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 April 30, 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
--------------------------------
LTX CORPORATION
---------------
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2594045
---------------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
LTX Park at University Avenue, Westwood, Massachusetts 02090
---------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (781) 461-1000
-----------------------------------------------------------------
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 May 14, 2002
----- ---------------------------
Common Stock, par value $0.05 per share 49,118,489
LTX CORPORATION
Index
Part I. FINANCIAL INFORMATION Page Number
Item 1. Consolidated Balance Sheets 1
April 30, 2002 and July 31, 2001
Consolidated Statements of Operations and Comprehensive Income 2
Three Months and Nine Months Ended April 30, 2002 and April 30, 2001
Consolidated Statements of Cash Flows 3
Nine Months Ended April 30, 2002 and April 30, 2001
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial 9-18
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
LTX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30, July 31,
2002 2001
-----------------------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and equivalents $245,964 $180,109
Accounts receivable, net of allowances 12,241 25,649
Accounts receivable - other 5,784 6,938
Inventories 77,924 96,695
Prepaid expense 47,212 58,975
-------- --------
Total current assets 389,125 368,366
Property and equipment, net 73,896 66,739
Deferred tax asset 70,759 33,896
Other assets 15,833 14,038
-------- --------
Total assets $549,613 $483,039
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 12,000 $ 12,900
Current portion of long-term debt 2,032 5,293
Accounts payable 27,427 16,577
Deferred revenues and customer advances 6,468 37,840
Deferred gain on leased equipment 11,170 13,906
Accrued restructuring charges 468 1,713
Other accrued expenses 24,328 19,557
-------- --------
Total current liabilities 83,893 107,786
Long-term debt, less current portion 1,701 5,984
Convertible subordinated notes 150,000 --
Stockholders' equity:
Common stock 2,589 2,557
Additional paid in capital 413,539 409,065
Other comprehensive income 358 553
Accumulated deficit (90,706) (31,145)
Less treasury stock, at cost (11,761) (11,761)
-------- --------
Total liabilities and stockholders' equity
$549,613 $483,039
======== ========
See accompanying Notes to Consolidated Financial Statements
1
LTX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Nine Months
Ended Ended
April 30, April 30,
--------- ---------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $28,055 $66,621 $88,643 $264,479
Cost of sales 23,298 37,691 69,830 140,718
Inventory related provision - - 42,200 -
-------- ------- -------- --------
Gross margin 4,757 28,930 (23,387) 123,761
Engineering and product development expenses 18,182 17,295 52,827 49,983
Selling, general and administrative expenses 6,781 8,180 21,319 29,203
-------- ------- -------- --------
Income (loss) from operations (20,206) 3,455 (97,533) 44,575
Other income (expense):
Interest expense (1,540) (297) (5,145) (966)
Interest income 1,200 2,259 5,646 7,343
-------- ------- -------- --------
Income (loss) before income taxes and cumulative effect
of change in accounting principle (20,546) 5,417 (97,032) 50,952
Provision (benefit) for income taxes (8,218) 1,625 (37,471) 15,283
-------- ------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle (12,328) 3,792 (59,561) 35,669
Cumulative effect of change in accounting
principle, net of applicable tax - - - 9,566
-------- ------- -------- --------
Net income (loss) $(12,328) $ 3,792 $(59,561) $26,103
========= ======= ========= ========
Net income (loss) before cumulative effect of change in
accounting principle, per share:
Basic $ (0.25) $ 0.08 $ (1.23) $ 0.75
======= ======= ======== ========
Diluted $ (0.25) $ 0.08 $ (1.23) $ 0.71
======= ======= ======== ========
Cumulative effect of change in accounting
principle, per share:
Basic $ - $ - $ - $ (0.20)
======== ======= ========= ========
Diluted $ - $ - $ - $ (0.19)
======== ======= ========= ========
Net income (loss) per share:
Basic $ (0.25) $ 0.08 $ (1.23) $ 0.55
======= ======= ======== ========
Diluted $ (0.25) $ 0.08 $ (1.23) $ 0.52
======= ======= ======== ========
Weighted--average common shares used in
computing net income (loss) per share:
Basic 48,825 47,803 48,580 47,676
======= ======= ======== ========
Diluted 48,825 50,522 48,580 50,145
======= ======= ======== ========
Comprehensive income (loss):
Net income (loss) $(12,328) $ 3,792 $(59,561) $26,103
Unrealized gain (loss) on
marketable securities 91 53 (195) 425
------- ------- -------- --------
Comprehensive income (loss) $(12,237) $ 3,845 $(59,756) $ 26,528
