
STOCK OPTIONS:
In October 1996, the Company's Board of Directors approved the 1996 Stock
Option Plan (the "Stock Plan"), which provided for granting of incentive and
non-qualified stock options to our employees and directors. The Stock Plan
provides that qualified options be granted at an exercise price equal to the
fair market value at the date of grant, as determined by the Board of
Directors (85% of fair market value in the case of non-statutory options and
purchase rights
46
and 110% of fair market value in certain circumstances). Options generally
expire within five years from date of grant. Most options become exercisable
in increments over a four-year period from the date of grant.
In October 2006, the Company's 2006 Equity Incentive Plan and 2006
Employee Stock Purchase Plan ("2006 Plans") were approved by the shareholders.
A total of 2,000,000 shares of common stock have been reserved for issuance
under the Company's 2006 Equity Incentive Plan. Options granted under the
2006 Equity Incentive Plan are generally for periods not to exceed ten years
(five years if the option is granted to a 10% stockholder) and are granted at
the fair market value of the stock at the date of grant as determined by the
Board of Directors. The 2006 Plans respectively replace the Company's Amended
and Restated 1996 Stock Option Plan, which would otherwise have expired in
2006; and the Company's 1997 Employee Stock Purchase Plan, which would have
otherwise expired in 2007. The Amended and Restated 1996 Stock Option Plan
will continue to govern awards previously granted under that plan.
As of May 31, 2011, out of the 2,771,000 shares authorized for grant under
the 1996 Stock Option Plan and 2006 Equity Incentive Plan, approximately
2,083,000 shares had been granted.
The following table summarizes the Company's stock option transactions
during fiscal 2011, 2010 and 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............. (555) 555 $6.01
Additional shares reserved.. 600 --
Options terminated.......... 141 (141) $5.37
Options exercised........... -- (44) $4.35
---------- --------
Balances, May 31, 2009........ 536 1,636 $5.37 --
Options granted............. (560) 560 $0.88
Additional shares reserved.. 800 --
Options terminated.......... 232 (232) $7.19
Plan shares expired......... (10) --
Options exercised........... -- (15) $2.03
---------- --------
Balances, May 31, 2010........ 998 1,949 $3.88 $833
Options granted............. (508) 508 $1.88
Options terminated.......... 327 (327) $4.30
Plan shares expired......... (130) --
Options exercised........... -- (47) $0.85
---------- --------
Balances, May 31, 2011........ 687 2,083 $3.40 $298
========== ========
Options exercisable and expected to be
exercisable at May 31, 2011 2,042 $3.40 $292
========
47
The options outstanding and exercisable at May 31, 2011 were in the
following exercise price ranges (in thousands, except per share data):
Options Outstanding Options Exercisable
at May 31, 2011 at May 31, 2011
-------------------------------- --------------------------------------
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
----------- ----------- ----------- -------- ------- -------- ----------- ---------
$0.85-$0.85 454 3.08 $0.85 436 $0.85 3.08
$1.29-$2.81 867 3.17 $2.12 436 $2.26 2.53
$2.84-$5.96 409 0.74 $4.59 405 $4.57 0.73
$6.00-$9.30 231 1.64 $7.66 225 $7.67 1.64
$9.94-$9.94 122 2.07 $9.94 89 $9.94 2.07
----------- -------
$0.85-$9.94 2,083 2.44 $3.40 1,591 $3.66 2.07 282
=========== =======
The total intrinsic values of options exercised were $25,000, $7,000 and
$219,000 during fiscal 2011, 2010 and 2009, respectively. The weighted
average contractual life of the options exercisable and expected to be
exercisable at May 31, 2011 was 2.44 years.
Options to purchase 1,591,000, 1,343,000 and 997,000 shares were
exercisable at May 31, 2011, 2010 and 2009, respectively. These exercisable
options had weighted average exercise prices of $3.66, $4.20 and $4.86 as of
May 31, 2011, 2010 and 2009, respectively.
9. EMPLOYEE BENEFIT PLANS:
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has a non-contributory, trusteed employee stock option plan
for full-time employees who have completed three consecutive months of service
and for part-time employees who have completed one year of service and have
attained an age of 21. The Company can contribute either shares of the
Company's stock or cash to the plan. The contribution is determined annually
by the Company and cannot exceed 15% of the annual aggregate salaries of those
employees eligible for participation in the plan. On May 31, 2007, the
Company converted the Aehr Test Systems Employee Stock Bonus Plan into the
Aehr Test Systems Employee Stock Ownership Plan (the "Plan"). The stock bonus
plan was converted to an employee stock ownership plan ("ESOP") to enable the
Plan to better comply with changes in the law regarding Company stock.
