SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2002
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 000-10761
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LTX CORPORATION
---------------
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2594045
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
LTX Park at University Avenue, Westwood, Massachusetts 02090
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (781) 461-1000
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check X 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 the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at February 18, 2002
----- --------------------------------
Common Stock, par value $0.05 per share 48,758,884
LTX CORPORATION
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet 1
January 31, 2002 and July 31, 2001
Consolidated Statement of Operations and Comprehensive Income 2
Three Months and Six Months Ended January 31, 2002 and January 31, 2001
Consolidated Statement of Cash Flows 3
Six Months Ended January 31, 2002 and January 31, 2001
Notes to Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis of Financial 9-16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
January 31, July 31,
2002 2001
------------------------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents $272,733 $180,109
Accounts receivable, net of allowances 8,146 25,649
Accounts receivable - other 4,523 6,938
Inventories 76,459 96,695
Prepaid expense 52,077 58,975
------ ------
Total current assets 413,938 368,366
Property and equipment, net 74,981 66,739
Deferred tax asset 62,770 33,896
Other assets 15,832 14,038
-------- ---------
Total assets $567,521 $483,039
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 12,000 $ 12,900
Current portion of long-term debt 5,945 5,293
Accounts payable 30,411 16,577
Deferred revenues and customer advances 7,521 37,840
Deferred gain on leased equipment 12,091 13,906
Accrued restructuring charges 1,121 1,713
Other accrued expenses 19,853 19,557
-------- ---------
Total current liabilities 88,942 107,786
Long-term debt, less current portion 4,241 5,984
Convertible subordinated notes 150,000 --
Stockholders' equity:
Common stock 2,573 2,557
Additional paid in capital 411,637 409,065
Other comprehensive income 267 553
Accumulated deficit (78,378) (31,145)
Less treasury stock, at cost (11,761) (11,761)
-------- ---------
Total liabilities and stockholders' equity
$567,521 $483,039
======== =========
See accompanying Notes to Consolidated Financial Statements
1
LTX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except share and per share data)
Three Months Six Months
Ended Ended
January 31, January 31,
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 27,585 $ 99,888 $ 60,588 $ 197,858
Cost of sales 23,142 51,959 46,532 103,027
Inventory related provision 42,200 -- 42,200 --
--------- --------- --------- ---------
Gross margin (37,757) 47,929 (28,144) 94,831
Engineering and product development expenses 18,107 16,649 34,645 32,688
Selling, general and administrative expenses 7,337 10,730 14,538 21,023
--------- --------- --------- ---------
Income (loss) from operations (63,201) 20,550 (77,327) 41,120
Other income (expense):
Interest expense (1,790) (307) (3,605) (669)
Interest income 1,925 2,679 4,446 5,084
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative effect
of change in accounting principle (63,066) 22,922 (76,486) 45,535
Provision (benefit) for income taxes (25,226) 6,875 (29,253) 13,658
--------- --------- --------- ---------
Income (loss) before cumulative effect of change
in accounting principle (37,840) 16,047 (47,233) 31,877
Cumulative effect of change in accounting
principle, net of applicable tax -- -- -- 9,566
--------- --------- --------- ---------
Net income (loss) $ (37,840) $ 16,047 $ (47,233) $ 22,311
========= ========= ========= =========
Net income (loss) before cumulative effect of change in
accounting principle, per share:
Basic $ (0.78) $ 0.34 $ (0.97) $ 0.67
========= ========= ========= =========
Diluted $ (0.78) $ 0.32 $ (0.97) $ 0.64
========= ========= ========= =========
Cumulative effect of change in accounting principle,
per share:
Basic $ -- $ -- $ -- $ (0.20)
========= ========= ========= =========
Diluted $ -- $ -- $ -- $ (0.19)
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.78) $ 0.34 $ (0.97) $ 0.47
========= ========= ========= =========
Diluted $ (0.78) $ 0.32 $ (0.97) $ 0.45
========= ========= ========= =========
Weighted--average common shares used in
computing net income (loss) per share:
Basic 48,507 47,626 48,458 47,612
========= ========= ========= =========
Diluted 48,507 49,656 48,458 49,957
========= ========= ========= =========
Comprehensive income:
Net income (loss) $ (37,840) $ 16,047 $ (47,237) $ 22,311
Unrealized gain (loss) on
marketable securities (525) 466 (286) 428
--------- --------- --------- ---------
Comprehensive income $ (38,365) $ 16,513 $ (47,523) $ 22,739
========= ========= ========= =========
See accompanying Notes to Consolidated Financial Statements
2
LTX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months
Ended
January 31,
2002 2001
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (47,233) $ 22,311
Add (deduct) non-cash items:
Cumulative effect of a change in accounting principle, net of tax -- 9,566
Depreciation and amortization 8,600 6,637
Charge for excess inventory 42,200 --
Translation (gain) loss (49) 186
(Increase) decrease in:
Accounts receivable 19,411 27,845
Inventories (9,507) (54,418)
Prepaid expenses (35,315) (33,422)
Deferred tax (benefit) expense (28,874) (377)
Other assets (787) 382
Increase (decrease) in:
Accounts payable 13,864 5,524
Accrued expenses and restructuring charges (216) 781
Deferred revenues and customer advances 1,061 45,719
--------- ---------
Net cash (used in) provided by operating activities (36,845) 30,734
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (16,838) (21,649)
Minority investment -- (4,000)
--------- ---------
Net cash used in investing activities (16,838) (25,649)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock plans:
Employees' stock purchase plan 1,111 946
Exercise of stock options 1,477 401
Advances of short-term notes payable 19,493 24,000
Payments of short-term notes payable (20,393) (23,725)
Proceeds from convertible subordinated notes 145,566 --
Proceeds from lease financing 1,744 --
Payments of long-term debt (2,829) (556)
--------- ---------
Net cash provided by financing activities 146,169 1,066
--------- ---------
Effect of exchange rate changes on cash 138 (78)
--------- ---------
Net increase in cash and equivalents 92,624 6,073
Cash and equivalents at beginning of period 180,109 206,973
--------- ---------
Cash and equivalents at end of period $ 272,733 $ 213,046
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ (3,951) $ (4,745)
Income taxes $ 823 $ 418
See accompanying Notes to Consolidated Financial Statements
3
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY
LTX Corporation ("LTX" or the "Company") designs, manufactures, and markets
automatic test equipment for the semiconductor industry that is used to test
system-on-a-chip, digital, analog, and mixed signal (a combination of digital
and analog) integrated circuits ("ICs"). The Company's Fusion product is a
single test platform that can be configured to test system-on-a-chip devices,
digital VLSI devices including microprocessors and microcontrollers, and
analog/mixed signal devices. The Company also sells hardware and software
support and maintenance services for its test systems. The semiconductors tested
by the Company's systems are widely used in the computer, communications,
automotive and consumer electronics industries. The Company markets its products
worldwide to manufacturers of system-on-a-chip, digital, analog and mixed signal
ICs. The Company is headquartered, and has development and manufacturing
facilities, in Westwood, Massachusetts, a development facility in San Jose,
California, and worldwide sales and service facilities to support its customer
base.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared by the Company, without
audit, and reflect all adjustments, which, in the opinion of management, are
necessary for a fair statement of the results of the interim periods presented.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of income and expenses during the reporting periods.