========= ======= ======== ========
See accompanying Notes to Consolidated Financial Statements
2
LTX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months
Ended
April 30,
2002 2001
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (59,561) $ 26,103
Add (deduct) non-cash items:
Cumulative effect of a change in accounting principle, net of tax -- 9,566
Depreciation and amortization 12,834 10,016
Charge for excess inventory 42,200 --
Net gain from Ando Settlement (778) --
Translation (gain) loss (69) 673
(Increase) decrease in:
Accounts receivable 14,077 45,707
Inventories (10,975) (55,190)
Prepaid expenses 2,762 (37,880)
Deferred tax (benefit) expense (36,863) 1,370
Other assets (694) 616
Increase (decrease) in:
Accounts payable 11,782 (12,066)
Accrued expenses and restructuring charges (2,579) (2,792)
Deferred revenues and customer advances (34,121) 38,372
--------- ---------
Net cash (used in) provided by operating activities (61,985) 24,495
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (19,989) (37,942)
Minority investment -- (9,334)
--------- ---------
Net cash used in investing activities (19,989) (47,276)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock plans:
Employees' stock purchase plan 1,111 946
Exercise of stock options 3,395 1,124
Advances (payments) of short-term notes payable, net (900) 5,275
Proceeds from convertible subordinated notes 145,566 --
Proceeds from lease financing 1,744 --
Payments of long-term debt (3,282) (2,804)
--------- ---------
Net cash provided by financing activities 147,634 4,541
--------- ---------
Effect of exchange rate changes on cash 195 (550)
--------- ---------
Net increase in cash and equivalents 65,855 (18,790)
Cash and equivalents at beginning of period 180,109 206,973
--------- ---------
Cash and equivalents at end of period $ 245,964 $ 188,183
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,875 $ 471
Income taxes $ 1,355 $ 3,267
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 period. Net realized and unrealized gains and losses
resulting from foreign currency remeasurement and transaction gains and losses
were a gain of $69,000 and a loss of $673,000 for the nine months ended April
30, 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
significant 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
4
received or written evidence of acceptance is delivered to the Company. If the
portion of the holdback is greater than 20%, the 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 $8.9 million, or 31.7% of net sales and $10.9
million, or 16.4% of net sales for the three months ended April 30, 2002 and
2001, respectively. For the nine months ended April 30, 2002, service revenue
totaled $25.7 million, or 29.0% of net sales, and $27.4 million, or 10.4% of net
sales, for the nine months ended April 30, 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 on July 31, 2001 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 (SFAS) 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 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.
Management continually evaluates the need for a valuation allowance for deferred
tax assets based on the probability of realization determined by expectations
for future taxable income and other factors. Although realization is not
assured, based on available evidence, 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 Nine Months Ended
April 30, April 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except per share data)
Net income (loss) $(12,328) $ 3,792 $(59,561) $26,103
Basic EPS
Basic common shares 48,825 47,803 48,580 47,676
Basic EPS $ (0.25) $ 0.08 $ (1.23) $ 0.55
Diluted EPS
Basic common shares 48,825 47,803 48,580 47,676
Plus: Impact of stock options and warrants -- 2,719 -- 2,469
------- -------- -------- -------
Diluted common shares 48,825 50,522 48,580 50,145
Diluted EPS $ (0.25) $ 0.08 $ (1.23) $ 0.52
5
The impact of the stock options was not used in the calculation of April 30,
2002 diluted EPS as the Company was in a net loss position. Options to purchase
203,600 shares and 398,500 shares of common stock on April 30, 2002 and 2001,
respectively, 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 SFAS
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 $91,000 and $53,000 for the three months ended
April 30, 2002 and 2001, respectively, and ($195,000) and $425,000 for the nine
months ended April 30, 2002 and 2001, respectively, for unrealized gains
(losses) 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:
April 30, July 31,
2002 2001
----------------------------
(in thousands)
Raw materials $ 28,737 $ 48,602
Work-in-progress 30,486 33,986
Finished goods 18,701 14,107
-------- --------
$ 77,924 $ 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 April 30, 2002, amounts related to payments for projects
are refundable.
