##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period fromto
 Commission File Number 000-51828
 
 EAGLE TEST SYSTEMS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    36-2917389(State of incorporation)
    
    (I.R.S. Employer Identification No.)2200 Millbrook Drive, Buffalo Grove, Illinois
    
    60089(Address of principal executive offices)
    
    (Zip Code)
 (847) 367-8282
  o þ
  o o þ
 o þ




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##### Table of Contents



EAGLE TEST SYSTEMS, INC.  (The Company)
 INDEX
 PagePart I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2006 (unaudited) and September 30, 2005
    
    3Condensed Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss)
(unaudited) for the three and six months ended March 31, 2006 and 2005
    
    4Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended March
31, 2006 and 2005
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    20Item 4. Controls and Procedures
    
    20Part II. Other InformationItem 1. Legal Proceedings
    
    21Item 1A. Risk Factors
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    29Item 3. Defaults Upon Senior Securities
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    30Item 5. Other Information
    
    30Item 6. Exhibits
    
    30Signatures
    
    31Exhibit Index
    
    32Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 March 31,
    
    
    September 30,2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    35,509
    
    
    $
    9,976Marketable securities
    
    
    25,700
    
    
    
    12,700Accounts receivable, net of allowances, of $1,356 and $1,240
    
    
    16,798
    
    
    
    9,202Inventories
    
    
    19,759
    
    
    
    17,707Deferred income taxes
    
    
    3,570
    
    
    
    3,426Prepaid expenses and other current assets
    
    
    1,775
    
    
    
    548Total current assets
    
    
    103,111
    
    
    
    53,559Property, plant and equipment, net
    
    
    11,456
    
    
    
    12,135Other assets
    
    
    667
    
    
    
    477Total assets
    
    $
    115,234
    
    
    $
    66,171LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    7,265
    
    
    $
    1,523Current portion of long-term debt
    
    
    249
    
    
    
    249Deferred revenue
    
    
    9,763
    
    
    
    3,419Accrued compensation and related liabilities
    
    
    3,567
    
    
    
    3,103Accrued income taxes
    
    
    1,668
    
    
    
    767Other accrued expenses
    
    
    3,983
    
    
    
    2,881Total current liabilities
    
    
    26,495
    
    
    
    11,942Long-term liabilities:Long-term debt, less current portion
    
    
    518
    
    
    
    29,484Redeemable warrants
    
    
    
    
    
    
    2,667Deferred income taxes
    
    
    1,244
    
    
    
    1,272Other long-term liabilities
    
    
    423
    
    
    
    393Total long-term liabilities
    
    
    2,185
    
    
    
    33,816Series A convertible preferred stock, par value $0.01 per share, no shares authorized, issued, or
outstanding as of March 31, 2006, 3,437 shares authorized and 3,436 shares issued as of September 30, 2005
    
    
    
    
    
    
    65,000Stockholders equity (deficit):Preferred stock, par value $0.01 per share 10,000,000 shares authorized, no shares
issued or outstanding as of March 31, 2006 and no shares authorized, issued or
outstanding as of September 30, 2005
    
    
    
    
    
    
    Common stock, par value $0.01 per share, 90,000,000 and 15,495,325 shares authorized as
of March 31, 2006 and September 30, 2005, respectively; 20,650,283 and 5,396,248 shares
outstanding as of March 31, 2006 and September 30, 2005, respectively
    
    
    207
    
    
    
    54Additional paid in capital
    
    
    138,794
    
    
    
    156Accumulated deficit
    
    
    (52,447
    )
    
    
    (44,665
    )Deferred stock compensation expense
    
    
    
    
    
    
    (132
    )Total stockholders equity (deficit)
    
    
    86,554
    
    
    
    (44,587
    )Total liabilities and stockholders equity (deficit)
    
    $
    115,234
    
    
    $
    66,171
  3




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##### Table of Contents



EAGLE TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
 (In thousands, except share and per share data)
 Three Months
    
