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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997
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 NO. 0-10761
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LTX CORPORATION
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 04-2594045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
UNIVERSITY AVENUE, WESTWOOD, MASSACHUSETTS 02090
(Address of principal executive offices) (Zip Code)
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(617) 461-1000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.05 PER SHARE
7 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock held by non-affiliates of
the registrant on October 1, 1997 was $266,668,404.
Number of shares outstanding of each of the issuer's classes of Common Stock as
of October 1, 1997:
Common Stock, Par Value $0.05 Per Share, 36,788,728 shares.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT IN CONNECTION WITH ITS 1997
ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF
THIS FORM 10-K REPORT. THE COMPENSATION COMMITTEE REPORT AND STOCK PERFORMANCE
GRAPH OF THE REGISTRANT'S PROXY STATEMENT ARE EXPRESSLY NOT INCORPORATED HEREIN
BY REFERENCE.
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL
YEAR ENDING JULY 31, 1997 (THE "1997 ANNUAL REPORT") ARE INCORPORATED BY
REFERENCE INTO PART II AND PART IV. EXCEPT AS OTHERWISE SPECIFICALLY
INCORPORATED HEREIN BY REFERENCE IN THIS FORM 10-K REPORT, THE 1997 ANNUAL
REPORT IS NOT DEEMED FILED AS PART OF THIS FORM 10-K REPORT.
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LTX CORPORATION
INDEX
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PART I
Item 1. Business Overview........................................................... 1
Industry Background......................................................... 1
Company Strategy............................................................ 2
Products and Markets........................................................ 3
Linear/Mixed Signal Products................................................ 4
Digital Products............................................................ 5
Discrete Products........................................................... 6
Service..................................................................... 6
Sales and Distribution...................................................... 6
Customers................................................................... 7
Engineering and Product Development......................................... 7
Manufacturing and Supply.................................................... 7
Competition................................................................. 7
Backlog..................................................................... 8
Proprietary Rights.......................................................... 8
Executive Officers of the Company........................................... 8
Employees................................................................... 9
Environmental Affairs....................................................... 9
Item 2. Properties.................................................................. 9
Item 3. Legal Proceedings........................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......................... 10
PART II
Item 5. Market Value for the Registrant's Common Stock and Related Security Holder
Matters..................................................................... 10
Item 6. Selected Consolidated Financial Data........................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 10
Item 8. Financial Statements and Supplementary Data................................. 11
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 12
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 12
Item 11. Executive Compensation...................................................... 12
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 12
Item 13. Certain Relationships and Related Transactions.............................. 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 12
Financial Statements....................................................... 12
Schedules.................................................................. 12
Exhibits................................................................... 12
Listing of Exhibits........................................................ 13
Reports on Form 8-K........................................................ 14
Exhibits................................................................... 14
Signatures................................................................. 15
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LTX(R), HiPer(R) and enVision(TM) are all trademarks of LTX Corporation.
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PART I
ITEM 1. BUSINESS
OVERVIEW
LTX Corporation ("LTX" or the "Company") designs, manufactures and markets
automatic test equipment for the semiconductor industry that is used to test
digital, linear and mixed signal (a combination of digital and linear)
integrated circuits ("ICs") and discrete semiconductor components. The Company
currently offers three lines of test systems: digital test systems, which test
digital ICs, including microprocessors and microcontrollers; linear/mixed signal
test systems, which test a wide range of linear and mixed signal ICs; and
discrete component test systems, which test small signal and high power
semiconductor components. In fiscal 1998, the Company will introduce LTX Fusion,
a single platform test system designed to test system-on-a-chip devices. The
Company also sells service and applications support 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 both manufacturers and users of digital,
linear and mixed signal ICs and discrete semiconductor components.
INDUSTRY BACKGROUND
All semiconductor manufacturers use semiconductor test equipment ("STE") in
the design and manufacture of ICs. During design, STE is used for design
verification, characterization, qualification and failure analysis of ICs.
During manufacture, STE is used during wafer probing to select usable ICs and
after packaging to classify ICs by performance characteristics and to assure
conformance with quality standards. Typically, all ICs are tested two or more
times during the manufacturing process. In addition, certain large electronic
equipment manufacturers employ STE for incoming inspection and for further
classification of ICs.
Demand for STE is driven by overall business expansion in the semiconductor
industry and advances in semiconductor technology. When demand for
semiconductors increases, semiconductor manufacturers will often purchase STE to
meet their growing capacity requirements. Advances in semiconductor technology
have allowed for increasingly complex semiconductor devices with improved
performance, lower cost and greater reliability than earlier generations of
devices. As a result, the use of semiconductors has proliferated across many
industries, particularly in applications for the computer, communications,
automotive and consumer electronics industries. In turn, semiconductor
manufacturers are demanding STE that is faster, more versatile, more accurate,
more productive and easier to program and maintain.
Prices of STE systems generally increase as their capabilities increase.
The acquisition of STE represents a significant investment on the part of the
Company's customers, who typically consider both the capital and long term
operating costs of the test system in the acquisition process. Factors that can
vary from one test system to another, and thereby affect the total cost of
testing, include:
Speed. A test system that offers faster test times or that is able to test
more than one device at a time is able to test a greater number of devices over
its product life, thus increasing the system's efficiency and reducing the
customer's cost of testing.