Certain information and footnote disclosures normally included in the annual
financial statements, which are prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly, although the
Company believes that the disclosures are adequate to make the information
presented not misleading, the financial statements should be read in conjunction
with the footnotes contained in the Company's Annual Report on 10-K.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are translated in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation". The Company's functional currency is the U.S. dollar.
Accordingly, the Company's foreign subsidiaries translate monetary assets and
liabilities at period end exchange rates while non-monetary items are translated
at historical rates. Income and expense accounts are translated at the average
rates in effect during the year, except for sales, cost of sales and
depreciation, which are primarily translated at historical rates. Net realized
and unrealized gains and losses resulting from foreign currency remeasurement
and transaction gains and losses were a loss of $49,000 and a gain of $186,000
for the six months ended January 31, 2002 and 2001, respectively. The amounts
recorded in both periods were principally due to fluctuations in the Japanese
yen that are included in the consolidated results of operations.
Revenue Recognition
The Company changed its revenue recognition policy effective August 1, 2000,
based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." The Company recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the seller's price is fixed or determinable and
collectibility is reasonably assured.
The Company derives revenues from three sources - equipment sales, spare parts
and service contracts. SAB 101 has no effect on the Company's revenue
recognition policy for spare parts or service contracts. For equipment sales
there are different revenue recognition points under SAB 101, which are
described as follows:
Acceptance: For equipment sales to a new customer, existing products with new
specifications and/or a new product, revenue is recognized upon customer
acceptance.
Shipment and acceptance: Equipment sales to existing customers, who have
purchased the same equipment with the same customer-specified provisions in the
past, are accounted for as multiple-element arrangement sales. If a portion of
the payment is linked to product acceptance and is 20% or less, the revenue is
deferred on only the percentage holdback until payment is received or written
evidence of acceptance is delivered to the Company. If the portion of the
holdback is greater than 20%, the
4
full value of the equipment is deferred until payment is received or written
evidence of acceptance is delivered to the Company.
Revenue related to spare parts is recognized on shipment. Revenue related to
maintenance and service contracts is recognized ratably over the duration of the
contracts. Service revenue totaled $7.8 million or 28.3% of net sales, for the
three months ended January 31, 2002 and $9.1 million, or 9.1% of net sales, for
the three months ended January 31, 2001. Revenue from engineering contracts are
recognized over the contract period on a percentage of completion basis.
In accordance with guidance provided in SAB 101, we recorded a non-cash charge
of $9.6 million (after reduction for income taxes of $4.1 million), or ($0.19)
per diluted share, to reflect the cumulative effect of the accounting change as
of August 1, 2000.
Prior to fiscal 2001, the revenue recognition policy was to recognize revenue at
the time the customer takes title to the product, generally at the time of
shipment. Revenue related to maintenance and service contracts was recognized
ratably over the duration of the contracts.
Engineering and Product Development Costs
The Company expenses all engineering, research and development costs as
incurred. Expenses subject to capitalization in accordance with the Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed, relating to certain software
development costs, were insignificant.
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates for the year in which the differences are
expected to be reflected in the tax return. Realization is dependent on the
generation of sufficient taxable income in future years. Although realization is
not assured, management believes it is more likely than not that the full amount
of the net deferred tax asset will be realized. However, the amount realizable
could be reduced if estimates of future taxable income are reduced. Research and
development tax credits are recognized for financial reporting purposes to the
extent that they can be used to reduce the tax provision.
Net Income (loss) per Share
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted income per share reflects the maximum
dilution that would have resulted from the assumed exercise and share repurchase
related to dilutive stock options and is computed by dividing net income by the
weighted average number of common shares and all dilutive securities
outstanding.
A reconciliation between basic and diluted earnings per share is as follows:
Three Months Ended Six Months Ended
January 31, January 31,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per share data)
Net income (loss) $(37,840) $ 16,047 $(47,233) $ 22,311
Basic EPS
Basic common shares 48,507 47,626 48,458 47,612
Basic EPS $ (0.78) $ 0.34 $ (0.97) $ 0.47
Diluted EPS
Basic common shares 48,507 47,626 48,458 47,612
Plus: Impact of stock options and warrants -- 2,030 -- 2,345
-------- -------- -------- --------
Diluted common shares 48,507 49,656 48,458 49,957
Diluted EPS $ (0.78) $ 0.32 $ (0.97) $ 0.45
The impact of the stock options was not used in the calculation of January 31,
2002 diluted EPS as the Company was in a net loss position. Options to purchase
191,600 shares and 1,310,500 shares of common stock on January 31, 2002 and
2001, respectively,
5
were outstanding but not included in the quarter end calculation of diluted net
income per share because either the options' exercise price was greater than the
average market price of the common shares during the period ended, or the effect
of including the options would have been anti-dilutive in effect.
Cash and Equivalents
The Company considers all highly liquid investments that are readily convertible
to cash and that have original maturity dates of three months or less to be cash
equivalents. Cash equivalents consist primarily of repurchase agreements,
commercial paper and available for sale investments. In accordance with the
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, investments in debt securities are
classified as trading, available-for-sale or held-to-maturity. Investments are
classified as held-to-maturity when the Company has the positive intent and
ability to hold those securities to maturity. Held-to-maturity securities are
stated at amortized cost with premiums and discounts amortized to interest
income over the life of the investment. The Company has no investments that are
classified as held-to-maturity.
The fair market value of cash equivalents and short-term investments is
substantially equal to the amortized cost, due to the short period of time to
maturity, which is less than one year. The company did recognize other
comprehensive income (loss) of $(525,000) and $466,000 for the three months
ended January 31, 2002 and 2001, respectively, for unrealized gain (loss) from
available for sale securities.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
include materials, labor and manufacturing overhead. Inventories consisted of
the following at:
January 31, July 31,
2002 2001
-------------------------
(in thousands)
Raw materials $41,166 $48,602
Work-in-progress 23,477 33,986
Finished goods 11,816 14,107
------- -------
$76,459 $96,695
======= =======
Prepaid Expense
Certain amounts in the prepaid expense balance relate to inventory capacity
purchases and payments for projects not completed. The completion of these
projects along with the receipt of inventory is expected to occur during fiscal
2002 and 2003. As of January 31, 2002, amounts related for payments for projects
are refundable.