    
    Six MonthsEnded March 31,
    
    
    Ended March 31,(unaudited)
    
    
    (unaudited)2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenue
    
    $
    28,565
    
    
    $
    8,600
    
    
    $
    51,013
    
    
    $
    28,791Cost of goods sold
    
    
    9,319
    
    
    
    5,027
    
    
    
    16,349
    
    
    
    12,707Gross profit
    
    
    19,246
    
    
    
    3,573
    
    
    
    34,664
    
    
    
    16,084Operating expensesSelling, general and administrative
    
    
    6,958
    
    
    
    5,045
    
    
    
    13,246
    
    
    
    9,659Research and development
    
    
    2,392
    
    
    
    2,010
    
    
    
    4,468
    
    
    
    4,099Operating income (loss)
    
    
    9,896
    
    
    
    (3,482
    )
    
    
    16,950
    
    
    
    2,326Interest expense
    
    
    2,430
    
    
    
    976
    
    
    
    3,410
    
    
    
    1,946Other (income) and expenseIncome from marketable securities
    
    
    (305
    )
    
    
    (136
    )
    
    
    (483
    )
    
    
    (293
    )Investment impairments
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    Increase (decrease) in value of warrants
    
    
    3,275
    
    
    
    (420
    )
    
    
    5,466
    
    
    
    (441
    )Other (income), net
    
    
    (10
    )
    
    
    (282
    )
    
    
    (12
    )
    
    
    (292
    )Income (loss) before taxes
    
    
    4,506
    
    
    
    (3,620
    )
    
    
    8,545
    
    
    
    1,406Provision (benefit) for income taxes
    
    
    2,733
    
    
    
    (1,571
    )
    
    
    4,898
    
    
    
    400Net income (loss)
    
    $
    1,773
    
    
    $
    (2,049
    )
    
    $
    3,647
    
    
    $
    1,006Net income (loss) per share, basic
    
    $
    (1.04
    )
    
    $
    (0.38
    )
    
    $
    (1.06
    )
    
    $
    0.07Net income (loss) per share, diluted
    
    $
    (1.04
    )
    
    $
    (0.42
    )
    
    $
    (1.06
    )
    
    $
    (0.02
    )Weighted average shares outstanding, basic
    
    
    9,299,266
    
    
    
    5,396,248
    
    
    
    7,326,312
    
    
    
    5,396,248Weighted average shares outstanding, diluted
    
    
    9,299,266
    
    
    
    5,920,404
    
    
    
    7,326,312
    
    
    
    14,514,053Comprehensive income (loss):Net income (loss)
    
    $
    1,773
    
    
    $
    (2,049
    )
    
    $
    3,647
    
    
    $
    1,006Unrealized gain (loss) on marketable securities,
net of taxes
    
    
    
    
    
    
    (122
    )
    
    
    
    
    
    
    53Comprehensive income (loss)
    
    $
    1,773
    
    
    $
    (2,171
    )
    
    $
    3,647
    
    
    $
    1,059Income (loss) available to common stockholders:Net income (loss)
    
    $
    1,773
    
    
    $
    (2,049
    )
    
    $
    3,647
    
    
    $
    1,006Retained earnings adjustment for redemption of redeemable preferred
stock
    
    
    (11,430
    )
    
    
    
    
    
    
    (11,430
    )
    
    
    Net income allocated to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (618
    )Income (loss) available to common stockholders
    
    $
    (9,657
    )
    
    $
    (2,049
    )
    
    $
    (7,783
    )
    
    $
    388
  4




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##### Table of Contents



EAGLE
TEST SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Six Months EndedMarch 31,2006
    
    2005(unaudited)Cash flows from operating activities:Net income
    
    $
    3,647
    
    
    $
    1,006Adjustments to reconcile net income to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    1,479
    
    
    
    846Investment impairments
    
    
    24
    
    
    
    Realized (gain) loss on sale of marketable securities
    
    
    
    
    
