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, 1999
-----------------------
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
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(exact Name of Registrant as Specified in Its Chapter)
Massachusetts 04-2594045
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(State or Other Jurisdiction of (I.R.S. Employer
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 June 10, 1999
- --------------------------------------- ----------------------------
Common Stock, par value $0.05 per share 35,766,127
LTX CORPORATION
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet 1
April 30, 1999 and July 31, 1998
Consolidated Statement of Operations 2
Three Months and Nine Months Ended
April 30, 1999 and April 30, 1998
Consolidated Statement of Cash Flows 3
Nine Months Ended April 30, 1999
and April 30, 1998
Notes to Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of Financial 7-14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
(Unaudited)
April 30, July 31,
1999 1998
-------------- -------------
ASSETS
Current assets:
Cash and equivalents $ 19,048 $ 25,109
Accounts receivable (less allowance of $1,696 and $2,200) 29,310 33,871
Accounts receivable - other 3,941 2,044
Inventories 40,291 38,264
Other current assets 4,078 3,633
-------------- -------------
Total current assets 96,668 102,921
Property and equipment, net 30,956 35,427
Other assets 472 2,671
-------------- -------------
$ 128,096 $ 141,019
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,301 $ 4,827
Current portion of long-term debt - 5,106
Accounts payable 24,995 25,020
Deferred revenues and customer advances 12,157 15,045
Other accrued expenses 16,315 18,965
-------------- -------------
Total current liabilities 55,768 68,963
-------------- -------------
Long-term debt, less current portion 12,000 8,235
Other long-term liabilities 500 563
Convertible subordinated debentures 7,308 7,308
Stockholders' equity 52,520 55,950
-------------- -------------
$ 128,096 $ 141,019
============== =============
1
LTX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amount)
Three Months Nine Months
Ended Ended
April 30, April 30,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- --------------
Net sales $ 43,210 $ 54,130 $ 103,919 $ 163,468
Cost of sales 27,154 39,766 70,229 110,120
-------------- ------------- -------------- --------------
Gross margin 16,056 14,364 33,690 53,348
Engineering and product development 6,308 8,350 18,101 22,994
expenses
Selling, general and administrative expenses 7,781 12,812 22,905 34,767
-------------- ------------- -------------- --------------
Income (loss) from operations 1,967 (6,798) (7,316) (4,413)
Interest (income) expense, net 173 132 429 48
Other (income) expense, net - - (3,786) -
-------------- ------------- -------------- --------------
Income (loss) before income taxes 1,794 (6,930) (3,959) (4,461)
Provision for income taxes - (596) - -
-------------- ------------- -------------- --------------
Net income (loss) $ 1,794 $ (6,334) $ (3,959) $ (4,461)
============== ============= ============== ==============
Net income (loss) per share:
Basic $ 0.05 $ (0.17) $ (0.11) $ (0.12)
Diluted $ 0.05 $ (0.17) $ (0.11) $ (0.12)
Weighted average shares:
Basic 35,643 36,797 35,532 36,757
Diluted 37,195 36,797 35,532 36,757
2
LTX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months
Ended
April 30,
------------------------------
1999 1998
-------------- --------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (3,959) $ (4,461)
Add (deduct) non-cash items:
Depreciation and amortization 8,665 9,229
Gain on liquidation / sale of business units (3,786)
Exchange (gain) loss 467 (15)
(Increase) decrease in:
Accounts receivable 4,900 (10,864)
Inventories (2,074) (22,032)
Other current assets (434) 157
Other assets (124) 250
Increase (decrease) in:
Accounts payable (809) 15,972
Accrued expenses and restructuring charges (4,670) (6,776)
Deferred revenues and customer advances (6,738) 9,171
-------------- --------------
Net cash used in operating activities (8,562) (9,369)
-------------- --------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Expenditures for property and equipment, net (4,795) (10,167)
-------------- --------------
Net cash used in investing activities (4,795) (10,167)
-------------- --------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from stock purchase and option plans 523 962
Proceeds from sale of business unit 2,000
Proceeds from short term borrowing 3,480