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:
6
April 30, July 31, Depreciable
2002 2001 Life in Years
------------------------------------------------------
(in thousands)
Machinery and equipment $107,925 $138,278 3-7
Office furniture and equipment 61,282 16,036 3-7
Leasehold improvements 13,875 13,861 shorter of 10 or term of lease
-------- -------
183,082 168,175
Less: Accumulated depreciation and amortization (109,186) (101,436)
--------- ---------
$ 73,896 $ 66,739
======== ========
Deferred Gain on Leased Equipment
The deferred gain from the sale and leaseback 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 reclassifications had no impact on earnings for the prior
period.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS
141 "Business Combinations" and SFAS 142, "Goodwill and Other Intangible
Assets". 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. The
Company does not expect that the adoption of these standards will result in any
material impact on financial statements at this time.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 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 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002 with early adoption permitted.
The Company does not expect that the adoption of this standard will result in
any material impact on financial statements at this time.
In October 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS 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 144 is effective
for financial statements issued for fiscal years beginning after December 15,
2001 with early adoption encouraged. The Company does not expect the adoption of
this standard will result in any material impact on financial statements at this
time.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statement No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This
statement rescinds the following pronouncements: FASB Statement No. 4,
"Reporting Gains and Losses from Extinguishment of Debt", FASB Statement No. 44,
"Accounting for Intangible Assets of Motor Carriers" and FASB Statement No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This
Statement amends FASB Statement No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
makes Technical Corrections to other existing authoritative pronouncements to
clarify meanings, or describe their applicability under changed conditions.
SFAS 145 is effective for financial
7
statements issued for fiscal years beginning after May 15, 2002 with early
adoption permitted.
The Company has adopted SFAS 145 in the recording of the settlement of a lawsuit
with Ando Electric, Co., Ltd. On May 18, 2001, the Company served Ando with a
Demand for Arbitration with claims for breach of contract, breach of fiduciary
duty, unfair competition and other claims arising out of Ando's conduct. During
February 2002, the Company and Ando entered into an agreement providing for the
dismissal, with prejudice, of all claims filed under the arbitration proceedings
with the American Arbitration Association in San Jose, California. Under the
terms of this agreement, in lieu of cash, Ando has agreed to forgive $6 million
of debt, which is the remaining balance of a $20 million loan from Ando in 1994
scheduled to mature in July 2003. Ando also agreed to the forgiveness of other
current obligations totaling approximately $0.9 million and the termination of
contractual obligations totaling $1.7 million. In addition, Ando has agreed to
certain continuing supply and support obligations for customers in Japan for a
transition period. At the end of the transition period, the Company will
continue to supply and support former Ando customers in Japan. An accrual of
$7.9 million has been recorded for anticipated expenses associated with this
transition period.
SFAS 145 provides that gains and losses from the extinguishment of debt be
reported in ordinary operations. Accordingly, the Company recorded the gain from
the extinguishment of debt, net of the transition expenses, as a reduction in
selling general and administrative expenses for the quarter ended April 30,
2002.