    
    (62
    )Gain on sale of property and equipment
    
    
    
    
    
    
    (246
    )Accretion of discount and redemption premium on long-term debt
    
    
    1,752
    
    
    
    140Increase (decrease) in value of warrants
    
    
    5,466
    
    
    
    (441
    )Non cash compensation related to stock options
    
    
    205
    
    
    
    23Deferred income taxes
    
    
    (172
    )
    
    
    393Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,596
    )
    
    
    20,868Inventories
    
    
    (2,052
    )
    
    
    3,670Prepaid expenses and other current assets
    
    
    (1,227
    )
    
    
    (115
    )Other assets
    
    
    (214
    )
    
    
    23Accounts payable
    
    
    5,742
    
    
    
    (5,098
    )Deferred revenue
    
    
    6,344
    
    
    
    (14,168
    )Accrued compensation and related liabilities
    
    
    464
    
    
    
    (4,153
    )Accrued income taxes
    
    
    901
    
    
    
    (2,799
    )Other accrued expenses
    
    
    1,102
    
    
    
    (1,716
    )Other liabilities
    
    
    30
    
    
    
    2Net cash
provided by (used in) operating activities
    
    
    15,895
    
    
    
    (1,827
    )Cash flows from investing activities:Purchases of marketable securities
    
    
    (13,000
    )
    
    
    (27
    )Sale of property and equipment
    
    
    
    
    
    
    659Capital expenditures
    
    
    (800
    )
    
    
    (5,263
    )Net cash used in investing activities
    
    
    (13,800
    )
    
    
    (4,631
    )Cash flows from financing activities:Payments of long-term debt
    
    
    (30,595
    )
    
    
    Payments of capital lease obligations
    
    
    (123
    )
    
    
    (21
    )Redemption of redeemable preferred stock
    
    
    (32,500
    )
    
    
    Proceeds from issuance of common stock, net of issuance costs
    
    
    86,656
    
    
    
    Net cash provided by (used in) financing activities
    
    
    23,438
    
    
    
    (21
    )Net increase (decrease) in cash and cash equivalents
    
    
    25,533
    
    
    
    (6,479
    )Cash and cash equivalents at beginning of period
    
    
    9,976
    
    
    
    17,303Cash and cash equivalents at end of period
    
    $
    35,509
    
    
    $
    10,824
  5




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##### Table of Contents



EAGLE TEST SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands, except share and per share data)
 (Unaudited)
 1. The Company
  2. Summary of Significant Accounting Policies
 Basis of Presentation
   Preparation of Financial Statements and Use of Estimates
  Unaudited Interim Results
  6




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EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 Stock Options
  Accounting for Stock Issued to Employees .
 3. Inventories
  March 31,
    
    
    September 30,2006
    
    
    2005Raw materials
    
    $
    6,080
    
    
    $
    7,683Work-in-process
    
    
    5,899
    
    
    
    1,865Finished goods
    
    
    5,376
    
    
    
    7,434Inventory at customers under purchase orders
    
    
    2,404
    
    
    
    725$
    19,759
    
    
    $
    17,707
  7




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##### Table of Contents



EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 4. Initial Public Offering
  Recapitalization
   Common Stock
    Preferred Stock
 Series A Convertible Preferred Stock/Redeemable Preferred Stock
  8




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EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 4. Initial Public Offering (continued)
 Long-term Debt
 Senior Subordinated Convertible Notes/ Senior Subordinated Notes
  Warrants
  5. Long-Term Debt
  March 31,
    
    
    September 30,2006
    
    
    2005Senior Subordinated Convertible Notes, net
of discount of $1,157 at September 30, 2005
    
    $
    
    
    
    $
    28,843Capital lease obligations
    
    
    767
    
    
    
    890$
    767
    
    
    $
    29,733Less current portion of capital lease obligations
    
    
    (249
    )
    
    
    (249
    )$
    518
    
    
    $
    29,484
  6. Net Income Per Share
   9




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EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
  Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 312006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    1,773
    