Payments of short term borrowing (1,946) (376)
Payments of long-term debt and other liabilities (1,174) (2,976)
Proceeds from lease financing 3,850 1,451
-------------- --------------
Net cash provided by (used in) financing activities 6,733 (939)
-------------- --------------
Effect of exchange rate changes on cash 563 (372)
-------------- --------------
Net decrease in cash and equivalents (6,061) (20,847)
Cash and equivalents at beginning of period 25,109 67,800
-------------- --------------
Cash and equivalents at end of period $ 19,048 $ 46,953
============== ==============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (received) during the period for:
Interest $ 973 $ 1,485
Income taxes $ (784) $ 979
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
1,600,000 shares of LTX common stock received by LTX as $ - $ 7,400
consideration for certain marketing, sales and manufacturing
rights and held in treasury
3
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company
-----------
LTX Corporation (the "Company") designs, manufactures, and markets
automatic test equipment for the semiconductor industry that is used to
test systems-on-a-chip, digital, analog, and mixed signal (a combination of
digital and analog) integrated circuits (ICs). The Company is headquartered
in Westwood, Massachusetts, has additional development facilities 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.
Revenue Recognition
Revenues from product sales and related warranty costs are recognized at
the time of shipment. Service revenues are recognized over the applicable
contractual periods or as services are performed. Revenues from engineering
contracts are recognized over the contract period on a percentage of
completion basis.
Net Income (Loss) Per Share
In July 1998, the Company adopted Statement of Financial Accounting
Standards, "Earnings Per Share," (SFAS 128). All previously reported
earnings per share information presented has been restated to reflect the
impact of adopting SFAS 128. There were no adjustments to the earnings per
share numbers previously reported for the three months and nine months
ended April 30, 1998 as the Company reported a net loss for that period.
Under SFAS 128, basic net income (loss) per common 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 net
income (loss) per common share reflects the maximum dilution that would
have resulted from the assumed exercise and share
4
repurchase related to dilutive stock options and is computed by dividing
net income (loss) 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 Nine Months
Ended Ended
April 30, April 30,
------------------------------ -----------------------------
1999 1998 1999 1998
-------------- ----------- ------------ -------------
(In thousands, except per share amount)
Net income (loss) $ 1,794 $(6,334) $(3,959) ($4,461)
Basic EPS
Basic common shares 35,643 36,797 35,532 36,757
Basic EPS $ 0.05 $ (0.17) $ (0.11) $ (0.12)
Diluted EPS
Basic common shares 35,643 36,797 35,532 36,757
Plus: Impact of stock options 1,552 - - -
============ =========== ============ =============
Diluted common shares 37,195 36,797 35,532 36,757
Diluted EPS $ 0.05 $ (0.17) $ (0.11) $ (0.12)
Options to purchase 4,778,819 shares of common stock in fiscal 1999 and
3,439,680 shares in fiscal 1998 were outstanding during the periods then
ended. Options to purchase 449,709 shares of Common Stock at April 30, 1999
at a weighted average price of $6.43, were not included in the computation
of diluted earnings per share because the options' exercise prices were
greater than the average market price of the common shares and, therefore,
their inclusion would be antidilutive.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing overhead. Inventories
consisted of the following at:
April 30, July 31,
1999 1998
---------------- ----------------
(In thousands)
Raw materials $21,347 $14,400
Work-in-progress 14,493 19,419
Finished goods 4,451 4,445
---------------- ----------------
$40,291 $38,264
================ ================
5
3. Comprehensive Income
----------------------
In August 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". The statement requires comprehensive income to be reported with
the same prominence as other financial statements. Comprehensive income
would include any unrealized gains or losses on available-for-sale
securities, foreign currency translation adjustments and minimum pension
liability adjustments. The effect of SFAS 130 is immaterial to the
Company's financial results.
4. Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." The
statement is effective for fiscal 1999. SFAS 131 changes the definition and
reporting of segments and requires disclosure by operating segment of
information such as revenues, profit and loss, identifiable assets and
capital expenditures, major customers and types of products from which
revenues are derived.
5. Interest Expense and Income
---------------------------
Interest expense and income were as follows:
Three Months Nine Months
Ended Ended
April 30, April 30,
------------------------ ---------------------
1999 1998 1999 1998
------- --------- ------- --------
(In thousands) (In thousands)
------------------------ ---------------------
Expense $ 302 $ 500 $1,009 $ 1,629
Income (129) (368) (580) (1,581)
------- --------- ------- --------
Interest (income) expense, net $ 173 $ 132 $ 429 $ 48
======= ========= ======= ========
6
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
Percentage of Net Sales Increase/(Decrease)
--------------------------------------------------- ------------------------------
Three Months Nine Months Three Months Nine Months
Ended April 30, Ended April 30, 1999 1999
----------------------- ----------------------- Over Over
1999 1998 1999 1998 1998 1998
---------- ---------- ----------- ---------- ------------- --------------
Net sales 100.0% 100.0% 100.0% 100.0% (20.2) (36.4)%
Cost of sales 62.8 73.5 67.6 67.4 (31.7) (36.2)
---------- ---------- ----------- ---------- ------------- --------------
Gross margin 37.2 26.5 32.4 32.6 11.8 (36.8)
Engineering and product
development expenses 14.6 15.4 17.4 14.0 (24.5) (21.3)
Selling, general and
administrative expenses 18.0 23.7 22.0 21.3 (39.3) (34.1)
---------- ---------- ----------- ---------- ------------- --------------
Income (loss) from operations 4.6 (12.6) (7.0) (2.7) 129.0 N/M
Interest (income) expense, net 0.4 0.2 0.4 - 31.1 N/M
Other income - - 3.6 - N/A N/M
---------- ---------- ----------- ---------- ------------- --------------
Income (loss) before income
taxes 4.2 (12.8) (3.8) (2.7) 125.9 N/M
Provision for income taxes - (1.1) - - N/M N/M
---------- ---------- ----------- ---------- ------------- --------------
Net income (loss) 4.2 % (11.7)% (3.8)% (2.7)% 128.3 N/M %
========== ========== =========== ========== ============= ==============
N/M - Not Meaningful
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 1999 Compared
to the Three Months and Nine Months Ended April 30, 1998
Net sales for the three months ended April 30, 1999 were $43.2 million
(including $2.5 million of deferred revenue from the Company's Fusion alliance
with Ando Electric Co., Ltd.) as compared to $54.1 million in the same quarter
of the prior year, a decrease of 20%. For the nine months ended April 30, 1999,
net sales were $103.9 million as compared to $163.5 million for the same period
of the prior year, a decrease of 36%. The decrease in revenue is primarily a
result of the STE and semiconductor industries experiencing a significant
decline in activity. Geographically, sales to customers outside of North America
were 46% and 55% of total net sales in the three months ended April 30, 1999 and
1998, respectively.
The gross profit margin was 37.2% of net sales in the three months ended April
30, 1999, compared to 26.5% of net sales in the same quarter of the prior year.
For the nine months ended April 30, 1999, gross profit margin was 32.4% compared
to 32.6% for the nine months ended April 30, 1998. Gross margin improved in the
three months ended April 30, 1999 as compared to the three months ended January
31, 1999 and the three months ended October 31, 1998 due to increased sales
volume, the full impact of the cost efficiencies gained from restructuring
including the consolidation of the Company's manufacturing operations into its
Westwood, Massachusetts facility and more favorable product mix. The Company
anticipates that its gross margin as a percentage of sales will improve as
industry conditions continue to improve and as sales volume increases.