The Company has suppliers who are also customers of LTX. In its fiscal year
2001, the Company entered into purchase agreements with certain suppliers to
secure a supply of custom integrated circuits and printed circuit boards in
order to ensure an uninterrupted flow of materials during the Company's
transition to an outsource manufacturing model. The Company has certain
agreements and the right to offset its inventory related deposits at suppliers
against advances from the same suppliers for LTX supplied product and services.
Prepaid expenses for inventory purchases were reduced and offset by customer
advances for LTX products and services in an amount of $31.7 million as of
January 31, 2002.
Property and Equipment
Property and equipment is recorded at cost. The Company provides for
depreciation and amortization on the straight-line method. Charges are made to
operating expenses in amounts that are sufficient to amortize the cost of the
assets over their estimated useful lives. Property and equipment are summarized
as follows:
January 31, July 31, Depreciable
2002 2001 Life in Years
------------------------------------------------------
(in thousands)
Machinery and equipment $106,469 $138,278 3-7
Office furniture and equipment 61,210 16,036 3-7
6
Leasehold improvement 13,875 13,861 shorter of
-------- -------
181,554 168,175 10 or term of lease
Less: Accumulated depreciation and amortization (106,573) (101,436)
--------- ---------
$74,981 $66,739
======= =======
Deferred Gain on Leased Equipment
The deferred gain from the sale and lease back of equipment is recognized
ratably over the term of the lease.
Reclassifications
Prior year financial statements have been reclassified to conform to the fiscal
2002 presentation. The reclassification had no impact on earnings for the prior
period.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An interpretation of APB Opinion No. 25 ("FIN 44")". FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN44 did not have a material impact on our financial position or
results of operations.
The Securities and Exchange Commission ("SEC") released Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," on
December 3, 1999. On June 26, 2000 the SEC staff announced that they are
delaying the required implementation date for SAB No. 101 with the issuance of
SAB No. 101B. The SAB provides additional guidance on the accounting for revenue
recognition, including both broad conceptual discussions as well as certain
industry-specific guidance. The new guidance concerns the timing of revenue
recognition for sales that involve contractual customer acceptance provisions
and installation of the product if these events occur after shipment and
transfer of title. The Company's previous revenue recognition policy was to
recognize revenue at the time the customer takes title to the product, generally
at the time of shipment.
As a result of SAB 101, the Company changed its method of accounting for revenue
recognition. The Company reported this change in accounting principle in
accordance with APB Opinion No. 20, "Accounting Changes", by a cumulative effect
adjustment. This change was adopted in the fourth quarter of fiscal year ending
July 31, 2001. No cumulative effect of the change is included in net income in
the fourth quarter of July 31, 2001. Instead, APB 20 requires that the change be
made as of the beginning of the fiscal year (August 1, 2000) and that financial
information for interim periods reported prior to the change, in this case the
first three quarters of fiscal 2001, be restated by applying SAB 101 to those
periods.
In accordance with guidance provided in SAB 101, we recorded a non-cash charge
of $9.6 million (after reduction for income taxes of $4.1 million), or ($0.19)
per diluted share, to reflect the cumulative effect of the accounting change as
of the beginning of the fiscal year.
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and Statement of Financial Accounting Standards No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 as well as all purchase method business combinations completed after
June 30, 2001. SFAS 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually.
SFAS 141 is effective immediately, except with regard to business combinations
initiated prior to July 1, 2001 and SFAS 142 is effective January 1, 2002.
Furthermore, any goodwill and intangible assets determined to have indefinite
useful lives that are acquired in a purchase business combination completed
after June 30, 2001 will not be amortized. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will continue to
be amortized until the adoption of SFAS 142.
SFAS 141 will require upon adoption of SFAS 142 that goodwill acquired in a
prior purchase business combination be evaluated and any necessary
reclassifications be made in order to conform to the new criteria in SFAS 141
for recognition apart from goodwill. Any impairment loss will be measured as of
the date of the adoption and recognized as a cumulative effect of a change in
accounting principles in the first interim period. The Company does not expect
that the adoption of these statements will result in any material impact on
financial statements at this time.
7
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 with early
adoption permitted. Management is currently assessing the impact of SFAS No 143
and has not yet determined the impact, if any, on the Company's consolidated
financial statements.
In October 2001, the FASB issued SFAS No. 144 ("SFAS No. 144"), "Accounting for
the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
asset and does not apply to goodwill or intangible assets that are not being
amortized and certain other long-lived assets. This Statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions
of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", for the disposal of a segment
of a business (as previously defined in that Opinion). This Statement also
amends APB No. 51, "Consolidated Financial Statements", to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 with early adoption encouraged.
3. SEGMENT REPORTING
The Company operates predominantly in one industry segment: the design,
manufacture and marketing of automated test equipment for the semiconductor
industry that is used to test system-on-a-chip, digital, analog and mixed signal
(a combination of digital and analog) integrated circuits.
The Company's net sales for the six months ended January 31, 2002 and 2001,
along with the long-lived assets at January 31, 2002 and July 31, 2001, are
summarized as follows:
Three Months Six Months
Ended Ended
January 31, January 31,
----------- -----------
(in thousands)
--------------
2002 2001 2002 2001
---- ---- ---- ----
Sales to unaffiliated customers:
United States $ 15,291 $ 41,885 $ 35,876 $ 89,919
Singapore 5,403 28,678 11,204 50,101
Taiwan 653 11,365 1,403 27,881
Japan 4,164 7,751 4,558 11,164
All other countries 2,074 10,209 7,547 18,793
-------- -------- -------- --------
Total sales to unaffiliated customers $ 27,585 $ 99,888 $ 60,588 $197,858
======== ======== ======== ========
January 31, July 31,
2002 2001
------------------------------------
(in thousands)
Long-lived Assets:
United States $ 54,703 $ 51,131
Singapore 9,570 6,968
Taiwan 3,933 2,878
Japan 48 53
All other countries 6,727 5,709
-------- --------
Total long-lived assets $ 74,981 $ 66,739
======== ========
8
4. CONVERTIBLE SUBORDINATED NOTES
On August 8, 2001, the Company received net proceeds of $145.5 million from a
private placement of 4.25% Convertible Subordinated Notes due 2006. The private
placement was effected through a Rule 144A offering to qualified institutional
buyers.
These Notes are convertible into LTX common stock at a conversion price equal to
$29.04 per share, subject to adjustment in certain circumstances. The Notes were
issued at 100% of the principal amount. The Notes are redeemable by the Company
any time after August 20, 2004 at specified prices, and are redeemable prior to
August 20, 2004 if certain conditions are satisfied. LTX has filed a
registration statement for the resale of the Notes and the shares of common
stock issuable upon conversion of the Notes. The Registration Statement was
declared effective by the SEC on December 21, 2001.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth for the periods indicated the principal items
included in the Consolidated Statement of Operations as percentages of net
sales.