    
    $
    (2,049
    )
    
    $
    3,647
    
    
    $
    1,006Basic EPS:Adjustments to income:Retained earnings
adjustment for
conversion of
redeemable preferred
stock *
    
    
    (11,430
    )
    
    
    
    
    
    
    (11,430
    )
    
    
    Net income allocated to
convertible preferred
shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (618
    )Income (loss) available to common
stockholders
    
    
    (9,657
    )
    
    
    (2,049
    )
    
    
    (7,783
    )
    
    
    388Weighted-average common share outstanding
    
    
    9,299,266
    
    
    
    5,396,248
    
    
    
    7,326,312
    
    
    
    5,396,248Basic net income (loss) per common share
    
    $
    (1.04
    )
    
    $
    (0.38
    )
    
    $
    (1.06
    )
    
    $
    0.07Diluted EPS:Adjustments to Income:Dividend on redeemable
preferred stock  as
converted
    
    $
    
    
    
    $
    
    **
    
    $
    
    
    
    $
    (818
    )Warrant value adjustment
    
    
    
    **
    
    
    (420
    )
    
    
    
    **
    
    
    (441
    )(Loss) available to common stockholders
    
    $
    (9,657
    )
    
    $
    (2,469
    )
    
    $
    (7,783
    )
    
    $
    (253
    )Weighted-average common shares outstanding
    
    
    9,299,266
    
    
    
    5,396,248
    
    
    
    7,326,312
    
    
    
    5,396,248Plus impact of convertible preferred
stock and warrants and stock options, as
applicable
    
    
    
    **
    
    
    524,156
    
    
    
    
    **
    
    
    9,117,805Diluted common shares
    
    
    9,299,266
    
    
    
    5,920,404
    
    
    
    7,326,312
    
    
    
    14,514,053Diluted (loss) per common share
    
    $
    (1.04
    )
    
    $
    (0.42
    )
    
    $
    (1.06
    )
    
    $
    (0.02
    )
 
 *
    
    The difference between the fair market value of the Redeemable Preferred Stock at date of issue
of $21,070 and the redemption price of $32,500 was charged to retained earnings. This adjustment
is used to reduce net income to arrive at income available to common stockholders for purposes of
calculating earnings per common share in accordance with EITF Topic D-42-The Effect on the
Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.**
    
    This element of the diluted EPS computation is not applicable since the impact on the
computation would be anti-dilutive.
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EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 7. Income Taxes
  8. Stock Option Plans
   WeightedOutstanding
    
    
    AverageOptions
    
    
    Exercise PriceOutstanding at September 30, 2005
    
    
    703,111
    
    
    $
    8.29Granted
    
    
    325,000
    
    
    
    10.46Exercised
    
    
    (8,750
    )
    
    
    6.00Forfeited
    
    
    (64,861
    )
    
    
    9.00Outstanding at March 31, 2006
    
    
    954,500
    
    
    $
    9.00
  WeightedAverageGrant-DateNon Vested Options
    
    Options
    
    Fair ValueNon vested at September 30, 2005
    
    
    
    
    
    $
    Granted
    
    
    325,000
    
    
    $
    4.91Vested
    
    
    (37,222
    )
    
    $
    3.75Forfeited
    
    
    
    
    
    $
    Non vested at March 31, 2006
    
    
    287,778
    
    
    $
    5.06
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##### Table of Contents



EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 8. Stock Option Plan (continued)
   Options Outstanding
    
    
    Options VestedWeighted-
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrice
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$6.00-$7.00
    
    
    319,500
    
    
    
    8.41
    
    
    $
    6.32
    
    
    
    122,833
    
    
    $
    6.25$8.00-$10.00
    
    
    383,611
    
    
    
    8.83
    
    
    $
    9.92
    
    
    
    132,257
    
    
    $
    10.00703,111
    
    
    
    
    
    
    
    
    
    
    