Engineering and product development expenses were $6.3 million or 14.6% of net
sales, in the three months ended April 30, 1999, as compared to $8.4 million, or
15.4% of net sales, in the same quarter of the prior year. For the nine months
ended April 30, 1999, engineering and product development expenses were $18.1
million, or 17.4% of net sales, as compared to $23.0 million, or 14.0% of net
sales, in the nine months ended April 30, 1998. During the first three quarters
of fiscal 1999, the Company realized savings in relation to the higher levels of
spending during fiscal 1998 when the Company was at an earlier stage of
development of its Fusion product.
Selling, general and administrative expenses were $7.8 million, or 18.0% of net
sales, in the three months ended April 30, 1999, as compared to $12.8 million,
or 23.7% of net sales, in the same quarter of the prior year. For the nine
months ended April 30, 1999, selling, general and administrative expenses were
$22.9 million, or 22.0% of net sales, as compared to $34.8 million, or 21.3% of
net sales, in the nine months ended April 30, 1998. The decrease in selling,
general and administrative expenses in absolute dollars largely relates to the
Company's restructuring efforts undertaken during the fourth quarter of fiscal
1998.
Amounts charged against the accrued restructuring liability were $0.7 million
and $3.6 million for the three months and nine months ended April 30, 1999,
respectively. Expenses charged off against the liability for accrued
restructuring included severance, outplacement fees and disposals of fixed
assets.
8
The Company anticipates that the restructuring of its worldwide operations will
be completed by the quarter ending July 31, 1999.
Net interest expense was $173,000 for the three months ended April 30, 1999, as
compared to $132,000 for the same quarter in the prior year.
The Company had no tax provision for the three months and nine months ended
April 30, 1999 and April 30, 1998 due to a net loss for each such period
and net operating loss carryforwards from prior periods.
Net income was $1.8 million, or $0.05 per share, in the three months ended April
30, 1999. The Company had a net loss of $6.3 million, or $(0.17) per share, in
the same quarter of the prior year.
Liquidity and Capital Resources
At April 30, 1999, the Company had $19.0 million in cash and equivalents and
working capital of $40.9 million, as compared to $25.1 million of cash and
equivalents and $34.0 million of working capital at July 31, 1998. The decrease
in cash balance of $6.1 million included $4.2 million of cash payments for
severance and restructuring costs including consolidation of the Company's San
Jose, California manufacturing operations with its Westwood, Massachusetts
facility. Net cash used in operating activities of $8.6 million and capital
asset additions of $4.8 million were partially offset from cash provided by
financing activities of $6.7 million.
The Company had $2.3 million of short term bank debt outstanding at April 30,
1999, as compared to $4.8 million at July 31, 1998. The decrease is a result of
the payment of approximately $5.0 million of short term bank debt of the
Japanese subsidiary by Sumitomo Metal Industries, Ltd. in connection with the
liquidation of the Company's joint venture with Sumitomo Metal Industries, Ltd.
during the quarter ended January 31, 1999 offset by an increase of $2.3 million
in short term borrowing from the Company's domestic line of credit.
In October 1998, the Company obtained a $10.0 million domestic credit facility
from a bank. The facility is secured by all assets of the Company and bears
interest at the bank's prime rate plus 1%. Borrowing availability under the
facility is based on a formula of eligible accounts receivable less outstanding
letters of credit issued on behalf of the Company. The Company had used
approximately $2.2 million of borrowing availability for outstanding letters of
credit at April 30, 1999 and in addition had $2.3 million of outstanding
borrowings at April 30, 1999.
The reserve against accounts receivable was $1.7 million or 5.5% of gross
accounts receivable at April 30, 1999, as compared to $2.2 million or 6.1% at
July 31, 19998. The principal reason for the decrease was due to amounts written
off that were deemed uncollectible.
The Company has taken and continues to take significant steps to control and
reduce spending and capital expenditures and divest its non-strategic assets.