Percentage of Net Sales
Three Months Six Months
Ended Ended
January 31, January 31,
----------- -----------
2002 2001 2002 2001
------- ------- ------- -------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.9 52.0 76.8 52.1
Inventory related provision 153.0 0.0 69.7 0.0
------- ------- ------- -------
Gross margin (136.9) 48.0 (46.5) 47.9
Engineering and product development expenses 65.6 16.7 57.2 16.5
Selling, general and administrative expenses 26.6 10.7 23.9 10.6
------- ------- ------- -------
Income (loss) from operations (229.1) 20.6 (127.6) 20.8
Other income (expense):
Interest expense (6.5) (0.3) (6.0) (0.3)
Interest income 7.0 2.7 7.3 2.5
------- ------- ------- -------
Income (loss) before income taxes and cumulative effect
of change in accounting principle (228.6) 23.0 (126.3) 23.0
Provision (benefit) for income taxes (91.4) 6.9 (48.3) 6.9
------- ------- ------- -------
Income (loss) before cumulative effect of change
in accounting principle (137.2) 16.1 (78.0) 16.1
Cumulative effect of change in accounting
principle, net of applicable tax 0.0 0.0 0.0 4.8
------- ------- ------- -------
Net income (loss) (137.2)% 16.1% (78.0)% 11.3%
======= ======= ======= =======
The discussion below contains certain forward-looking statements relating to,
among other things, estimates of economic and industry conditions, sales trends,
expense levels and capital expenditures. Actual results may vary from those
contained in such forward-looking statements. See "Business Risks" below.
Results of Operations
Three Months and Six Months Ended January 31, 2002 Compared to the Three Months
and Six Months Ended January 31, 2001.
Net sales for the three months ended January 31, 2002 decreased 72.4% to $27.6
million as compared to $99.9 million in the
9
same quarter of the prior year. For the six months ended January 31, 2002, net
sales were $60.6 million as compared to $197.9 million for the same period of
the prior year, a decrease of 69.4%. The decrease in revenue is primarily a
result of the sharp decline in industry conditions. The $27.6 million of net
sales in the three months ended January 31, 2002 resulted primarily from the
increased investment in the Fusion test platform by one of our customers
preparing to ramp new technology. Service revenue accounted for $7.8 million, or
28.3% of net sales, and $9.1 million, or 9.1% of net sales, for the three months
ended January 31, 2002 and 2001, respectively, and $16.8 million, or 27.7% of
net sales and $16.5 million, or 8.3% of net sales for the six months ended
January 31, 2002 and 2001, respectively. Geographically, sales to customers
outside of the United States were 44.6% and 58.1% of net sales in the three
months ended January 31, 2002 and 2001, respectively, and 40.8% and 45.4% for
the six months ended January 31, 2002 and 2001, respectively.
We regularly evaluate our inventory levels to determine if levels are
appropriate given our expectations regarding industry conditions, as well as new
product introductions. Based on our most current evaluation, we determined that
an adjustment was appropriate and, therefore, recorded a $42.2 million inventory
related provision in January 31, 2002. Of the $42.2 million, $38.7 million of
the provision relates to excess inventory principally due to the sharp decline
in semiconductor test system orders. The remaining $3.5 million relates to
Delta/STE inventory that was previously transferred to our third party reseller
of Delta/STE products.
The gross margin was $(37.8) million, or (136.9)% of net sales in the three
months ended January 31, 2002, as compared to $47.9 million, or 48.0% of net
sales, in the same quarter of the prior year. For the six months ended January
31, 2002, the gross margin was $(28.1) million, or (46.5)% of net sales, as
compared to $94.8 million, or 47.9% for the same period in the prior year.
Before the inventory related provision, the gross margin was $4.4 million, or
16.1% of net sales, for the three months ended January 31, 2002 and $(14.1)
million, or (23.2)% of net sales for the six months ended January 31, 2002. The
decrease was primarily the result of a lower level of sales relative to fixed
manufacturing costs.
Engineering and product development expenses were $18.1 million, or 65.6% of net
sales, in the three months ended January 31, 2002, as compared to $16.6 million,
or 16.7% of net sales, in the same quarter of the prior year. For the six months
ended January 31, 2002, engineering and product development expenses were $34.6
million, or 57.2% of net sales, as compared to $32.7 million, or 16.5% of net
sales for the same period in the prior year. The increase in expenditure is
principally a result of a higher level of development expenses and key account
support costs related to growth of the Company's Fusion product line.
Selling, general and administrative expenses were $7.3 million, or 26.6% of net
sales, in the three months ended January 31, 2002, as compared to $10.7 million,
or 10.7% of net sales, in the same quarter of the prior year. For the six months
ended January 31, 2002, selling, general and administrative expenses were $14.5
million, or 23.9% of net sales, as compared to $21.0 million, or 10.6% of net
sales, for the same period in the prior year. The decrease in the selling,
general and administrative expenses is related to the reduction in certain
variable costs resulting from the decrease in sales and expense reduction
initiatives.
Interest expense was $1.8 million and $0.3 million for the three months ended
January 31, 2002 and 2001, respectively. For the six months ended January 31,
2002, interest expense was $3.6 million as compared to $0.7 million for the same
period of the prior year. The increase in expense is a result of accruing
interest expense for the convertible subordinated notes bearing interest at the
rate of 4.25%.
Interest income was $1.9 million and $2.7 million for the three months ended
January 31, 2002 and 2001, respectively. For the six months ended January 31,
2002, interest income was $4.4 million as compared to $5.1 million for the same
period of the prior year. Although the Company's cash balance was higher for the
quarter ended January 31, 2002 than for the quarter ended January 31, 2001,
interest rates declined over the prior year causing interest income to decline.
The Company had a tax benefit of $25.2 million for the three months ended
January 31, 2002 as compared to a tax provision of $6.9 million, in the same
quarter of the prior year. For the six months ended January 31, 2002, the
Company had a tax benefit of $29.3 million as compared to a tax provision of
$13.7 million for the same period of the prior year. Realization of the net
deferred tax assets is dependent on our ability to generate future taxable
income. Management believes that it is more likely than not that the assets will
be realized. However, there can be no assurance that we will meet our
expectations of future income. The Company's assumed tax rate was 40.0% for
January 31, 2002 and its effective tax rate was 30% for January 31, 2001. The
effective tax rate in January 31, 2001 differs from the statutory income tax
rate primarily due to the generation of tax credits and state taxes.
Cumulative effect of change in accounting principle was $9.6 million, or 4.8% of
net sales for the six months ended January 31, 2001, was recognized relating to
the cumulative effect of an accounting change as related to SAB 101 which is
described further in "Recent Accounting Pronouncements" above.
10
Net loss was $37.8 million, or $0.78 per diluted share, in the three months
ended January 31, 2002, as compared with net profit of $16.0 million, or $0.32
per diluted share, in the same quarter in the prior year. The Company had net
loss of $47.2 million, or $0.97 per diluted share, in the six months ended
January 31, 2002, as compared to net income of $22.3 million, or $0.45 per
diluted share, for the same period in the prior year. Before the inventory
related provision, net loss was $12.5 million, or $0.26 per diluted share, in
the three months ended January 31, 2002 and net loss was $21.9 million, or $0.45
per diluted share, in the six months ended January 31, 2002.