    255,090
  Options Outstanding
    
    
    Options VestedWeighted-
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Remaining
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrice
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$6.00-$7.00
    
    
    369,500
    
    
    
    8.24
    
    
    $
    6.47
    
    
    
    163,979
    
    
    $
    6.34$8.00-$10.00
    
    
    395,000
    
    
    
    8.42
    
    
    $
    9.65
    
    
    
    157,188
    
    
    $
    9.90$11.00-$13.00
    
    
    190,000
    
    
    
    9.89
    
    
    $
    12.58
    
    
    
    20,556
    
    
    $
    11.40954,500
    
    
    
    
    
    
    
    
    
    
    
    341,723
  9. Commitments and Contingencies
 Contingencies
   12




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EAGLE TEST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
(In thousands, except share and per share data)
(Unaudited)
 9.
Commitments and Contingencies (Continued)
 Product Warranty
   Product Warranty Activity
 Six Months EndedMarch 31,2006
    
    
    2005Balance at beginning of period
    
    $
    563
    
    
    $
    1,271Warranty expenditures
    
    
    (390
    )
    
    
    (839
    )Provisions for warranty
    
    
    492
    
    
    
    352Balance at end of period
    
    $
    665
    
    
    $
    784
 13




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward Looking Statements And Projections
 This Quarterly Report on Form 10-Q contains forward looking statements. Forward looking
statements relate to future events or our future financial performance. We generally identify
forward looking statements by terminology such as may, will, should, expects, plans,
anticipates, could, intends, target, projects, contemplates, believes, estimates,
predicts, potential or continue or the negative of these terms or other similar words. These
statements are only predictions. We have based these forward looking statements largely on our
current expectations and projections about future events and financial trends that we believe may
affect our business, results of operations and financial condition. The outcome of the events
described in these forward looking statements is subject to risks, uncertainties and other factors
described in Managements Discussion and Analysis of Financial Condition and Results of
Operations, Risk Factors and elsewhere in this Quarterly Report on Form 10-Q. Accordingly, you
should not rely upon forward looking statements as predictions of future events. We cannot assure
you that the events and circumstances reflected in the forward looking statements will be achieved
or occur, and actual results could differ materially from those projected in the forward looking
statements. The forward looking statements made in this Quarterly Report on Form 10-Q relate only
to events as of the date on which the statements are made. We undertake no obligation to update any
forward looking statement to reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events.
 Overview
        14




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Critical Accounting Policies and Estimates
   Revenue Recognition.
 
    
    we have a written sales agreement;
    
    delivery has occurred or services have been rendered;
    
    the price is fixed or determinable; and
    
    collectibility is reasonably assured.
    Inventory Reserves.
  Warranty Reserves.
 15




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##### Table of Contents



Allowance for Sales Returns and Uncollectibles.
 Stock-Based Compensation.
  Results of Operations
  Three Months
    
    
    Six MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    32.6
    
    
    
    58.5
    
    
    
    32.0
    
    
    
    44.1Gross profit
    
    
    67.4
    
    
    
    41.5
    
    
    
    68.0
    
    
    
    55.9Operating expensesSelling, general and administrative
    
    
    24.4
    
    
    
    58.7
    
    
    
    26.0
    
    
    
    33.6Research and development
    
    
    8.4
    
    
    
    23.3
    
    
    
    8.8
    
    
    
    14.2Operating income (loss)
    
    
    34.6
    
    
    
    (40.5
    )
    
    
    33.2
    
    
    
    8.1Interest expense
    
    
    8.5
    
    
    
    11.3
    
    
    
    6.7
    
    
    
    6.7Increase (decrease) in value of warrants
    
    
    11.4
    
    
    
    (4.9
    )
    
    
    10.7
    
    
    
    (1.5
    )Other (income)
    
    
    (1.1
    )
    
    
    (4.8
    )
    
    
    (0.9
    )
    
    
    (2.0
    )Income (loss) before taxes
    
    
    15.8
    
    
    