The Company anticipates that these steps, combined with its working capital and
its existing credit facility will be adequate to fund the Company's currently
proposed operating activities for the remainder of the fiscal year. However, a
significant shortfall from plan as a result of the Company's inability to ship
products as scheduled or delayed acceptance of the Company's new Fusion products
would unfavorably impact the Company's cash flow. The Company may require
additional capital to fund
9
anticipated growth in fiscal 2000. In that event, the Company would need to seek
additional debt or equity financing. There can be no assurance that the Company
could obtain the necessary financing.
Year 2000
A discussion of the impact of the Year 2000 to the Company appears under the
heading "Business Risks" below.
BUSINESS RISKS
The Company in this report makes, and may from time to time elsewhere make,
disclosures which contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such disclosures in this
report include, without limitation, statements regarding the development,
introduction, acceptance and market for Fusion, the Company's belief, under
"Results of Operations. Three Months and Nine Months Ended April 30, 1999 As
Compared to the Three Months and Nine Months Ended April 30, 1998," as to
anticipated revenues, margins and levels of engineering and product development
expenses and the Company's belief, under "Liquidity and Capital Resources," as
to the adequacy of its cash resources. Such forward-looking statements involve
risks and uncertainties including, but not limited to, the following important
factors that could cause actual results to differ materially from those in the
forward-looking statement.
Importance of New Product Introduction
The STE market is subject to rapid technological change and new product
introductions, as well as advancing industry standards. The development of
increasingly complex semiconductors and the utilization of semiconductors in a
broader spectrum of products have driven the need for more advanced test systems
to test such devices and to do so at an acceptable cost. The Company's ability
to remain competitive in the mixed signal and system-on-a-chip IC markets will
depend upon its ability to successfully enhance existing test systems, develop
new generations of test systems, such as its new Fusion platform, and to
introduce these new products in a timely and cost-effective manner. The Company
also has to manufacture its products in volume at a competitive price and on a
timely basis to enable customers to integrate them into their operations as they
begin to produce their next generation of semiconductors. The Company's failure
to manufacture and ship test systems to customers in sufficient volume and on a
timely basis could materially adversely affect the Company's business and
results of operations. The Company's failure to have a competitive test system
available when required by a semiconductor manufacturer would make it
substantially more difficult for the Company to sell test systems to that
manufacturer for a number of years. The Company has in the past experienced
delays in introducing certain of its products and enhancements, and there can be
no assurance that it will not encounter technical or other difficulties that
could in the future delay the introduction of new products or enhancements.
If new products have reliability or functionality problems, then reduced,
canceled or rescheduled orders, higher manufacturing costs, delays in collecting
accounts receivable and additional warranty expense may result, which would
reduce gross margins on new product sales and otherwise materially affect the
Company's business and results of operations. The Company's
10
Fusion product is subject to the risks associated with new product
introductions, including the risk that delays in development, reliability or
functionality problems could increase expenses and reduce gross margins on new
product sales. Furthermore, announcements by the Company or its competitors of
new products could cause customers to defer or forego purchases of the Company's
existing products, which would also adversely affect the Company's business and
results of operations. There can be no assurance that the Company will be
successful in the introduction and volume manufacture of its new productions,
that such introduction will coincide with the development by semiconductor
manufacturers of their next generation semiconductors or that such products will
satisfy customer needs or achieve market acceptance. The failure to do so could
materially adversely affect the Company's business and results of operations.
Fluctuations in Sales and Operating Results
Given the relatively large selling prices of the Company's test systems, sales
of a limited number of test systems account for a substantial portion of sales
in any particular fiscal quarter and a small number of transactions could
therefore have a significant impact on sales and gross margins for that fiscal
quarter. The Company's sales and operating results have fluctuated and could
in the future fluctuate significantly from period to period, including from one
quarterly period to another, due to a combination of factors, including the
cyclical demand of the semiconductor industry, order cancellations or
rescheduling by customers, the large selling prices of the Company's test
systems (which typically result in a long selling process), competitive pricing
pressures and the mix between and configuration of test systems sold in a
particular period. The impact of these and other factors on the Company's sales
and operating results in any future period cannot be forecast with accuracy. In
addition, the need for continued investment in research and development, for
capital equipment requirements and for extensive worldwide customer support
capability results in significant fixed costs which would be difficult to reduce
in the event that the Company does not meet its sales objectives.