Management believes that the Company's financial results will continue to
reflect the slow semiconductor equipment industry conditions for the near term.
Until there is a substantial improvement in industry conditions, the sluggish
industry conditions will continue to adversely affect the Company's results of
operations. The Company's results of operations would be further adversely
affected if it were to experience lower than anticipated order levels,
cancellations of orders in backlog, extended customer delivery requirements or
lower than anticipated margins due to unfavorable equipment mix. The Company has
taken steps to reduce variable costs and discretionary spending.
Liquidity and Capital Resources
At January 31, 2002, the Company had $272.7 million in cash and equivalents and
working capital of $325.0 million, as compared to $180.1 million of cash and
equivalents and $260.6 million of working capital at July 31, 2001. The increase
in the cash balance is primarily a result of proceeds received from an offering
of convertible subordinated notes which was offset by cash used in operating
activities and capital purchases.
Accounts receivable from trade customers decreased by $17.5 million to $8.1
million at January 31, 2002, as compared to $25.6 million at July 31, 2001. The
principal reason for the decrease is a result of cash collecting activities
along with lower sales.
Inventories decreased by $20.2 million to $76.5 million at January 31, 2002 as
compared to $96.7 million at July 31, 2001. The decrease is primarily as a
result of an inventory related provision of $42.2 million due to a severe drop
in demand for semiconductor test equipment offset by additions to inventory to
support current production and next generation product development.
Deferred revenues and customer advances decreased $30.3 million to $7.5 million
at January 31, 2002 as compared to $37.8 million at July 31, 2001. The reason
for the decrease is that the Company has certain agreements and the right to
offset its inventory related deposits at suppliers against advances from the
same suppliers for LTX product and services. At January 31, 2002, this offset
amounted to $31.7 million. Prepaid expense decreased by $6.9 million to $52.1
million at January 31, 2002 as compared to $59.0 million at July 31, 2001. The
decrease is attributed to the receipts of inventory against the prepayments.
Inventory related deposits were $39.7 million as of January 31, 2002 and $44.0
million as of July 31, 2001.
Capital expenditures totaled $8.7 million for the three months ended January 31,
2002 as compared to $5.2 million for the three months ended January 31, 2001.
The principal reason for the increase relates to the addition of application
development equipment supporting the growth of the Fusion product line.
Deferred tax asset increased by $28.9 million to $62.8 million at January 31,
2002 as compared to $33.9 million at July 31, 2001. The increase is attributed
to the recording of certain deferred tax assets. During the quarter, the Company
reclassified its deferred tax asset from a short term to a long term asset on
its balance sheet since industry conditions have made it difficult to project
short term realization of this asset. Other assets increased by $1.8 million to
$15.8 million at January 31, 2002 as compared to $14.0 million at July 31, 2001.
The increase is related to the costs to be amortized associated with the
convertible subordinated notes.
The Company has a domestic credit facility of $15.0 million, which is secured by
all assets and bears interest at the bank's prime rate. Borrowing availability
under this facility is based on a formula of eligible domestic and foreign
accounts receivable. Outstanding borrowings at January 31, 2002 were $12.0
million and $12.9 million at July 31, 2001 under this credit facility and the
interest rate was 4.75% and 6.75%, respectively. This facility expires on March
31, 2002. The Company is negotiating with the lender to extend this facility. A
second credit facility with another lender was established on April 30, 2001 as
a revolving credit line for $30.0 million. This facility is secured by cash and
bears interest (at our option) at either: (i) the greater of the federal funds
rate plus 0.5% or the bank's prime rate, in each case, minus 1.0% or (ii) LIBOR
plus 0.4%. The Company's objective in maintaining these variable rate borrowings
is the flexibility obtained regarding early repayment without penalties and
lower overall cost as compared with fixed-rate borrowings.
On August 8, 2001, the Company received net proceeds of $145.5 million from a
private placement of 4.25% Convertible Subordinated Notes due 2006. The private
placement was effected through a Rule 144A offering to qualified institutional
buyers.
11
The Company anticipates that cash from operations combined with available cash
balance and credit facilities will be adequate to fund our currently proposed
operating activities for the next twelve months.
BUSINESS RISKS
This report includes or incorporates forward-looking statements that involve
substantial risks and uncertainties and fall within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. You can identify these forward-looking statements by our use of the words
"believes," "anticipates," "plans," "expects," "may," "will," "would, "intends,"
"estimates," and similar expressions, whether in the negative or affirmative. We
cannot guarantee that we actually will achieve these plans, intentions or
expectations. Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking statements we make.
We have included important factors in the cautionary statements, particularly
under the heading "Business Risks," which we believe could cause our actual
results to differ materially from the forward-looking statements that we make.
We do not assume any obligation to update any forward-looking statement we make.
Our sole market is the highly cyclical semiconductor industry, which causes a
cyclical impact on our financial results.
We sell capital equipment to companies that design, manufacture, assemble, and
test semiconductor devices. The semiconductor industry is highly cyclical,
causing in turn a cyclical impact on our financial results. Our recent operating
results have been negatively impacted by an industry-wide slowdown in the
semiconductor industry which began to impact us in the latter half of the second
quarter of fiscal 2001. Any failure to expand in cycle upturns to meet customer
demand and delivery requirements or contract in cycle downturns at a pace
consistent with cycles in the industry could have an adverse effect on our
business.
Any significant downturn in the markets for our customers' semiconductor devices
or in general economic conditions would likely result in a reduction in demand
for our products and would hurt our business. Our revenue and operating results
are currently being negatively impacted by a sudden and severe downturn that the
semiconductor industry is currently experiencing. Downturns in the semiconductor
test equipment industry have been characterized by diminished product demand,
excess production capacity, inventory obsolescence and accelerated erosion of
selling prices. We believe the markets for newer generations of devices,
including system-on-a-chip ("SOC"), will also experience similar
characteristics. Our market is also characterized by rapid technological change
and changes in customer demand. We have significant investments in on hand
inventory and prepaid inventory at suppliers. We cannot assure you that obsolete
or excess inventories or other asset impairment, which may result from changes
in our market, will not materially and adversely affect us. In the past, we have
experienced delays in commitments, delays in collecting accounts receivable and
significant declines in demand for our products during these downturns, and we
cannot be certain that we will be able to maintain or exceed our current level
of sales.
Additionally, as a capital equipment provider, our revenue is driven by the
capital expenditure budgets and spending patterns of our customers who often
delay or accelerate purchases in reaction to variations in their businesses.
Because a high proportion of our costs are fixed, we are limited in our ability
to reduce expenses quickly in response to revenue shortfalls. In a contraction,
we may not be able to reduce our significant fixed costs, such as continued
investment in research and development and capital equipment requirements.