    (42.1
    )
    
    
    16.7
    
    
    
    4.9Provision (benefit) for income taxes
    
    
    9.6
    
    
    
    (18.3
    )
    
    
    9.6
    
    
    
    1.4Net income (loss)
    
    
    6.2
    %
    
    
    (23.8
    )%
    
    
    7.1
    %
    
    
    3.5
    %
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedMarch 31,
    
    
    March 312006
    
    
    2005
    
    
    2006
    
    
    2005United States
    
    $
    6,835
    
    
    
    23.9
    %
    
    $
    3,926
    
    
    
    45.7
    %
    
    $
    12,599
    
    
    
    24.7
    %
    
    $
    16,357
    
    
    
    56.8
    %Malaysia
    
    
    10,300
    
    
    
    36.1
    
    
    
    1,892
    
    
    
    22.0
    
    
    
    21,240
    
    
    
    41.6
    
    
    
    *
    
    
    
    *Taiwan
    
    
    4,397
    
    
    
    15.4
    
    
    
    *
    
    
    
    *
    
    
    
    5,808
    
    
    
    11.4
    
    
    
    *
    
    
    
    *Thailand
    
    
    3,498
    
    
    
    12.2
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    *Other
    
    
    3,535
    
    
    
    12.4
    
    
    
    2,782
    
    
    
    32.3
    
    
    
    11,366
    
    
    
    22.3
    
    
    
    12,434
    
    
    
    43.2Total
    
    $
    28,565
    
    
    
    100.0
    %
    
    $
    8,600
    
    
    
    100.0
    %
    
    $
    51,013
    
    
    
    100
    %
    
    $
    28,791
    
    
    
    100
    %
 
 *
    
    Less than 10% of total revenues 16




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded
    
    
    EndedMarch 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Allegro MicroSystems, Incorporated
    
    
    *
    %
    
    
    10.0
    %
    
    
    *
    %
    
    
    *
    %National Semiconductor Corporation
    
    
    *
    
    
    
    13.1
    
    
    
    13.4
    
    
    
    12.5ON Semiconductor Corporation
    
    
    11.7
    
    
    
    *
    
    
    
    *
    
    
    
    *Texas Instruments Incorporated
    
    
    61.4
    
    
    
    36.3
    
    
    
    48.8
    
    
    
    36.7
 
 *
    
    Less than 10%. Comparison of Three and Six Months Ended March 31, 2006 and 2005
 Net Revenue.
  Gross Profit.
  Selling, General and Administrative.
  Research and Development.
 17




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##### Table of Contents



Interest Expense.
  Increase (Decrease) in Value of Warrants.
  Other (Income) and Expense.
  Provision (benefit) for Income Taxes.
  Liquidity and Capital Resources
   18




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Contractual Obligations
  Payments Due inRemainderTotal
    
    
    Of 2006
    
    
    2007-2008
    
    
    2009-2010
    
    
    ThereafterOperating lease obligations
    
    $
    14,140
    
    
    $
    1,059
    
    
    $
    3,913
    
    
    $
    3,210
    
    
    $
    5,958Capital lease obligations
    
    
    823
    
    
    
    142
    
    
    
    562
    
    
    
    119
    
    
    
    Purchase commitments(1)
    
    
    9,332
    
    
    
    9,332
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    24,295
    
    
    $
    10,533
    
    
    $
    4,475
    
    
    $
    3,329
    
    
    $
    5,958
 
 (1)
    
    The purchase commitments primarily represent the value of purchase
orders issued for raw materials and purchased services that have
been scheduled for fulfillment in the next six months. 19




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Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
 Item 4. Controls and Procedures
   20