Individuals' account balances vest at a rate of 20% per year commencing upon
completion of two years of service. Non-vested balances, which are forfeited
following termination of employment, are allocated to the remaining employees
in the Plan. Under the Plan provisions, each employee who reaches age fifty-
five (55) and has been a participant in the Plan for ten years will be offered
an election each year to direct the transfer of up to 25% of his/her ESOP
account to the employee self-directed account in the Savings & Retirement
Plan. For anyone who met the above prerequisites, the first election to
diversify holdings was offered after May 31, 2008. In the sixth year,
employees will be able to diversify up to 50% of their ESOP accounts.
Contributions of $60,000, $150,000 and $60,000 were authorized for the plan
during fiscal 2011, 2010 and 2009, respectively. The contribution amounts are
recorded as compensation expense, in the period authorized and included in
accrued liabilities, in the period authorized. Contributions of 64,102 shares
were made to the ESOP during fiscal 2011 for fiscal 2010. Contributions of
64,516 shares were made to the ESOP during fiscal 2010 for fiscal 2009.
Contributions of 20,334 shares were made to the ESOP during fiscal 2009 for
fiscal 2008. The contribution for fiscal 2011 will be made in fiscal 2012.
Shares held in the ESOP are included in the EPS calculation.
401(K) PLAN:
The Company maintains a defined contribution savings plan (the "401(k)
Plan") to provide retirement income to all qualified employees of the Company.
The 401(k) Plan is intended to be qualified under Section 401(k) of the
Internal Revenue Code of 1986, as amended. The 401(k) Plan is funded by
voluntary pre-tax contributions from employees. Contributions are invested,
as directed by the participant, in investment funds available under the 401(k)
Plan. The Company is not required to make, and did not make, any
contributions to the 401(k) Plan during fiscal 2011, 2010 and 2009.
48
EMPLOYEE STOCK PURCHASE PLAN:
The Company's Board of Directors adopted the 1997 Employee Stock Purchase
Plan in June 1997. A total of 400,000 shares of common stock have been
reserved for issuance under the plan. The plan has consecutive, overlapping,
twenty-four month offering periods. Each twenty-four month offering period
includes four six month purchase periods. The offering periods generally
begin on the first trading day on or after April 1 and October 1 each year,
except that the first such offering period commenced with the effectiveness of
the Company's initial public offering and ended on the last trading day on or
before March 31, 1999. Shares are purchased through employee payroll
deductions at exercise prices equal to 85% of the lesser of the fair market
value of the Company's common stock at either the first day of an offering
period or the last day of the purchase period. If a participant's rights to
purchase stock under all employee stock purchase plans of the Company accrue
at a rate which exceeds $25,000 worth of stock for a calendar year, such
participant may not be granted an option to purchase stock under the 1997
Employee Stock Purchase Plan. The maximum number of shares a participant may
purchase during a single purchase period is 3,000 shares.
In October 2006, the Company's shareholders approved the 2006 Employee
Stock Purchase Plan, or 2006 Purchase Plan. A total of 450,000 shares of the
Company's common stock were reserved for issuance under the 2006 Purchase
Plan. The 2006 Purchase Plan has consecutive, overlapping, twenty-four month
offering periods. Each twenty-four month offering period includes four six
month purchase periods. The offering periods generally begin on the first
trading day on or after April 1 and October 1 each year. The first exercise
date under the 2006 Purchase Plan was April 1, 2007. All employees who work a
minimum of 20 hours per week and are customarily employed by the Company (or
an affiliate thereof) for at least five months per calendar year are eligible
to participate. Under the 2006 Purchase Plan, shares are purchased through
employee payroll deductions at exercise prices equal to 85% of the lesser of
the fair market value of the Company's common stock at either the first day of
an offering period or the last day of the purchase period. If a participant's
rights to purchase stock under all employee stock purchase plans of the
Company accrue at a rate which exceeds $25,000 worth of stock for a calendar
year, such participant may not be granted an option to purchase stock under
the 2006 Purchase Plan. For the years ended May 31, 2011, 2010 and 2009,
approximately 157,000, 89,000 and 73,000 shares of common stock, respectively,
were issued under the plans. To date, 765,000 shares have been issued under
both employee stock purchase plans.