Our sales and operating results have fluctuated significantly from period to
period, including from one quarter to another, and they may continue to do so.
Our quarterly and annual operating results are affected by a wide variety of
factors that could adversely affect sales or profitability or lead to
significant variability in our operating results or our stock price. This may be
caused by a combination of factors, including the following:
. sales of a limited number of test systems account for a substantial portion
of our net sales in any particular fiscal quarter, and a small number of
transactions could therefore have a significant impact;
. our revenues and orders are highly concentrated in a small number of
customers, and the loss of a single major customer, or delays or
cancellations from a single major customer, could therefore have a
significant impact;
. order cancellations by customers;
12
. lower gross margins in any particular period due to changes in:
. our product mix,
. the configurations of test systems sold, or
. the customers to whom we sell these systems;
. the high selling prices of our test systems (which typically result in a
long selling process); and
. changes in the timing of product orders due to:
. unexpected delays in the introduction of products by our customers,
. shorter than expected lifecycles of our customers' semiconductor
devices, or
. uncertain market acceptance of products developed by our customers.
We cannot predict the impact of these and other factors on our sales and
operating results in any future period. Results of operations in any period,
therefore, should not be considered indicative of the results to be expected for
any future period. Because of this difficulty in predicting future performance,
our operating results may fall below expectations of securities analysts or
investors in some future quarter or quarters. Our failure to meet these
expectations would likely adversely affect the market price of our common stock.
A substantial amount of the shipments of our test systems for a particular
quarter occur late in the quarter. Our shipment pattern exposes us to
significant risks in the event of problems during the complex process of final
integration, test and acceptance prior to shipment. If we were to experience
problems of this type late in our quarter, shipments could be delayed and our
operating results could fall below expectations.
The market for semiconductor test equipment is highly concentrated, and we have
limited opportunities to sell our products.
The semiconductor industry is highly concentrated, and a small number of
semiconductor device manufacturers and contract assemblers account for a
substantial portion of the purchases of semiconductor test equipment generally,
including our test equipment. Sales to our ten largest customers accounted for
88.2% of revenues for the six months ended in January 31, 2002 and 90.3% in the
same six months for the prior year. Our customers may cancel orders with few or
no penalties. If a major customer reduces orders for any reason, our revenues,
operating results, and financial condition will be hurt. In addition, our
ability to increase our sales will depend in part upon our ability to obtain
orders from new customers. Semiconductor manufacturers select a particular
vendor's test system for testing the manufacturer's new generations of devices
and make substantial investments to develop related test program software and
interfaces. Once a manufacturer has selected one test system vendor for a
generation of devices, that manufacturer is more likely to purchase test systems
from that vendor for that generation of devices, and, possibly, subsequent
generations of devices as well.
We may not be able to deliver custom hardware options and software applications
to satisfy specific customer needs in a timely manner.
We must develop and deliver hardware and software to meet our customers'
specific test requirements. Our test equipment may fail to meet our customers'
technical or cost requirements and may be replaced by competitive equipment or
an alternative technology solution. Our inability to provide a test system that
meets requested performance criteria when required by a device manufacturer
would severely damage our reputation with that customer. This loss of reputation
may make it substantially more difficult for us to sell test systems to that
manufacturer for a number of years. We have, in the past, experienced delays in
introducing some of our products and enhancements.
Our dependence on international sales and non-U.S. suppliers involves
significant risk.
International sales have constituted a significant portion of our revenues in
recent years, and we expect that this composition will continue. International
sales accounted for 40.8% of our revenues for the six months ended January 31,
2002 and 45.4% of our revenues for the six months ended January 31, 2001. In
addition, we rely on non-U.S. suppliers for several components of the equipment
we sell. As a result, a major part of our revenues and the ability to
manufacture our products are subject to the risks associated with international
commerce. A reduction in revenues or a disruption or increase in the cost of our
manufacturing materials could hurt our operating results. These international
relationships make us particularly sensitive to changes in the countries from
which we derive sales and obtain supplies. International sales and our
relationships with suppliers may be hurt by many factors, including:
13
. changes in law or policy resulting in burdensome government controls,
tariffs, restrictions, embargoes or export license requirements;
. political and economic instability in our target international
markets;
. longer payment cycles common in foreign markets;
. difficulties of staffing and managing our international operations;
. less favorable foreign intellectual property laws making it harder to
protect our technology from appropriation by competitors; and
. difficulties collecting our accounts receivable because of the
distance and different legal rules.
In the past, we have incurred expenses to meet new regulatory requirements in
Europe, experienced periodic difficulties in obtaining timely payment from
non-U.S. customers, and been affected by the recession in several Asian
countries. Our foreign sales are typically invoiced and collected in U.S.
dollars. A strengthening in the dollar relative to the currencies of those
countries where we do business would increase the prices of our products as
stated in those currencies and could hurt our sales in those countries.
Significant fluctuations in the exchange rates between the U.S. dollar and
foreign currencies could cause us to lower our prices and thus reduce our
profitability. These fluctuations could also cause prospective customers to push
out or delay orders because of the increased relative cost of our products. In
the past, there have been significant fluctuations in the exchange rates between
the dollar and the currencies of countries in which we do business.
Our future rate of growth is highly dependent on the growth of the SOC market.
In 1996, we refocused our business strategy on the development of our Fusion HF
product, which is primarily targeted towards addressing the needs of the SOC
market. If the SOC market fails to grow as we expect, our ability to sell our
Fusion HF product will be hampered.
Our market is highly competitive, and we have limited resources to compete.
The test equipment industry is highly competitive in all areas of the world.
Many other domestic and foreign companies participate in the markets for each of
our products, and the industry is highly competitive. Our principal competitors
in the market for semiconductor test equipment are Agilent Technologies,
Credence Systems, Schlumberger Limited, and Teradyne. Most of these major
competitors have substantially greater financial resources and more extensive
engineering, manufacturing, marketing, and customer support capabilities.
We expect our competitors to enhance their current products and to introduce new
products with comparable or better price and performance. The introduction of
competing products could hurt sales of our current and future products. In
addition, new competitors, including semiconductor manufacturers themselves, may
offer new testing technologies, which may in turn reduce the value of our
product lines. Increased competition could lead to intensified price-based
competition, which would hurt our business and results of operations. Unless we
are able to invest significant financial resources in developing products and
maintaining customer support centers worldwide, we may not be able to compete.
Development of our products requires significant lead-time, and we may fail to
correctly anticipate the technical needs of our customers.