Dependence Upon Key Suppliers
Most of the components for the Company's products are available from a number of
different suppliers; however, certain components are purchased from a single
supplier. Any disruption or termination of supply of components, particularly
single source components, could have an adverse effect on the Company's business
and results of operations.
Dependence Upon Key Personnel
The Company's success is dependent upon certain key management and technical
personnel. There is intense competition for a limited number of qualified
employees among companies in
11
the semiconductor test equipment industry, and the loss of certain of the
Company's employees or an inability to attract and motivate highly skilled
employees could adversely affect its business.
Cyclicality of Semiconductor Industry
The Company's business is largely dependent upon the capital expenditures of
semiconductor manufacturers. The semiconductor industry is highly cyclical and
has historically experienced recurring periods of oversupply, which often have
had a severely detrimental effect on such industry's demand for test equipment
and could cause cancellations, rescheduling or reductions of customer orders.
No assurance can be given that the Company's business and results of operations
will not be materially adversely affected if the current upswing does not
continue or if downturns or changes in any particular market segments of the
semiconductor industry occur in the future, especially if all of the market
segments in which the Company participates experience downturns at the same
time.
Highly Competitive Industry
The STE industry is highly competitive in all areas of the world. Most of the
Company's major competitors have substantially greater financial resources and
some have more extensive engineering, manufacturing, marketing and customer
support capabilities than the Company. The Company expects its competitors to
continue to improve the performance of their current products and to introduce
new products with improved price and performance characteristics. The Company
principally competes on the basis of performance, cost of test, reliability,
customer service, applications support, price and ability to deliver its
products on a timely basis. New product introductions by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products and could prevent the successful introduction of the
Company's new products. In addition, increased competitive pressure could lead
to intensified price-based competition, resulting in lower prices and adversely
affecting the Company's business and results of operations. The Company believes
that to remain competitive it will require significant financial resources for
investment in new product development and for the maintenance of customer
support centers worldwide. There can be no assurance that the Company will be
able to compete successfully in the future.
Year 2000
Many computer systems will experience problems handling dates beyond the Year
1999 because the systems are coded to accept only two-digit entries in the date
code field. The Company is assessing the readiness of its products sold to
customers for handling Year 2000 issues, as well as its own internal business
systems and the products and internal business systems of its suppliers. In
connection with the foregoing, the Company has established a Year 2000 Program
to address both LTX product compliance and internal business systems and
suppliers compliance. The Program is sponsored by a member of senior management
who is charged with apprising senior management and the Board of Directors of
the status of the Company's compliance efforts.
Certain hardware and software products currently installed at sites will require
upgrade or other remediation to become Year 2000 compliant. The Company is
identifying and contacting affected customers to advise them of non-compliant
products. The Company has established three ongoing product-based teams to
ensure product compliance. The teams are managed in accordance with the
Company's engineering product development process. The Company anticipates that
it will incur costs of approximately $400,000 to make its products Year 2000
compliant. A majority of such Year 2000 compliance expenses is represented by
existing engineering personnel assigned to the project. The Company does not
believe that there will be a material adverse impact as a result of making its
products Year 2000 compliant since the Company's products are not "date
dependent" in any material respect.
The Company also has established a team to assess Year 2000 readiness of its
internal business systems (including its facilities) and the products and
internal business systems of its suppliers. The team has identified all mission
critical systems and plans have been formulated to ensure Year 2000 compliance.
It is anticipated that the Company will incur costs of approximately
12
$300,000 in making its internal business systems Year 2000 compliant. There can
be no assurance, however, that the Company will not experience unanticipated
material costs caused by undetected errors or defects in such systems.