10. STOCKHOLDER RIGHTS PLAN:
The Company's Board of Directors adopted a Stockholder Rights Plan on
March 5, 2001, under which a dividend of one Right to purchase one one-
thousandth of a share of the Company's Series A Participating Preferred Stock
was distributed for each outstanding share of the Company's common stock. The
plan entitled each Right holder to purchase 1/1000th of a share of the
Company's Series A Participating Preferred Stock at an exercise price of
$35.00, subject to adjustment, in certain events, such as a tender offer to
acquire 20% or more of the Company's outstanding common stock. Under some
circumstances, such as if a person or group acquires 20% or more of the
Company's common stock prior to redemption of the Rights, the plan entitled
such holders (other than an acquiring party) to purchase the Company's common
stock having a market value at that time of twice the Right's exercise price.
The Rights expired on April 3, 2010.
11. OTHER INCOME (EXPENSE), NET:
Other income (expense), net comprises the following (in thousands):
Year Ended May 31,
-----------------------------------
2011 2010 2009
----------- ----------- -----------
Dividend distribution on long-term
investment...................... $575 -- --
Foreign exchange gain ............ 135 $118 $331
Other, net........................ 52 13 (54)
----------- ----------- -----------
$762 $131 $277
=========== =========== ===========
49
12. SEGMENT INFORMATION:
As the Company's business is completely focused on one industry segment,
the designing, manufacturing and marketing of advanced test and burn-in
products to the semiconductor manufacturing industry, management believes that
the Company has only one reportable segment. The Company's net sales and
profits are generated through the sale and service of products for this one
segment.
The following presents information about the Company's operations in
different geographic areas (in thousands):
United
States Asia Europe Total
--------- --------- --------- ---------
2011:
Net sales...................... $11,911 $1,404 $422 $13,737
Property and equipment, net.... 872 72 10 954
2010:
Net sales...................... $11,080 $256 $338 $11,674
Property and equipment, net.... 1,412 77 15 1,504
2009:
Net sales...................... $17,268 $3,208 $931 $21,407
Property and equipment, net.... 2,642 88 11 2,741
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 exclude
intercompany transactions.
13. RELATED PARTY TRANSACTIONS:
The Company has entered into transactions with ESA Electronics Pte Ltd.,
or ESA, in which the Company owned a 12.5% interest at May 31, 2011, 2010 and
2009. ESA purchased goods from the Company for $11,000, $34,000 and $30,000
during fiscal 2011, 2010 and 2009, respectively. In addition, the Company
purchased goods from ESA for $2,000 and $3,000 in fiscal 2010 and 2009,
respectively. There were no goods purchased from ESA in fiscal 2011. At May
31, 2011 and 2010, the Company had no amounts payable to ESA. At May 31, 2011
and 2010, the Company had no amounts receivable from ESA.
Mario M. Rosati, one of the Company's directors, is also a member of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, which has served
as the Company's outside corporate counsel and has received compensation at
normal commercial rates for these services.
14. COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
The Company leases most of its manufacturing and office space under
operating leases. The Company entered into non-cancelable operating lease
agreements for its United States manufacturing and office facilities and
maintains equipment under non-cancelable operating leases in Germany. The
Company's principal administrative and production facilities are located in
Fremont, California, in a 51,289 square foot building. The term of the
Company's current lease commenced on April 1, 2008 and ends on June 30, 2015.
The Company has an option to extend the lease for an additional period at
rates to be determined. The Company's facility in Japan is located in Tokyo
in a 4,294 square foot building under a cancellable lease whose term commenced
on October 1, 2007 and ends on September 30, 2013. The Company leases a sales
and support office in Utting, Germany. The lease, which began February 1,
1992 and expires on January 31, 2012, contains an automatic twelve months
renewal, at rates to be determined, if no notice is given prior to six months
from expiry. Under the lease agreements, the Company is responsible for
payments of utilities, taxes and insurance.
50
Minimum annual rentals payments under operating leases in each of the next
five fiscal years and thereafter are as follows (in thousands):
Years Ending May 31,
2012.................................... $ 585
2013.................................... 576
2014.................................... 583
2015.................................... 593
2016.................................... 49
Thereafter.............................. --
------
Total $2,386
======
Rental expense for the years ended May 31, 2011, 2010 and 2009 was
$680,000, $653,000 and $684,000, respectively.
