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 October 31, 1999
-----------------------------
OR
[X] 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 Identification No.)
Incorporation or Organization)
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 December 3, 1999
- ----------------------------------------- ----------------------------------
Common Stock, par value $0.05 per share 42,586,879
LTX CORPORATION
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet 1
October 31, 1999 and July 31, 1999
Consolidated Statement of Operations 2
Three months ended October 31, 1999
And October 31, 1998
Consolidated Statement of Cash Flows 3
Three months ended October 31, 1999
And October 31, 1998
Notes to Consolidated Financial Statements 4-8
Item 2. Management's Discussion and Analysis of Financial 9-19
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except share data)
October 31, July 31,
1999 1999
------------- -------------
ASSETS
Current assets:
Cash and equivalents $ 93,534 $ 19,936
Accounts receivable, net of allowances of $1,792 and $2,200 52,579 37,043
Accounts receivable - other 4,129 4,324
Inventories 55,110 48,551
Other current assets 5,726 5,795
------------- -------------
Total current assets 211,078 115,649
Property and equipment, net 32,649 31,942
Other assets 745 402
------------- -------------
$ 244,472 $ 147,993
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 11,399 $ 5,472
Current portion of long-term debt 661 674
Accounts payable 40,298 37,439
Deferred revenues and customer advances 12,257 11,391
Other accrued expenses 12,463 12,758
------------- -------------
Total current liabilities 77,078 67,734
============= =============
Long-term debt, less current portion 14,080 14,023
Other long-term liabilities - -
Convertible subordinated debentures 7,308 7,308
Stockholders' equity 146,006 58,928
------------- -------------
$ 244,472 $ 147,993
============= =============
See accompanying Notes to Consolidated Financial Statements
1
LTX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amount)
Three Months
Ended
October 31,
--------------------------------
1999 1998
-------------- ---------------
Net sales $ 60,005 $ 27,018
Cost of sales 36,259 19,847
------------- --------------
Gross margin 23,746 7,171
Engineering and product development 7,818 5,996
expenses
Selling, general and administrative expenses 8,698 7,869
------------- --------------
Income (loss) from operations 7,230 (6,694)
Interest (income) expense, net 356 198
Other (income) expense, net - -
------------- --------------
Income (loss) before income taxes 6,874 (6,892)
Provision for income taxes - -
------------- --------------
Net income (loss) $ 6,874 $ (6,892)
============= ==============
Net income (loss) per share:
Basic $ 0.19 $ (0.19)
Diluted $ 0.17 $ (0.19)
Weighted average shares:
Basic 37,029 35,477
Diluted 40,422 35,477
See accompanying Notes to Consolidated Financial Statements
2
LTX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months
Ended
October 31,
-------------------------------
1999 1998
-------------- --------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 6,874 $ (6,892)
Add (deduct) non-cash items:
Depreciation and amortization 2,773 2,859
Exchange (gain) loss (267) 460
(Increase) decrease in:
Accounts receivable (14,973) 5,121
Inventories (6,511) (875)
Other current assets 82 (538)
Other assets (343) (2)
Increase (decrease) in:
Accounts payable 2,672 (3,108)
Accrued expenses and restructuring charges (359) (544)
Deferred revenues and customer advances (790) (938)
------------- -------------
Net cash used in operating activities (10,842) (4,457)
------------- -------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Expenditures for property and equipment, net (4,005) (506)
------------- -------------
Net cash used in investing activities (4,005) (506)
------------- -------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from stock purchase plans - -
Proceeds from stock option plans 249 -
Proceeds from stock equity offering 79,954
Proceeds from short term borrowing 27,949 -
Payments of short term borrowing (22,022) (767)
Payments of long-term debt and other liabilities 44 (362)
Proceeds from lease financing 2,087 -
------------- -------------
Net cash provided by (used in) financing activities 88,261 (1,129)
------------- -------------
Effect of exchange rate changes on cash 184 619
------------- -------------
Net decrease in cash and equivalents 73,598 (5,473)
Cash and equivalents at beginning of period 19,936 25,109
------------- -------------
Cash and equivalents at end of period $ 93,534 $ 19,636
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (received) during the period for:
Interest $ 910 $ 359
Income taxes $ 42 $ (846)
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 newly introduced 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.