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 nine months ended April 30, 2002 and 2001, along
with the long-lived assets at April 30, 2002 and July 31, 2001, are summarized
as follows:
Three Months Nine Months
Ended Ended
April 30, April 30,
--------- ---------
(in thousands)
--------------
2002 2001 2002 2001
---- ---- ---- ----
Sales to unaffiliated customers:
United States $ 10,948 $ 45,484 $ 46,824 $135,403
Singapore 8,912 7,783 20,116 57,885
Taiwan 2,476 4,929 3,879 32,811
Japan 1,754 1,264 6,312 12,428
All other countries 3,965 7,161 11,512 25,952
-------- -------- -------- --------
Total sales to unaffiliated customers $ 28,055 $ 66,621 $ 88,643 $264,479
======== ======== ======== ========
April 30, July 31,
2002 2001
------------------------------------
(in thousands)
Long-lived Assets:
United States $ 53,925 $ 51,131
Singapore 9,481 6,968
Taiwan 3,833 2,878
Japan 46 53
All other countries 6,611 5,709
-------- --------
Total long-lived assets $ 73,896 $ 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
Critical Accounting Policies and the Use of Estimates
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, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. We based these
estimates and assumptions on historical experience, and evaluate them on an
on-going basis to ensure they remain reasonable under current conditions. Actual
results could differ from those estimates. The items in our financial statements
requiring significant estimates and judgements are as follows: revenue
recognition, inventory reserve, warranty, allowances for doubtful accounts and
deferred taxes.
Revenue Recognition
The Company's revenue recognition policy is described in Note 2 of the summary
of significant accounting policies. In the future, if acceptance provisions
significantly change, the timing of the revenue recognition could be affected.
Inventory Reserve
We sell capital equipment to companies that design, manufacture, assemble, and
test semiconductor devices. We are exposed to a number of economic and industry
factors that could result in portions of our inventory becoming either obsolete
or in excess of anticipated usage. These factors include, but are not limited
to, changes in our customers capital expenditures, technological changes in our
markets, our ability to meet changing customer requirements, competitive
pressures in products and prices, and the availability of key components from
our suppliers. Our policy is to establish inventory reserves when conditions
exist that suggest that our inventory may be in excess of anticipated demand or
is obsolete based upon our assumptions about future demand for our products or
market conditions. We regularly evaluate the ability to realize the value of our
inventory based on a combination of factors including the following: historical
usage rates, forecasted sales or usage, product end of life dates, estimated
current and future market values and new product introductions. Purchasing and
alternative usage options are also explored to mitigate inventory exposure. When
recorded, our reserves are intended to reduce the carrying value of our
inventory to its net realizable value. As of April 30, 2002, our inventory of
$77.9 million is stated net of inventory reserves of $57.1 million. If actual
demand for our products deteriorates or market conditions are less favorable
than those that we project, additional inventory reserves may be required.
Warranty
Our products are sold with warranty provisions that require us to remedy
deficiencies in quality or performance of our products over a specified period
of time at no cost to our customers. Our policy is to establish warranty
reserves at levels that represent our estimate of the costs that will be
incurred to fulfill those warranty requirements at the time that revenue is
recognized. We believe that our recorded liability at April 30, 2002 is adequate
to cover our future cost of materials, labor and overhead for the servicing of
our products sold through that date. If actual product failures, or material or
service delivery costs differ from our estimates, our warranty liability would
need to be revised accordingly.
Allowance for Doubtful Accounts
A majority of our trade receivables are derived from sales to large
multinational semiconductor manufacturers throughout the world. In order to
monitor potential credit losses, we perform ongoing credit evaluations of our
customers' financial conditions.
9
An allowance for doubtful accounts is maintained for potential credit losses
based upon our assessment of the expected collectibility of all accounts
receivable. The allowance for doubtful accounts is reviewed periodically to
assess the adequacy of the allowances. We take into consideration any
circumstances in which we are aware of a customer's inability to meet its
financial obligations, a certain percentage of the accounts receivable balance,
which is based on the age of the receivables and our historical experience. If
circumstances change, and the financial condition of our customers were
adversely effected resulting in their inability to meet their financial
obligations to us, we may need to take additional allowances.