Our customers make decisions regarding purchases of our test equipment while
their devices are still in development. Our test systems are used by our
customers to develop, test and manufacture their new devices. We therefore must
anticipate industry trends and develop products in advance of the
commercialization of our customers' devices, requiring us to make significant
capital investments to develop new test equipment for our customers well before
their devices are introduced. If our customers fail to introduce their devices
in a timely manner or the market does not accept their devices, we may not
recover our capital investment through sales in significant volume. In addition,
even if we are able to successfully develop enhancements or new generations of
our products, these enhancements or new generations of products may not generate
revenue in excess of the costs of development, and they may be quickly rendered
obsolete by changing customer preferences or the introduction of products
embodying new technologies or features by our competitors. Furthermore, if we
were to make announcements of product delays, or if our competitors were to make
announcements of new test systems, these announcements could cause our customers
to defer
14
or forego purchases of our existing test systems, which would also hurt our
business.
Our success depends on attracting and retaining key personnel.
Our success will depend on our ability to attract and retain highly qualified
managers and technical personnel. Competition for such specialized personnel is
intense, and it may become more difficult for us to hire or retain them. Our
volatile business cycles only aggravate this problem. Any significant layoffs in
an industry downturn could make it more difficult for us to hire or retain
qualified personnel.
Our dependence on subcontractors and sole source suppliers may prevent us from
delivering an acceptable product on a timely basis.
We rely on subcontractors to manufacture many of the components and
subassemblies for our products, and we rely on sole source suppliers for certain
components. We may be required to qualify new or additional subcontractors and
suppliers due to capacity constraints, competitive or quality concerns or other
risks that may arise, including a result of a change in control of, or a
deterioration in the financial condition of, a supplier or subcontractor. The
process of qualifying subcontractors and suppliers is a lengthy process. Our
reliance on subcontractors gives us less control over the manufacturing process
and exposes us to significant risks, especially inadequate capacity, late
delivery, substandard quality, and high costs. In addition, the manufacture of
certain of these components and subassemblies is an extremely complex process.
If a supplier became unable to provide parts in the volumes needed or at an
acceptable price, we would have to identify and qualify acceptable replacements
from alternative sources of supply, or manufacture such components internally.
The process of qualifying subcontractors and suppliers is a lengthy process. We
are dependent on two semiconductor device manufacturers, Vitesse Semiconductor
and Maxtech Components. Each is a sole source supplier of components
manufactured in accordance with our proprietary design and specifications. We
have no written supply agreements with these sole source suppliers and purchase
our custom components through individual purchase orders. Vitesse Semiconductor
is also a Fusion customer.
We will depend on Jabil Circuit to produce and test our family of Fusion
products, and any failures or other problems at or with Jabil could cause us to
lose customers and revenues.
We have selected Jabil Circuit, Inc. to manufacture our Fusion HF test systems.
We are in the process of negotiating the definitive terms and conditions of this
arrangement and upon reaching a final binding agreement, we will transfer all of
our assembly, system integration and testing operations to Jabil. If we are
unable to finalize the terms of this arrangement, or if, after the execution of
a final agreement, Jabil cannot provide us with these products and services in a
timely fashion, or at all, whether due to labor shortage, slow down or stoppage,
deteriorating financial or business conditions or any other reason, we would not
be able, at least temporarily, to sell or ship our Fusion family of products to
our customers. We also may be unable to engage alternative production and
testing services on a timely basis or upon terms favorable to us, if at all.
We have begun the transition of our assembly, system integration and testing
operations of the Fusion products to Jabil. We may encounter unforeseen expenses
as well as difficulties in transferring these responsibilities to Jabil due to
technology and personnel compatibility. We cannot assure you that this
relationship with Jabil will result in a reduction of our fixed expenses.
Worldwide economic conditions in Asia may hurt our sales.
The semiconductor industry has been negatively impacted by the slowdown and
instability in worldwide economies, including the United States and Asia. We
cannot predict if or when these worldwide economics will rebound or whether the
semiconductor industry will rebound if and when the worldwide economies begin to
upturn. The slowdown and instability may continue or worsen, which could have a
material adverse impact on our financial position and results of operations.
We may not be able to protect our intellectual property rights.
Our success depends in part on our ability to obtain intellectual property
rights and licenses and to preserve other intellectual property rights covering
our products and development and testing tools. To that end, we have obtained
certain domestic patents and may continue to seek patents on our inventions when
appropriate. We have also obtained certain trademark registrations. To date, we
have not sought patent protection in any countries other than the United States,
which may impair our ability to protect our intellectual property in foreign
jurisdictions. The process of seeking intellectual property protection can be
time consuming and expensive. We cannot ensure that:
. patents will issue from currently pending or future applications;
. our existing patents or any new patents will be sufficient in scope or
strength to provide meaningful protection or any
15
commercial advantage to us;
. foreign intellectual property laws will protect our intellectual
property rights; or
. others will not independently develop similar products, duplicate our
products or design around our technology.
If we do not successfully enforce our intellectual property rights, our
competitive position could suffer, which could harm our operating results. We
also rely on trade secrets, proprietary know-how and confidentiality provisions
in agreements with employees and consultants to protect our intellectual
property. Other parties may not comply with the terms of their agreements with
us, and we may not be able to adequately enforce our rights against these
people.
Third parties may claim we are infringing their intellectual property, and we
could suffer significant litigation costs, licensing expenses or be prevented
from selling our products.
Intellectual property rights are uncertain and involve complex legal and factual
questions. We may be unknowingly infringing on the intellectual property rights
of others and may be liable for that infringement, which could result in
significant liability for us. If we do infringe the intellectual property rights
of others, we could be forced to either seek a license to intellectual property
rights of others or alter our products so that they no longer infringe the
intellectual property rights of others. A license could be very expensive to
obtain or may not be available at all. Similarly, changing our products or
processes to avoid infringing the rights of others may be costly or impractical.
We are responsible for any patent litigation costs. If we were to become
involved in a dispute regarding intellectual property, whether ours or that of
another company, we may have to participate in legal proceedings. These types of
proceedings may be costly and time consuming for us, even if we eventually
prevail. If we do not prevail, we might be forced to pay significant damages,
obtain licenses, modify our products or processes, stop making products or stop
using processes.
Our stock price is volatile.
In the twelve month period ending on January 31, 2002, the closing price of our
stock price has ranged from a low of $10.36 to a high of $32.15. The price of
our common stock has been and likely will continue to be subject to wide
fluctuations in response to a number of events and factors, such as:
. quarterly variations in operating results;
. variances of our quarterly results of operations from securities
analyst estimates;
. changes in financial estimates and recommendations by securities
analysts;
. announcements of technological innovations, new products, or strategic
alliances; and
. news reports relating to trends in our markets.
In addition, the stock market in general, and the market prices for
semiconductor-related companies in particular, have experienced significant
price and volume fluctuations that often have been unrelated to the operating
performance of the companies affected by these fluctuations. These broad market
fluctuations may adversely affect the market price of our common stock,
regardless of our operating performance.
Quantitative and Qualitative Disclosures About Market Risk
Financial instruments that potentially subject us to concentrations of
credit-risk consist principally of investments in cash equivalents, short-term
investments and trade receivables. We place our investments with high-quality
financial institutions, limit the amount of credit exposure to any one
institution and have established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity.