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 year-end exchange rates while non-monetary items are translated
at historical rates. Income and expense accounts are translated at the average
rates in effect during the year, except for sales, cost of sales and
depreciation, which are primarily translated at historical rates. Net realized
and unrealized gains and losses resulting from foreign currency remeasurement
and transaction gains and losses were a gain of $267,000 and a loss of $460,000
for the three months ended October 31, 1999 and 1998 respectively. The
4
amounts for both periods were principally due to fluctuations in the Japanese
yen. Transaction gains and losses are included in the consolidated results of
operations.
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.
During April 1998, Ando Electric Co., Ltd. ("Ando") paid the Company $17.4
million in cash and LTX Common Stock for the rights to manufacture, market and
develop LTX's Fusion product for Japanese customers. The Company recognized $7.4
million of revenue during fiscal 1998 for the sale of its marketing and
development rights. The Company deferred $10.0 million of revenue related to the
manufacturing rights and transfer of technology knowledge. The $10.0 million was
recognized on a percentage of completion basis over the period in which the
Company completes the transfer of the manufacturing and technology rights. The
Company recognized $8.5 million of the deferred revenue in fiscal 1999 and has
recognized the remaining $1.5 million in the first quarter of fiscal 2000. In
addition, the Company will receive future royalty payments, which will be
recognized as revenue in the period earned.
Income Taxes
Deferred income taxes are recorded for temporary differences between the
financial reporting and tax basis of assets and liabilities. Research and
development tax credits are recognized for financial reporting purposes to the
extent that they can be used to reduce the tax provision. The Company has not
provided for federal income taxes on the cumulative undistributed earnings of
its foreign subsidiaries, which were not significant, in the past since it
reinvested those earnings. At October 31, 1999, most of the Company's foreign
subsidiaries had accumulated deficits.
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 have been restated to reflect the impact of adopting SFAS
128. 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 income
(loss) per common 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 (loss) by the weighted average number of
common shares and all dilutive securities outstanding.
5
A reconciliation between basic and diluted earnings per share is as follows:
Three Months Ended
October 31,
1999 1998
(in thousands except per/share amounts)
Net income (loss) $ 6,874 $(6,892)
Basic EPS
Basic common shares 37,029 35,477
Basic EPS $ 0.19 $ (0.19)
Diluted EPS
Basic common shares 37,029 35,477
Plus: Impact of stock options and warrants 3,393 -
------- -------
Diluted common shares 40,422 35,477
------- -------
Diluted EPS $ 0.17 $ (0.19)
There were no options outstanding that were excluded in the above calculation of
diluted earnings per share as of October 31, 1999. The impact of stock option
and warrants was not used in the calculation of the October 31, 1998 diluted EPS
as the Company was in a net loss position.
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:
October 31, July 31,
1999 1999
----------- ----------
(In thousands)
Raw materials $24,770 $22,380
Work-in-progress 19,950 18,107
Finished goods 10,390 8,064
---------- ----------
$55,110 $48,551
========== ==========
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.
6
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board also issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131). 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 profit and loss,
assets and capital expenditures, major customers and types of products from
which revenues are derived, (see Note 9).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000. A company may also implement the
statement as of the beginning of any fiscal quarter after issuance (that is,
fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be
applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998). This statement could
increase volatility in earnings and other comprehensive income for companies
with applicable contracts. The Company is in the process of quantifying the
impact of adopting SFAS No. 133 on its financial statements and has not
determined the timing of or method of adoption.