At May 31, 2011 and 2010, the Company had a $50,000 certificate of deposit
held by a financial institution representing a security deposit for its United
States manufacturing and office space lease. This amount is included in
"Other Assets" on the consolidated balance sheets.
PURCHASE OBLIGATIONS
The Company has purchase obligations to certain suppliers. In some cases
the products the Company purchases are unique and have provisions against
cancellation of the order. At May 31, 2011, the Company had $908,000 of
purchase obligations which are due within the following 12 months. This
amount does not include contractual obligations recorded on the consolidated
balance sheets as liabilities.
CONTINGENCIES
The Company is, from time to time, involved in legal proceedings arising
in the ordinary course of business. While there can be no assurances as to
the ultimate outcome of any litigation involving the Company, management does
not believe any pending legal proceedings will result in judgment or
settlement that will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
In the normal course of business to facilitate sales of its products, the
Company indemnifies other parties, including customers, with respect to
certain matters. The Company has agreed to hold the other party harmless
against losses arising from a breach of representations or covenants, or from
intellectual property infringement or other claims. These agreements may
limit the time within which an indemnification claim can be made and the
amount of the claim. In addition, the Company has entered into
indemnification agreements with its officers and directors, and the Company's
bylaws contain similar indemnification obligations to the Company's agents.
It is not possible to determine the maximum potential amount under these
indemnification agreements due to the limited history of prior indemnification
claims and the unique facts and circumstances involved in each particular
agreement. To date, payments made by the Company under these agreements have
not had a material impact on the Company's operating results, financial
position or cash flows.
15. SUBSEQUENT EVENT:
In June 2011, the Company sold all of its shares of ESA for approximately
$1.4 million resulting in a gain of $1.0 million reported in the first quarter
of fiscal 2012.
On August 25, 2011 the Company entered into a working capital credit
facility agreement with Silicon Valley Bank allowing the Company to borrow up
to $1.5 million based upon qualified U.S. based and foreign customer
receivables, and export-related inventory. Each account receivable financed
by Lender will bear an annual interest rate or finance charge equal to the
greater of Lender's prime rate less 0.5%, or 3.50%, when the Company meets
certain borrowing base requirements. If the Company does not meet the
borrowing base requirements, each account receivable financed by Lender will
bear an annual interest rate or finance charge equal to the greater of
Lender's prime rate plus 0.75%, or 4.75%. The applicable interest is
calculated based on the full amount of the account receivable and export-
related inventory provided as collateral for the actual amounts borrowed. The
term of the agreement is one year.
51
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following table (presented in thousands, except per share data) sets
forth selected unaudited condensed consolidated statements of operations data
for each of the four quarters of the fiscal years ended May 31, 2011 and 2010.
The unaudited quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein and, in the Company's opinion,
includes all adjustments (consisting only of normal recurring entries)
necessary for a fair statement of the information for the quarters presented.
The operating results for any quarter are not necessarily indicative of
results for any future period and should be read in conjunction with the
audited consolidated financial statements of the Company's and the notes
thereto included elsewhere herein.
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb 28, May 31,
2010 2010 2011 2011
--------- --------- --------- ---------
Net sales.............................. $ 2,169 $3,577 $4,242 $3,749
Gross profit........................... $ 944 $1,354 $1,605 $1,609
Net loss............................... $(1,516) $ (767) $ (946) $ (144)
Net loss per share (basic)............. $ (0.17) $(0.09) $(0.11) $(0.02)
Net loss per share (diluted)........... $ (0.17) $(0.09) $(0.11) $(0.02)
During the three months ended August 31, 2010 the Company's Japanese
subsidiary received $0.2 million in proceeds from the Spansion Japan
bankruptcy claim and recorded the amount as a reduction of operating expenses.
During the three months ended November 30, 2010 the Company received a
dividend payment of $0.6 million related to a long-term investment and
reported the amount as other income.
During the three months ended May 31, 2011 the Company's Japanese
subsidiary received $0.7 million in proceeds from the Spansion Japan
bankruptcy claim and recorded the amount as a reduction of operating expenses.