Taxes
We have recorded a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. The valuation allowance we
have assessed is based upon our estimate of future taxable income covering a
time horizon consistent with the historical business cycle of this industry.
External market data is considered in this evaluation. The availability of tax
planning strategies to utilize our recorded deferred tax assets is also
considered. As of April 30, 2002, the deferred tax assets have been reduced by
valuation allowances of $8.1 million. If we are able to realize the deferred tax
assets in an amount in excess of our reported net amounts, an adjustment to the
deferred tax assets would increase earnings in the period such determination was
made. Similarly, if we should determine that we may be unable to realize our net
deferred tax assets to the extent reported, an adjustment to the deferred tax
assets would be charged to income in the period such determination was made.
10
The following table sets forth for the periods indicated the principal items
included in the Consolidated Statements of Operations as percentages of net
sales.
Percentage of Net Sales
Three Months Nine Months
Ended Ended
April 30, April 30,
--------- ---------
2002 2001 2002 2001
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 83.0 56.6 78.8 53.2
Inventory related provision 0.0 0.0 47.6 0.0
----- ----- ------ -----
Gross margin 17.0 43.4 (26.4) 46.8
Engineering and product development expenses 64.8 26.0 59.6 18.9
Selling, general and administrative expenses 24.2 12.3 24.1 11.0
----- ----- ------ -----
Income (loss) from operations (72.0) 5.1 (110.1) 16.9
Other income (expense):
Interest expense (5.5) (0.4) (5.8) (0.4)
Interest income 4.3 3.4 6.4 2.8
----- ----- ------ -----
Income (loss) before income taxes and cumulative effect
of change in accounting principle (73.2) 8.1 (109.5) 19.3
Provision (benefit) for income taxes (29.3) 2.4 (42.3) 5.8
----- ----- ------ -----
Income (loss) before cumulative effect of change
in accounting principle (43.9) 5.7 (67.2) 13.5
Cumulative effect of change in accounting
principle, net of applicable tax 0.0 0.0 0.0 3.6
----- ----- ------ -----
Net income (loss) (43.9)% 5.7% (67.2)% 9.9%
===== ===== ====== =====
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 Nine Months Ended April 30, 2002 Compared to the Three Months
and Nine Months Ended April 30, 2001.
Net sales for the three months ended April 30, 2002 decreased 57.8% to $28.1
million as compared to $66.6 million in the same quarter of the prior year. For
the nine months ended April 30, 2002, net sales were $88.6 million as compared
to $264.5 million for the same period of the prior year, a decrease of 66.5%.
The decrease in revenue is primarily a result of the continuing decline in
demand for semiconductors, resulting in reduced demand for semiconductor test
equipment. Service revenue accounted for $8.9 million, or 31.7% of net sales,
and $10.9 million, or 16.4% of net sales, for the three months ended April 30,
2002 and 2001, respectively, and $25.7 million, or 29.0% of net sales and $27.4
million, or 10.4% of net sales for the nine months ended April 30, 2002 and
2001, respectively. Geographically, sales to customers outside of the United
States were 61.0% and 31.7% of net sales in the three months ended April 30,
2002 and 2001, respectively, and 47.2% and 48.8% for the nine months ended April
30, 2002 and 2001, respectively.
During the quarter ended January 31, 2002, we recorded a $42.2 million inventory
related provision. 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 excess Delta/STE inventory
that was previously transferred to our third party reseller of Delta/STE
products.
11
The gross margin was $4.8 million, or 17.0% of net sales in the three months
ended April 30, 2002, as compared to $28.9 million, or 43.4% of net sales, in
the same quarter of the prior year. For the nine months ended April 30, 2002,
the gross margin was $(23.4) million, or (26.4)% of net sales, as compared to
$123.8 million, or 46.8% for the same period in the prior year. Before the
inventory related provision, the gross margin was $18.8 million, or 21.2% of net
sales for the nine months ended April 30, 2002. The decrease was primarily the
result of a lower level of sales relative to fixed manufacturing costs.