The impact to the Company of Year 2000 will also be dependent on the manner in
which Year 2000 issues are addressed by third parties that either provide or
receive services or data to or from the Company or whose operations are critical
to the Company. To reduce this risk, the team has been identifying mission
critical third parties to determine their Year 2000 readiness. The Company is
also developing contingency plans if these third parties fail to address
adequately Year 2000 issues. These plans primarily involve identifying
alternative vendors and suppliers. The Company has targeted August 31, 1999 for
completion of its contingency plans. There can be no assurance that these plans
will fully address these problems and whether such alternative sources are in
fact available.
Although the Company does not believe that there will be any material adverse
impact to its operations and products as a result of the Year 2000, there can be
no assurance that the Company will not experience unanticipated costs and
consequences caused by Year 2000 which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Reasonable descriptions of most likely worse case scenarios could include power
outages at the Company's facilities, in particular, its Westwood, Massachusetts
facility and product component shortages as a result of Year 2000 problems at
the Company's critical suppliers and vendors. If any of these were to occur, the
Company's business and operations could be adversely impacted.
Market Risk
Financial instruments that potentially subject the Company to concentrations of
credit-risk consist principally of investments in cash equivalents, short-term
investments and trade receivables. The Company places its investment with high-
quality financial institutions, limits the amount of credit exposure to any one
institution and has established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity. The
Company's trade receivables result primarily from sales to semiconductors
manufacturers located in North America, Japan, the Pacific Rim and Europe.
Receivables are from major corporations or are supported by letters of credit.
The Company maintains reserves for potential credit losses and such losses have
been immaterial.
The fair value of the Company's notes payable and long-term liabilities is
estimated based on quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
For all other balance sheet financial instruments, the carrying amount
approximates fair value.
Asia Economic Conditions
In light of the economic downturn in certain Asian countries, there can be no
assurance that the Company will be able to continue to obtain additional orders
or that it will not experience cancellations of existing orders from customers
located in or dependent upon such countries, any of which would have an adverse
effect on the Company's business and results of operations.
Customer Concentration
The loss of a major customer or reduction in, or rescheduling or cancellation
of, orders by major customers, including reductions, cancellations or
rescheduling due to market or competitive conditions in the semiconductor
industry, has had in the past and could have in the future an adverse effect on
the Company's business and results of operations. In addition, the Company's
ability to increase its sales will depend in part upon its ability to obtain
orders from new
13
customers. The loss of one or more of its top ten customers could have a
material adverse effect on the Company's business and results of operations.
Proprietary Rights
The Company's future success depends in part upon its proprietary technology.
Although the Company attempts to protect its proprietary technology through a
combination of contract provisions, trade secrets, copyrights and patents, it
believes that its future success depends more upon its engineering,
manufacturing, marketing and service skills. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or the independent development by
others of similar technology. Although there are no pending actions against the
Company regarding any patents, no assurance can be given that infringement
claims by third parties will not have a material adverse effect on the Company's
business and results of operations.
Acquisitions
The Company from time to time may acquire technologies, product lines or
businesses that are complementary to those of the Company. Although the Company
believes that integration of acquired technologies, product lines and businesses
will result in long-term growth and profitability, there can be no assurance
that the Company will be able to successfully negotiate, finance or integrate
such acquired technologies, product lines or business. Furthermore, the
integration of an acquired company or business may cause a diversion of
management time and resources. There can be no assurance that a given
acquisition, if consummated, would not materially adversely affect the Company.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule.
(b) There were no reports on Form 8-K filed during the three months
ended April 30, 1999.
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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: June 14, 1999 By: /s/ Roger W. Blethen
-------------------------------- -------------------------------------
Roger W. Blethen
Chief Executive Officer and President
Date: June 14, 1999 By: /s/ David G. Tacelli
-------------------------------- ------------------------------------
David G. Tacelli
Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)