Interest Expense and Income
Interest expense and income were as follows:
Three Months
Ended
October 31,
1999 1998
-----------------------------
(In thousands)
Expense $ 611 $ 397
Income (255) (199)
------- --------
Interest (income) expense, net $ 356 $ 198
======= ========
7
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 sales to unaffiliated customers for the three months ended October
31, 1999 and 1998, along with the long-lived assets for October 31, 1999 and
July 31, 1999 are summarized as follows:
Three Months
Ended
October 31,
----------------------------------
1999 1998
-------- ---------
Sales to unaffiliated customers:
United States $ 11,665 $ 12,374
Taiwan 14,887 5,488
Japan 829 1,099
Singapore 16,377 1,701
All other countries 16,247 6,356
--------- ---------
Total sales to unaffiliated customers $ 60,005 $ 27,018
========= =========
October 31, July 31,
1999 1999
---------- ---------
Long-lived assets:
United States $ 25,683 $ 24,965
Taiwan 1,075 1,175
Japan 59 59
Singapore 3,390 3,695
All other countries 2,442 2,048
---------- ----------
Total long-lived assets $ 32,649 $ 31,942
========== ==========
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the principal items
included in the Consolidated Statement of Operations as percentages of net
sales.
Percentage of Net Sales
----------------------- Percentage
Three Months Increase/(Decrease)
Ended -------------------
October 31, Three Months
----------------------- 1999
1999 1998 Over 1998
--------- -------- -------------------
Net Sales 100.0% 100.0% 122.0%
Cost of sales 60.4% 73.3% 82.7%
--------- -------- -------------------
Gross Margin 39.6% 26.7% 231.1%
Engineering and product
development expenses 13.0% 22.2% 30.3%
Selling, general and
administrative expenses 14.5% 29.1% 10.5%
--------- -------- -------------------
Income (loss) from
operations 12.1% N/M N/M
Interest (income) expense,
net 0.6% 0.7% N/M
--------- -------- -------------------
Income (loss) before
income taxes 11.5% N/M N/M
Provision for income taxes -0- -0- -0-
--------- -------- -------------------
Net income (loss) 11.5% N/M N/M
========= ======== ===================
N/M - Not Meaningful
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 Ended October 31, 1999 Compared
to the Three Months Ended October 31, 1998
Net sales for the three months ended October 31, 1999 increased 122% to $60.0
million as compared to $27.0 million in the same quarter of the prior year. Net
sales included $1.5 million of deferred revenue from the Company's Fusion
alliance with Ando Electric Co., Ltd. All of the $10.0 million of deferred
revenue from the Fusion alliance with Ando has been recognized. Geographically,
sales to customers outside of North America were 80% and 54% of total net sales
in the three months ended October 31, 1999 and 1998, respectively. The increase
was due in part to sales to domestic semiconductor producers, which shipped to
international sites. Service revenues accounted for $7.4 million or 12.3% and
$6.8 million or 25.2% for the three months ended October 31, 1999 and 1998,
respectively.
The gross profit margin was 39.6% of net sales in the three months ended October
31, 1999, compared to 26.7% of net sales in the same quarter of the prior year.
The increase is a result of a higher level of sales relative to fixed
manufacturing costs and improved product margins due to shipments of the
Company's Fusion test systems, which carry a higher gross margin than the prior
generation systems.
Engineering and product development expenses were $7.8 million, or 13.0% of net
sales, in the three months ended October 31, 1999, as compared to $6.0 million,
or 22.2% of net sales, in the same quarter of the prior year. The increase in
expenditure is principally a result of a higher level of development expenses
and key account support costs for the Company's Fusion product line.
Selling, general and administrative expenses were $8.7 million, or 14.5% of net
sales, in the three months ended October 31, 1999, as compared to $7.9 million,
or 29.3% of net sales, in the same quarter of the prior year. The increase in
the selling, general and administrative expenses of $0.8 million is related to
the development of the Fusion product line and support of key account wins.
Net interest expense was $0.4 million in the three months ended October 31,
1999, as compared to net interest income of $0.2 million in the same quarter in
the prior year and occurred because of the increase in the Company's bank debt
outstanding.