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Part II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 We caution you that the following important factors, among others, could cause our actual
results to differ materially from those expressed in forward-looking statements made by us or on
our behalf in filings with the SEC, press releases, communications with investors and oral
statements. Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q and
in any other public statements we make may turn out to be wrong. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors
mentioned in the discussion below will be important in determining future results. Consequently,
no forward-looking statement can be guaranteed. Actual future results may vary materially. We
undertake no obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise.
 Risks Related to Our Business and Industry
 The highly cyclical nature of the semiconductor industry could adversely affect our operating
results.
   
    
    decreased customer orders, test systems shipments and revenue;
    
    decreases in backlog;
    
    decreases in the ASPs of our test systems;
    
    delays in order commitments;
    
    lower operating margins;
    
    increases in order cancellations and customer-requested shipment delays;
    
    excess production capacity;
    
    delays in collecting accounts receivable; and
    
    excessive inventory levels.
  21




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Our quarterly operating results may fluctuate significantly from period to period and this may
cause our stock price to decline.
  
    
    rapid shifts in demand for, or acceptance of, our products as a result of the
cyclical nature of the semiconductor equipment industry or otherwise, often resulting in
sharp reductions in equipment sales during industry downturns and increased equipment
sales during periods of industry recovery;
    
    the loss of a significant customer or reduced capital spending by a customer;
    
    delays, cancellations or reschedulings, or other changes in the timing or terms of product shipments;
    
    acceleration or postponement of existing customer order delivery dates;
    
    delays in acceptance of products as a result of our failure to meet customers specifications;
    
    the timing of our new product introductions, and market acceptance of our new products
and enhanced versions of our existing products;
    
    our competitors announcements of new products, services or technological innovations,
which can, among other things, render our products less competitive;
    
    competitive pressures resulting in lower ASPs for our test systems;
    
    lower gross margins in any period due to changes in our product mix or increased prices for components;
    
    our inability to quickly reduce our fixed costs or managements decision to maintain
headcount notwithstanding decreased demand for our products;
    
    disruptions in our manufacturing or in our supply of components, causing us to delay
shipment of our products; and
    
    write-offs of excess or obsolete inventory and accounts receivable that are not
collectible.
   We depend on a small number of customers for a significant portion of our sales, and the loss of
any of these customers will adversely affect our revenue.
  We face difficulty in obtaining new customers because of the high cost of switching test equipment
vendors in our markets.
  22




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Our sales cycle is long, requires significant investment, and may not result in additional sales.
  
    
    the capital expenditure budgets and capital equipment needs of our customers;
    
    the willingness and ability of customers to incur the expense of adopting new product platforms;
    
    the internal technical capabilities and sophistication of our customers;
    
    the efforts and effectiveness of our sales force; and
    
    the need for and our success in demonstrating our technical and manufacturing
capabilities to meet our customers requirements.
  We face substantial competition that, among other things, may adversely affect our sales and may
lead to price pressure.
   We rely on a few key employees and our success depends on our ability to hire and retain key
personnel.
   23




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If we fail to maintain adequate internal control over financial reporting, if we are unable to
timely complete our assessment of the effectiveness of our internal control over financial
reporting, or if our independent registered public accounting firm cannot attest to our assessment
of our internal control over financial reporting, we may be subject to regulatory sanctions and a
loss of public confidence and the trading price of our stock could be negatively impacted.
  We have grown rapidly and if we fail to manage our growth, our business will suffer.
  If we are not successful in developing new and enhanced products, we will lose market share to our
competitors and our operating results will suffer.
  
    
    successfully develop and commercialize innovative products that are differentiated from our competitors offerings;
    
    properly and quickly identify customer needs and anticipate technological advances and industry trends;
    
    quickly adjust to changing industry conditions and product announcements by competitors; and
    
    establish manufacturing processes that will enable us to build and timely deliver new
or enhanced products to specification in sufficient volumes.
  24




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Products that do not meet customer specifications or that contain defects could cause us to lose
customers and revenue.
  You should not rely on our level of backlog as an indication of our future revenues.
  We obtain some of the components and subassemblies included in our test systems from a limited
number of suppliers and subcontractors, which may result in production delays, loss of revenue or
increased costs.
  If we cannot accurately plan the production of products to meet our customers demands, we could
incur excess inventory or miss sales opportunities.
  Our manufacturing activities are conducted at a single facility, and any prolonged disruption in
the operations of that facility could have a material adverse effect on our revenue.
  25