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
2009 2009 2010 2010
--------- --------- --------- ---------
Net sales.............................. $1,268 $ 1,646 $5,193 $3,567
Gross profit (loss).................... $ (57) $ 349 $4,015 $1,796
Net income (loss)...................... $ 961 $(2,158) $1,535 $ (819)
Net income (loss) per share (basic).... $ 0.11 $ (0.25) $ 0.18 $(0.09)
Net income (loss) per share (diluted).. $ 0.11 $ (0.25) $ 0.18 $(0.09)
During the three months ended August 31, 2009 the Company sold a portion
of its Spansion U.S. bankruptcy claim to a third party for net proceeds of
approximately $3.3 million and recorded the amount in income from operations.
During the three months ended November 30, 2009 the seven officers of the
Company elected to forfeit certain stock options previously granted. The
forfeiture of these options resulted in the immediate recognition of the
unamortized portion of stock compensation expense of $465,000.
During the three months ended February 28, 2010 the Company sold the
remaining balance of its Spansion U.S. bankruptcy claim to a third party for
net proceeds of approximately $4.6 million and recorded $2.7 million as net
sales related to cancellation charges, $1.3 million as deferred revenue and
$0.6 million as a reduction of operating expenses.
During the three months ended May 31, 2010 the Company received the
remaining payment of $0.1 million due from its first quarter of fiscal 2010
bankruptcy claim sale and recorded the amount as a reduction of operating
expenses and recognized $1.3 million of product sales which was deferred
during the three months ended February 28, 2010.
52
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A(T). Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our management evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-
15(e) under the Exchange Act, as of the end of the period covered by this
Annual Report on Form 10-K. 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
Exchange Act of 1934 is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow for timely decisions regarding required disclosure.
(b) Management's report on internal control over financial reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-
15(f) of the Exchange Act. Under the supervision and with the participation
of our Chief Executive Officer and Chief Financial Officer, our management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based upon the framework in "Internal Control - Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, management has concluded that the
Company's internal control over financial reporting was effective as of May
31, 2011. This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by
the Company's registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this Annual Report.
(c) Changes in internal controls over financial reporting.
There were no changes in our internal controls over financial
reporting that occurred during the period covered by this Annual Report on
Form 10-K that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
Item 9B. Other Information
None.
53
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to the
sections entitled "Board Matters and Corporate Governance", "Proposal 1 --
Election of Directors" and "Compensation of Executive Officers" of the Proxy
Statement.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the
sections entitled "Director Compensation" and "Compensation of Executive
Officers" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item is incorporated by reference to the
section entitled "Security Ownership of Certain Beneficial Owners, Directors
and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
section entitled "Certain Relationships and Related Transactions" of the Proxy
Statement.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the
section entitled "Independent Registered Public Accounting Firm's Fees" of
the Proxy Statement.
54
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Report:
1. Financial Statements
See Index under Item 8.
2. Financial Statement Schedule
See Index under Item 8.
3. Exhibits
See Item 15(b) below.
(b) Exhibits
The following exhibits are filed as part of or incorporated by reference
into this Report:
55
Exhibit
No. Description
------- -----------------------------------------------------------------
3.1(1) Restated Articles of Incorporation of Registrant.
3.2(1) Bylaws of Registrant.
3.2(2) Amended and Restated Bylaws of Registrant.
4.1(3) Form of Common Stock certificate.
4.2(4) 2006 Equity Incentive Plan.
4.3(4) 2006 Employee Stock Purchase Plan.
10.1(1) Amended 1986 Incentive Stock Plan and form of agreement
thereunder.
10.2(3) 1996 Stock Option Plan (as amended and restated) and forms of
Incentive Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder.
10.3(3) 1997 Employee Stock Purchase Plan and form of subscription
agreement thereunder.
10.4(3) Form of Indemnification Agreement entered into between Registrant
and its directors and executive officers.
10.5(1) Capital Stock Purchase Agreement dated September 11, 1979 between
Registrant and certain holders of Common Stock.
10.6(1) Capital Stock Investment Agreement dated April 12, 1984 between
Registrant and certain holders of Common Stock.
10.7(1) Amendment dated September 17, 1985 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain
holders of Common Stock.
10.8(1) Amendment dated February 26, 1990 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain
holders of Common Stock.
10.9(1) Stock Purchase Agreement dated September 18, 1985 between
Registrant and certain holders of Common Stock.
10.10(1) Common Stock Purchase Agreement dated February 26, 1990 between
Registrant and certain holders of Common Stock.