The Company had no tax provision for the three months ended October 31, 1999 and
1998. The Company's net operating loss carry forward is sufficient to cover
taxable income for the quarter ended October 31, 1999.
10
Net income was $6.9 million, or $0.17 per share, in the three months ended
October 31, 1999. The Company had a net loss of $(6.9) million or $(0.19) per
share, in the same quarter of the prior year.
Liquidity and Capital Resources
At October 31, 1999, the Company had $93.5 million in cash and equivalents and
working capital of $134.0 million, as compared to $19.9 million of cash and
equivalents and $47.9 million of working capital at July 31, 1999. The increase
in cash balance was a result of proceeds from a common stock offering totaling
approximately $80.0 million, which was completed in October 1999.
Accounts receivable from trade customers were $52.6 million at October 31, 1999,
as compared to $37.0 million at July 31, 1999. The principal reason for the
increase is a result of increasing sales revenue for Fusion products to new and
existing accounts. The reserve for sales returns allowances and doubtful
accounts was $1.8 million or 3.3% of gross accounts receivable on October 31,
1999 and $2.2 million or 5.6% of gross accounts receivable on July 31, 1999. The
major reason for the decrease in the reserve balance was due to write offs of
specifically identified accounts.
Inventories increased by $6.5 million to $55.1 million at October 31, 1999 as
compared to $48.6 million at July 31, 1999. The increase is directly
attributable to the production ramp in the Fusion product line as sales in that
line have increased sequentially each quarter since the quarter ending October
31, 1998.
On October 1, 1999, the Company renegotiated its $10.0 million domestic credit
facility with its current lender. The facility is secured by all assets of the
Company and bears interest at the bank's prime rate plus 0.5%. Borrowing
availability under the facility is based on a formula of eligible domestic
accounts receivable. In addition, the Company entered into an agreement with
the same bank that provided the Company with a $5.0 million line of credit that
bears interest at prime plus 0.5%. Borrowing availability under this facility
is based on a formula of eligible foreign accounts receivable and inventories
and is guaranteed by the Export-Import Bank of the United States. Outstanding
borrowings at October 31, 1999 were $6.3 million under the domestic credit
facility and $5.0 million under the foreign accounts receivable line facility.
The accrued liabilities for restructuring activity of $2.3 million remained
unchanged from July 31, 1999. This relates to the estimated cost to upgrade
products due to the transition to the Fusion product line. The Company
anticipates this activity will be completed by July 31, 2000.
The Company anticipates that cash flow from operations combined with the recent
equity offering proceeds and credit facility enhancements will be adequate to
fund the Company's currently proposed operating activities for the next twelve
months.
Year 2000
A discussion of the impact of the Year 2000 to the Company appears under the
heading "Business Risks" below.
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,
11
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. 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.
Most recently, our revenue and operating results declined in fiscal 1998 as a
result of a sudden and severe downturn in the semiconductor industry
precipitated by the recession in several Asian countries. Downturns in the
semiconductor test equipment industry have been characterized by diminished
product demand, excess production capacity 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. In the
past, we have experienced delays in commitments, delays in collecting accounts
receivable and significant declines in demand for our products during these
downturns, and we cannot be certain that we will be able to maintain or exceed
our current level of sales. Additionally, as a capital equipment provider, our
revenue is driven by the capital expenditure budgets and spending patterns of
our customers who often delay or accelerate purchases in reaction to variations
in their businesses. Because a high proportion of our costs are fixed, we are
limited in our ability to reduce expenses quickly in response to revenue
shortfalls. In a contraction, we may not be able to reduce our significant fixed
costs, such as continued investment in research and development and capital
equipment requirements.
Our Sales and Operating Results Have Fluctuated Significantly From Period to
Period, Including From One Quarter to Another, and They May Continue to Do So.