Engineering and product development expenses were $18.2 million, or 64.8% of net
sales, in the three months ended April 30, 2002, as compared to $17.3 million,
or 26.0% of net sales, in the same quarter of the prior year. For the nine
months ended April 30, 2002, engineering and product development expenses were
$52.8 million, or 59.6% of net sales, as compared to $50.0 million, or 18.9% 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 $6.8 million, or 24.2% of net
sales, in the three months ended April 30, 2002, as compared to $8.2 million, or
12.3% of net sales, in the same quarter of the prior year. Of the $6.8 million
for the three months ended April 30, 2002, $0.8 million relates to a one-time
benefit from the settlement of a lawsuit with Ando Electric Co., Ltd. During
February 2002, the Company and Ando entered into an agreement providing for
dismissal, with prejudice, of all claims filed under arbitration proceedings
with the American Arbitration Association in San Jose, California. Under the
terms of this agreement, in lieu of cash, Ando has agreed to forgive certain
loan and other debt and contractual obligations totaling $8.7 million. The
Company recorded an accrual of $7.9 million for supplying and supporting of
customers formerly supported by Ando. For the nine months ended April 30, 2002,
selling, general and administrative expenses were $21.3 million, or 24.1% of net
sales, as compared to $29.2 million, or 11.0% 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 $1.5 million and $0.3 million for the three months ended
April 30, 2002 and 2001, respectively. For the nine months ended April 30, 2002,
interest expense was $5.1 million as compared to $1.0 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 $1.2 million and $2.3 million for the three months ended
April 30, 2002 and 2001, respectively. For the nine months ended April 30, 2002,
interest income was $5.6 million as compared to $7.3 million for the same period
of the prior year. Although the Company's cash balance was higher for the
quarter ended April 30, 2002 than for the quarter ended April 30, 2001, interest
rates declined over the prior year causing interest income to decline.
The Company had a tax benefit of $8.2 million for the three months ended April
30, 2002 as compared to a tax provision of $1.6 million in the same quarter of
the prior year. For the nine months ended April 30, 2002, the Company had a tax
benefit of $37.5 million as compared to a tax provision of $15.3 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
continually evaluates the need for a valuation allowance for deferred tax assets
based on the probability of realization determined by expectations for future
taxable income and other factors. Although realization is not assured, based on
available evidence, 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
the nine months ended April 30, 2002 and its effective tax rate was 30% for the
nine months ended April 30, 2001. The effective tax rate in April 30, 2001
differs from the statutory income tax rate primarily due to the generation of
tax credits and state taxes.
The cumulative effect of a change in accounting principle was $9.6 million, or
3.6% of net sales for the nine months ended April 30, 2001, and relates to the
cumulative effect of a revenue recognition change required by SAB101.
Net loss was $12.3 million, or $0.25 per diluted share, in the three months
ended April 30, 2002, as compared with net profit of $3.8 million, or $0.08 per
diluted share, in the same quarter in the prior year. The Company had net loss
of $59.6 million, or $1.23 per diluted share, in the nine months ended April 30,
2002, as compared to net income of $26.1 million, or $0.52 per diluted share,
for the same period in the prior year. Before the inventory related provision,
net loss was $34.2 million, or $0.70 per diluted share, in the nine months ended
April 30, 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
pricing pressure. The Company has taken steps to reduce variable costs and
discretionary spending.
12
Liquidity and Capital Resources
At April 30, 2002, the Company had $246.0 million in cash and equivalents and
working capital of $305.2 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 $13.4 million to $12.2
million at April 30, 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 $18.8 million to $77.9 million at April 30, 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 during the
quarter ended January 31, 2002.
Deferred revenues and customer advances decreased by approximately $31 million
to $6.5 million at April 30, 2002 as compared to $37.8 million at July 31, 2001.