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##### Table of Contents



We have no experience with acquiring other companies and our future efforts to do so may subject us
to significant costs without the realization of the anticipated benefits of those acquisitions.
  
    
    difficulties in integrating the products, operations or personnel of acquired companies into our business;
    
    diversion of our managements attention from our ongoing operations;
    
    additional expenses associated with amortization of acquired assets or impairment of acquired goodwill;
    
    difficulties in maintaining uniform standards, controls, procedures and policies;
    
    potential impairment of existing relationships with employees, suppliers and customers
as a result of the difficulties in integration of new management personnel; and
    
    dilution to our stockholders in the event we issue stock to finance an acquisition or
increased leverage if we incur debt to finance an acquisition.
 Economic, political and other risks associated with international sales and operations,
particularly in Asia, could adversely affect our revenue.
  
    
    economic and political instability;
    
    compliance with foreign and domestic laws and regulations;
    
    changes in foreign and domestic legal and regulatory requirements or policies
resulting in burdensome government controls, tariffs, restrictions, embargoes or export
license requirements;
    
    longer payment cycles common in foreign markets;
    
    difficulties in staffing and managing our international operations;
    
    less favorable foreign intellectual property laws making it more difficult to protect
our technology from appropriation by competitors;
    
    potentially adverse tax treatment;
    
    difficulties with distributors;
    
    difficulties collecting our accounts receivable; and
    
    natural disasters.
  26




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##### Table of Contents



We could experience a decline in international sales due to currency fluctuations.
  Risks Related to Intellectual Property
 Third parties may claim we are infringing their intellectual property rights, and we could be
prevented from selling our products or services, or suffer significant litigation or licensing
expenses, even if these claims have no merit.
 tm
 Third parties may infringe or design around our intellectual property rights, and we may expend
significant resources enforcing our rights or suffer competitive injury.
     27




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Our efforts to protect our intellectual property may be less effective in some foreign countries
where intellectual property rights are not as well protected as in the United States.
   Risks Related to the Common Stock and our Capital Structure
 There is a limited history of a trading market for our common stock, and the market price of our
common stock may be highly volatile or may decline regardless of our operating performance.
  Future sales of our shares could adversely affect the market price of our common stock.
   Our directors and certain significant stockholders exercise significant control over Eagle Test.
  Provisions in our certificate of incorporation and by-laws may deter third parties from acquiring
us.
  
    
    our board of directors is divided into three classes serving staggered three-year terms;
    
    only our board of directors may call special meetings of our stockholders;
 28




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##### Table of Contents




    
    our stockholders may take action only at a meeting of our stockholders and not by written consent;
    
    we have authorized undesignated preferred stock, the terms of which may be established
and shares of which may be issued without stockholder approval;
    
    stockholder approval of amendments of our certificate of incorporation or by-laws
require a vote of 75% of our outstanding shares;
    
    vacancies on the board of directors may be filled only by the directors;
    
    our directors may be removed only for cause by the affirmative vote of the holders of
75% of the votes that all stockholders would be entitled to cast in the election of
directors; and
    
    we require advance notice for stockholder proposals.
  Section 203 of the Delaware General Corporation Law may delay, defer or prevent a change in control
that our stockholders might consider to be in their best interests.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     29




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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
    
 Item 5. Other Information
  
 Item 6. Exhibits
  30




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SIGNATURES
  EAGLE TEST SYSTEMS, INC.Date: May 12, 2006
    By:
    /s/ Leonard A. FoxmanLeonard A. FoxmanChief Executive Officer and President 31




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EXHIBIT INDEX
  Exhibit No.
    
    Description31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Chief Executive Officer and Chief Financial Officer.
 32