Our quarterly and annual operating results are affected by a wide variety of
factors that could adversely affect sales or profitability or lead to
significant variability in our operating results or our stock price. This may be
caused by a combination of factors, including the following:
. sales of a limited number of test systems account for a substantial
portion of our net sales in any particular fiscal quarter, and a small
number of transactions could therefore have a significant impact;
. order cancellations by customers;
. lower gross margins in any particular period due to changes in:
-- our product mix,
12
-- 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.
We May Not Be Able to Deliver Custom Hardware Options and Software Applications
to Satisfy Specific Customer Needs in a Timely Manner.
We must develop and deliver customized 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.
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. 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.
13
Our Future Rate of Growth is Highly Dependent on the Growth of the SOC Market.
In 1996, we refocused our business strategy on the development of our Fusion HF
product, which is primarily targeted towards addressing the needs of the SOC
market. If the SOC market fails to grow as we expect, our ability to sell our
Fusion HF product will be hampered.
Our Market Is Highly Competitive, and We Have Limited Resources to Compete.
The test equipment industry is highly competitive in all areas of the world.
Many other domestic and foreign companies participate in the markets for each of
our products, and the industry is highly competitive. Our principal competitors
in the market for semiconductor test equipment are Agilent Technologies
(formerly a division of Hewlett-Packard), Credence Systems, Schlumberger
Limited, and Teradyne. Most of these major competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing, and customer support capabilities.
We expect our competitors to enhance their current products and to introduce new
products with comparable or better price and performance. The introduction of
competing products could hurt sales of our current and future products. In
addition, new competitors, including semiconductor manufacturers themselves, may
offer new testing technologies, which may in turn reduce the value of our
product lines. Increased competition could lead to intensified price-based
competition, which would hurt our business and results of operations. Unless we
are able to invest significant financial resources in developing products and
maintaining customer support centers worldwide, we may not be able to compete.
Development of Our Products Requires Significant Lead-Time, and We May Fail to
Correctly Anticipate the Technical Needs of Our Customers.
Our customers make decisions regarding purchases of our test equipment while
their devices are still in development. Our test systems are used by our
customers to develop, test and manufacture their new devices. We therefore must
anticipate industry trends and develop products in advance of the
commercialization of our customers' devices, requiring us to make significant
capital investments to develop new test equipment for our customers well before
their devices are introduced. If our customers fail to introduce their devices
in a timely manner or the market does not accept their devices, we may not
recover our capital investment through sales in significant volume. In addition,
even if we are able to successfully develop enhancements or new generations of
our products, these enhancements or new generations of products may not generate
revenue in excess of the costs of development, and they may be quickly rendered
obsolete by changing customer preferences or the introduction of products
embodying new technologies or features by our competitors. Furthermore, if we
were to make announcements of product delays, or if our competitors were to make
announcements of new test systems, these announcements could cause our customers
to defer or forego purchases of our existing test systems, which would also hurt
our business.
Our Success Depends on Attracting and Retaining Key Personnel.
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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. Our layoffs in the last
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. 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.
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 80% of our revenues for the three months ended October 31,
1999 and 54% of our revenues for the quarter ended October 31, 1998. 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
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. 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.
Economic Conditions in Asia May Hurt Our Sales.
Asia is an important region for our customers in the semiconductor industry, and
many of them have operations there. In recent years, Asian economies have been
highly volatile and recessionary, resulting in significant fluctuations in local
currencies and other instabilities. These instabilities may continue or worsen,
which could have a material adverse impact on our financial position and results
of operations, as approximately 45% of our sales in fiscal 1999 were derived
from this region. These conditions may continue or worsen. In light of the
recent economic downturn in Asia, we may not be able to obtain additional orders
and may experience cancellations of orders. If conditions do not continue to
improve, our future financial condition, revenues, and operating results could
be hurt.
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.
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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 past twelve months, our stock price has ranged from a low of $2.06 to a
high of $16.18. The price of our common stock has been and likely will continue
to be subject to wide fluctuations in response to a number of events and
factors, such as:
. quarterly variations in operating results;
. variances of our quarterly results of operations from securities
analyst estimates;
. changes in financial estimates and recommendations by securities
analysts;
. announcements of technological innovations, new products, or strategic
alliances; and
. news reports relating to trends in our markets.