The majority of the decrease is attributed to the ratable recognition of revenue
from service contracts over the term of the contract in accordance with the
Company's revenue recognition policy, as well as revenue recognition for product
delivery against prepaid customer orders. Prepaid expense decreased by $11.8
million to $47.2 million at April 30, 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 $39.9 million as of April 30, 2002
and $44.0 million as of July 31, 2001.
Capital expenditures totaled $3.2 million for the three months ended April 30,
2002 as compared to $16.3 million for the three months ended April 30, 2001. The
principal reason for the decrease relates to tight cost controls over capital
spending due to the Company's current revenue levels.
The deferred tax asset increased by $36.9 million to $70.8 million at April 30,
2002 as compared to $33.9 million at July 31, 2001. The increase is attributed
to the recording of certain deferred tax assets, primarily related to benefits
of net operating losses. Management continually evaluates the need for a
valuation allowance for deferred tax assets based on the probability of
realization determined by expectations for future taxable income and other
factors. Although realization is not assured, based on available evidence,
management believes it is more likely than not that the full amount of the net
deferred tax asset will be realized. However, there can be no assurance that we
will meet our expectations of future income. During the quarter ended January
31, 2002, 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 April 30, 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 April 30, 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 will expire on June 30,
2002. 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.
The current portion and long-term portion of long-term debt decreased by $7.6
million to $3.7 million at April 30, 2002 as compared to $11.3 million at July
31, 2001. The principal reason for the decrease is due to the settlement of a
lawsuit with Ando Electric, Co., Ltd. During February 2002, the Company and Ando
entered into an agreement providing for dismissal, with prejudice, of all claims
filed under arbitration proceedings with the American Arbitration Association in
San Jose, California. Under the terms of this agreement, in lieu of cash, Ando
has agreed to forgive $4 million of long term and $2 million of short term debt,
which is the remaining balance of a $20 million loan from Ando in 1994 scheduled
to mature in July 2003.
13
The Company has operating lease commitments for certain facilities and equipment
and capital lease commitments for certain equipment. The approximate future
minimum lease payments under operating leases for real estate, equipment,
operating leases and capital leases at April 30, 2002 are as follows:
Lease Payments (in thousands)
2002 $ 4,173
2003 14,409
2004 10,068
2005 5,057
2006 4.600
2007 and thereafter 1,396
--------
$ 39,703
--------
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.
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.
14
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;
... 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
84.1% of revenues for the nine months ended in April 30, 2002 and 86.3% in the
same nine 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.
15
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 47.2% of our revenues for the nine months ended April 30,
2002 and 48.8% of our revenues for the nine months ended April 30, 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:
. 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
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 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
16
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 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 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.
17
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 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 April 30, 2002, 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
18
. 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 $165.7 million as of April
30, 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.
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 nine months ended April 30,
2002, our revenues derived from shipments outside the United States constituted
47.2% of our total revenues. Accounts receivable in currencies other than U.S.
dollars comprise 26.4% of the outstanding accounts receivable balance at April
30, 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 April 30, 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%.
19
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 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
forgiven 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. In connection with the termination of
obligations of the parties under the Fusion Agreement, Ando has also forgiven
contractual obligations totaling $1.7 million.
Item 6. Exhibits and Reports on Form 8-K
On April 3, 2002, the Company filed a Current Report on Form 8-K
reporting under Item 4 - changes in Registrant's Certifying
Accountant that the Board of Directors replaced Arthur Andersen
LLP as LTX's independent public accountants and engaged Ernst &
Young LLP to serve as LTX's independent public accountants for its
fiscal year ending July 31, 2002.
There were no other reports on Form 8-K filed during the three months
ended April 30, 2002.
20
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: June 14, 2002 By: /s/ Roger W. Blethen
- ------------------- ------------------------
Roger W. Blethen
Chairman of the Board and
Chief Executive Officer
Date: June 14, 2002 By: /s/ Mark J. Gallenberger
- ------------------- ----------------------------
Mark J. Gallenberger
Chief Financial Officer and Vice
President
(Principal Financial Officer)
21