10.11(1) Lease dated May 14, 1991 for facilities located at 1667 Plymouth
Street, Mountain View, California.
10.12(5) Lease dated August 3, 1999 for facilities located at Building C,
400 Kato Terrace, Fremont, California.
10.13(6) Preferred Shares Rights Agreement dated March 5, 2001.
10.14(7) Form of Change of Control Agreement.
10.15(9) First Amendment dated May 06, 2008 for facilities located at
400 Kato Terrace, Fremont, California.
10.16(10) Purchase and Sale Agreement between the Company and Fulcrum
Credit Partners LLC dated August 31, 2009.
10.17(11) Purchase and Sale Agreement between the Company and APS Capital
Corp. dated January 25, 2010.
10.18(12) Separation Agreement and Release between the Company and Gregory
M. Perkins, dated February 1, 2011.
10.19(13) Sale and Purchase Agreement between the Company and IPCO
International Limited dated April 13, 2011
16.1(8) Letter dated December 9, 2005 regarding change in Certifying
Accountant.
21.1(1) Subsidiaries of the Company.
23.1 Consent of Burr Pilger Mayer, Inc. - Independent Registered
Public Accounting Firm (filed herewith).
24.1 Power of Attorney (see page 58).
31.1 Certification Statement of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification Statement of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002 (filed herewith).
56
32.1 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 (furnished
herewith).
------------------------
(1) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 filed June 11, 1997
(File No. 333-28987).
(2) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Quarterly Report on Form 10-Q for the quarter ended
February 28, 2009 filed April 13, 2009 (File No. 000-22893).
(3) Incorporated by reference to the same-numbered exhibit previously filed
with Amendment No.1 to the Company's Registration Statement on Form S-1 filed
July 17, 1997 (File No. 333-28987).
(4) Incorporated by reference to the exhibit previously filed with the
Company's Registration Statement on Form S-8 filed October 27, 2006 (File No.
333-138249).
(5) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Form 10-K for the year ended May 31, 1999 filed August 30,
1999 (File No. 000-22893).
(6) Incorporated by reference to the Exhibit No. 4.1 previously filed with
the Company's Current Report on Form 8-K filed March 28, 2001 (File No. 000-
22893).
(7) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Form 10-K for the year ended May 31, 2001 filed August 29,
2001 (File No. 000-22893).
(8) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Current Report on Form 8-K filed December 9, 2005 (File No.
000-22893).
(9) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Current Report on Form 8-K filed May 9, 2008 (File No. 000-
22893).
(10) Incorporated by reference to the Exhibit No. 10.1 previously filed with
the Company's Quarterly Report on Form 10-Q for the quarter ended August 31,
2009 filed October 14, 2009 (File No. 000-22893).
(11) Incorporated by reference to the Exhibit No. 10.17 previously filed with
the Company's Current Report on Form
8-K filed January 29, 2010 (File No. 000-22893).
(12) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Current Report on Form 8-K filed February 3, 2011 (File No.
000-22893).
(13) Incorporated by reference to the same-numbered exhibit previously filed
with the Company's Current Report on Form 8-K/A filed April 20, 2011 (File No.
000-22893).
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 26, 2011
AEHR TEST SYSTEMS
By: /s/ RHEA J. POSEDEL
----------------------------------------
Rhea J. Posedel
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Rhea J. Posedel and Gary L. Larson,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
-------------------------- ----------------------------------- -----------------
Chief Executive Officer
and Chairman of the
/s/ RHEA J. POSEDEL Board of Directors August 26, 2011
-------------------------- (Principal Executive Officer) -----------------
Rhea J. Posedel
Vice President of Finance
and Chief Financial Officer
/s/ GARY L. LARSON (Principal Financial and August 26, 2011
-------------------------- Accounting Officer) -----------------
Gary L. Larson
/s/ ROBERT R. ANDERSON Director August 26, 2011
-------------------------- -----------------
Robert R. Anderson
/s/ WILLIAM W. R. ELDER Director August 26, 2011
-------------------------- -----------------
William W. R. Elder
/s/ MUKESH PATEL Director August 26, 2011
-------------------------- -----------------
Mukesh Patel
/s/ MARIO M. ROSATI Director August 26, 2011
-------------------------- -----------------
Mario M. Rosati
/s/ HOWARD T. SLAYEN Director August 26, 2011
-------------------------- -----------------
Howard T. Slayen
58