In addition, the stock market in general, and the market prices for
semiconductor-related companies in particular, have experienced significant
price and volume fluctuations that often have been unrelated to the operating
performance of the companies affected by these fluctuations. These broad market
fluctuations may adversely affect the market price of our common stock,
regardless of our operating performance.
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Year 2000 Problems May Hurt Our Business.
We have established a program to address Year 2000 software failure issues,
which is overseen by a senior manager who updates our officers and directors
regularly. We are currently assessing the Year 2000 compliance of the products
we manufacture, our internal business systems, and the products and internal
business systems of our suppliers. We expect to incur costs of approximately
$400,000 to make our products Year 2000 compliant, most of which is represented
by current engineering staff who have been assigned to the project, and
approximately $300,000 in ensuring compliance of our internal business systems
and those of our suppliers, most of which is represented by current
administrative personnel assigned to the project. Costs related to Year 2000
compliance have been immaterial as of October 31, 1999.
Three product-based teams, employing our engineering product development
process, are in the process of identifying and contacting affected customers to
advise them of non-compliant products. We cannot assure you that our products do
not contain undetected Year 2000 problems. Another team is assessing the Year
2000 compliance of our internal business systems, including facilities, and the
products and internal business systems of our suppliers. This team has
identified all mission-critical systems and third parties and has formulated
remediation plans. We are also developing comprehensive contingency plans if our
remediation plans do not work, which were essentially completed by October 31,
1999. These contingency plans primarily involve identifying alternative vendors
and suppliers. They may not adequately address our potential Year 2000 problems,
and alternative sources may not in fact be available. Although responses to a
survey of our critical suppliers, vendors and facilities owners indicate that
many of them are Year 2000 compliant, we have not received sufficient
information from all parties about their Year 2000 readiness to assess the
effectiveness of their efforts. We cannot be sure that these entities will
adequately address Year 2000 issues.
If we fail to detect errors or defects in our systems or those of our suppliers,
or if third parties with whom we interact experience Year 2000 problems,
reasonable descriptions of most likely worst case scenarios include the
following:
. power, communication and other utility outages at our facilities, in
particular, our Westwood, Massachusetts facility; and
. product component shortages as a result of Year 2000 problems at our
critical suppliers and vendors.
If any of these were to occur, our business and operations would be hurt.
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 $33.4 million as of October
31, 1999 and $27.5 million as of
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July 31, 1999, 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 a variable rate of prime plus 0.5%. 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 three months ended October
31, 1999, our revenues derived from shipments outside the United States
constituted 80.0% of our total revenues. Revenues invoiced and collected in
currencies other than U.S. dollars comprises 3% of our last quarter fiscal
revenues. 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. Subsequent to this
offering, we intend to manage our interest rate exposure using a mix of fixed
and floating interest rate debt and, if appropriate financial derivative
instruments.
On October 31, 1999, $11.3 million was outstanding under our domestic bank
facility bearing interest at a rate of 8.5%. Based on this balance, an immediate
change of 1% in the interest rate would cause a change in interest expense of
approximately $63,000 on an annual basis. Our 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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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) (i) Exhibit 10(U) - Loan and Security Agreement and Export-Import
Loan and Security, both dated as of October 1, 1999 between LTX
Corporation and Silicon Valley Bank
(ii) Exhibit 10(CC) - 1999 Stock Plan
(iii) Exhibit 27 - Financial Data Schedule
(b) There were no reports on Form 8-K filed during the three months ended
October 31, 1998.
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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: December 15, 1999 By: /s/ Roger W. Blethen
------------------- ---------------------
Roger W. Blethen
Chief Executive Officer and President
Date: December 15, 1999 By: /s/ David G. Tacelli
------------------- ---------------------
David G. Tacelli
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
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