Our primary exposures to market risks include fluctuations in interest rates on
our short-term and long-term debt of approximately $172.2 million as of January
31, 2002 and $24.2 million as of July 31, 2001, and in foreign currency exchange
rates. We do not use derivative financial instruments. We are subject to
interest rate risk on our short-term borrowings under our credit facilities. Our
short-term bank debt bears interest at prime. Long term debt interest rates are
fixed for the term of the notes.
16
Foreign Exchange Risk
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically also reflect economic
growth, inflation, interest rates, government actions and other factors. We
transact business in various foreign currencies and, accordingly, we are subject
to exposure from adverse movements in foreign currency exchange rates. As
currency exchange rates fluctuate, translation of the statements of operations
of our international businesses into U.S. dollars may affect year-over-year
comparability and could cause us to adjust our financing and operating
strategies. To date, the effect of changes in foreign currency exchange rates on
revenues and operating expenses have not been material. Substantially all of our
revenues are invoiced and collected in U.S. dollars. Our trade receivables
result primarily from sales to semiconductor manufacturers located in North
America, Japan, the Pacific Rim and Europe. In the six months ended January 31,
2002, our revenues derived from shipments outside the United States constituted
40.8% of our total revenues. Accounts receivable in currencies other than U.S.
dollars comprise 58.3% of the outstanding accounts receivable balance at January
31, 2002. Receivables are from major corporations or are supported by letters of
credit. We maintain reserves for potential credit losses and such losses have
been immaterial.
Based on a hypothetical ten percent adverse movement in interest rates and
foreign currency exchange rates, the potential losses in future earnings, fair
value of risk-sensitive financial instruments, and cash flows are immaterial,
although the actual effects may differ materially from the hypothetical
analysis.
We do not use derivative financial instruments for speculative trading purposes,
nor do we currently hedge our foreign currency exposure to offset the effects of
changes in foreign exchange rates. We intend to assess the need to utilize
financial instruments to hedge currency exposures on an ongoing basis.
Interest Rate Risk
Historically, we have had no material interest rate risk associated with debt
used to finance our operations due to limited borrowings. We manage our interest
rate exposure using a mix of fixed and floating interest rate debt and, if
appropriate, financial derivative instruments.
Borrowing availability under the $15.0 million domestic credit facility is
based on a formula of eligible domestic and foreign accounts receivable.
Outstanding borrowings at January 31, 2002 were $12.0 million under this credit
facility and the interest rate was 4.75%. Based on this balance, an immediate
change of 1% in the interest rate would cause a change in interest expense of
approximately $120,000 on an annual basis. A second credit facility with another
lender was established on April 30, 2001 as a revolving credit line for $30.0
million. This facility is secured by cash and bears interest (at our option) at
either: (i) the greater of the federal funds rate plus 0.5% or the bank's prime
rate, in each case, minus 1.0% or (ii) LIBOR plus 0.4%.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A discussion of the Company's exposure to and management of market risk appears
under the heading "Business Risks".
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We have had various commercial relationships with Ando Electric Co.,
Ltd., a Japanese test equipment manufacturer, since 1993 when Ando was a
subsidiary of NEC. In 1994, Ando loaned us $20 million, of which $6 million
remained outstanding as of January 31, 2002. This indebtedness was scheduled to
mature in July 2003. In 1998, we entered into a six year development,
manufacturing and marketing agreement with Ando (the "Fusion Agreement")
pursuant to which we granted Ando exclusive rights to manufacture and sell
Fusion in Japan, but retained exclusive rights to manufacture and sell Fusion to
certain customers in Japan and to manufacture and sell Fusion outside of Japan.
We also granted Ando a license to develop Fusion improvements for certain
specific purposes, and, subject to certain conditions, a license to use,
manufacture and sell these improvements in Japan. We were granted rights to use,
improve and modify these Ando improvements outside Japan. Ando is required to
pay quarterly royalties on sales of Fusion in Japan.
In January 2001, Yokogawa Electric Corporation, a Japanese manufacturer
of semiconductor test equipment, announced the acquisition of most of NEC's
interest in Ando. On May 18, 2001, we served Ando with a Demand for Arbitration
pursuant to
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the Fusion Agreement. Our demand asserted claims for breach of contract, breach
of fiduciary duty, unfair competition and other claims arising out of Ando's
conduct. Ando filed an answer and counterclaims to our demand for arbitration.
During February, 2002, the Company and Ando Electric Co., Ltd. entered
into an agreement providing for the dismissal, with prejudice, of all claims
filed under the arbitration proceedings pending with the American Arbitration
Association in San Jose, California. Under the terms of this agreement, Ando has
agreed to forgive certain loan and other debt obligations totaling approximately
$7 million and has agreed to certain continuing supply and support obligations
for customers in Japan for a transition period. Except for these continuing
obligations, the obligations of the parties under the Fusion Agreement and other
related agreements have been terminated.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on December 3,
2001.
(b) Stockholders elected Messrs. Mark S. Ain and Samuel Rubinovitz as
Class III Directors to serve additional terms of three years. Messrs.
Richard S. Hill, Stephen M. Jennings and Robert E. Moore continued to
serve as Class I Directors, with their terms of offices expiring at
the 2002 Annual Meeting of Stockholders. Messrs. Roger W. Blethen,
Robert J. Boehlke and Roger J. Maggs continued to serve as Class II
Directors, with their terms of office expiring at the 2003 Annual
Meeting of Stockholders.
(c) Matters voted upon and the results of the voting were as follows:
(i) Stockholders voted 44,883,458 shares FOR and 660,856 shares
WITHHELD from the election of Mark S. Ain as a Class III
Director. Stockholders voted 44,882,151 FOR and 662,163 shares
WITHHELD from the election of Samuel Rubinovitz as a Class III
Director.
(ii) Stockholders voted 25,855,007 shares FOR 19,652,228 shares
AGAINST and 37,077 shares ABSTAINED regarding the vote to
approve the 2001 Stock Plan.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10(FF) -- 2001 Stock Plan.
Exhibit 10(GG) -- Deferred Compensation Plan effective as of
December 1, 2001.
Exhibit 10.(M)(ii) -- Termination Agreement dated as of December 20,
2001 relating to Company's facility at 5 Rosemont Avenue, Westwood,
Massachusetts.
(b) There were no reports on Form 8-K filed during the three months ended
January 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LTX Corporation
Date: March 12, 2002 By: /s/ Roger W. Blethen
- -------------------- ------------------------
Roger W. Blethen
Chairman of the Board
and Chief Executive Officer
Date: March 12, 2002 By: /s/ Mark J. Gallenberger
- -------------------- ----------------------------
Mark J. Gallenberger
Chief Financial Officer and Treasurer
(Principal Financial Officer)
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