Accuracy. Superior accuracy improves the yield of the semiconductor
production process because it reduces the number of good devices that are
improperly rejected and permits the selection of a higher number of premium
devices.
Efficiency. Greater efficiency in test program preparation, loading and
debugging leads to faster time to market for newly-designed semiconductors.
Software. Test system operating software which is easier to use and more
powerful reduces the amount of engineering resources needed to develop test
programs and operate test systems.
Reliability. A test system that operates with minimal downtime allows the
customer's production and engineering work to proceed without frequent
intervention and provides more cost-effective operation.
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System Architecture. Test system architecture that is modular extends the
product life of a test system because the system can be adapted to meet the
customer's new requirements while largely retaining compatibility with existing
test programs.
Customer Support. Customer specific applications programs, worldwide
service and customer training contribute to the efficient use of STE and
minimize the customer's cost of testing.
COMPANY STRATEGY
The key components of the Company's strategy are as follows:
Develop Single Test Platform for Testing Systems-on-a-Chip
In fiscal 1997, the Company reorganized and integrated its linear/mixed
signal and digital engineering organizations to develop a single platform
systems-on-a-chip test system, LTX Fusion. By focusing its resources on a
single, shared technology product roadmap, the Company believes it will be able
to deliver the best mixed signal, digital and embedded memory test performance
for testing system-on-a-chip devices. The LTX Fusion test system is being
developed to enable complete functional testing of the embedded mixed signal,
digital and memory components of a system-on-a-chip device, as well as to
perform system-level testing related to the devices' end-use application. The
Company believes that superior test performance at the sub-component level,
without compromising functionality, is necessary to meet the requirements of the
emerging systems-on-a-chip market.
Provide Application Specific Solutions
The Company is committed to providing complete test solutions to its
customers by having a substantial group of engineers strategically located at
customer support centers throughout the world. By actively participating in the
application of its test systems, the Company is able to learn more about
requirements for new devices and to improve the design of future test systems.
LTX also believes that its participation in the application of its test systems
enables its customers to get devices to market more rapidly and builds stronger
ties with these customers.
Leverage Worldwide Presence
The semiconductor business is a worldwide industry, with well-established
manufacturers in the United States, Europe and the Far East. The Company has
nine offices in the United States, and in Europe maintains sales and support
offices in the United Kingdom, France, Italy and Germany. In recent years, an
increasing portion of semiconductor test and assembly operations have been
conducted in the Pacific Rim by manufacturers based in the United States and
Europe, as well as by local manufacturers. LTX has established sales and support
offices in Korea, Taiwan and Singapore to focus on the specific needs of the
markets within the Pacific Rim. In addition, through a majority-owned
subsidiary, the Company provides sales and support services at three locations
in Japan. The Company believes that this network of sales and support centers
improves its ability to sell and support its products to the world's major
semiconductor manufacturers.
Emphasize Quality and Reliability
The Company's quality program is designed to continually improve all of its
processes and increase the satisfaction of its customers. The Company believes
that this program will lead to: more efficient and timely performance in
engineering projects; improvement in manufacturing costs through the reduction
of defective products and manufacturing cycle time; better on-time delivery
performance; and greater reliability of its test systems. During fiscal 1997,
the Company expanded its ISO 9001 certification and its worldwide design,
manufacturing and service functions are now ISO 9001 certified.
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PRODUCTS AND MARKETS
Product Overview
The Company currently sells products in three broad product categories:
- Systems that are used to test linear and mixed signal devices, which
include the Synchro Series and Ninety;
- Systems that are used to test digital devices, which include the
Delta/STE and Master Series, and enVision test development software; and
- Discrete component test systems, marketed as the iPTest product line.
The Company's test systems are used by semiconductor manufacturers for
design verification, characterization, qualification and failure analysis of
ICs. In addition, certain large electronic equipment manufacturers use the
Company's test systems for incoming inspection and for further classification of
ICs. All of the Company's test systems are comprised of multiple
computer-controlled instruments which send signals to a device under test and
measure the responses of that device to classify the device by performance
characteristics and to ensure conformance with quality standards. The Company's
test system instrumentation is controlled by operating system software which is
developed by the Company. The Company also develops and sells test programs for
specific devices and offers software packages for use by semiconductor
manufacturers for test simulation in engineering design and test program
generation, data collection and statistical analysis in manufacturing.
Linear and Mixed Signal ICs
Linear ICs are used in almost every electronic application. Physical
occurrences, such as sound, images, temperature, pressure, speed, acceleration,
position and rotation, consist of continuously varying information. Linear ICs
are used to amplify, filter and shape this information. Mixed signal ICs convert
the signals from linear ICs into digital signals that can be processed by a
computer. Mixed signal devices also convert processed digital information into a
linear form to control physical phenomena or to improve sound and images.
Linear and mixed signal ICs are widely used in automobiles, appliances,
personal computers, telephone systems, personal communication products, such as
cellular telephones and pagers, and home entertainment products. The complexity
and density of these ICs have increased rapidly over the past several years, as
the demand for portable, battery-operated products has required IC manufacturers
to integrate more functions on each chip and reduce size and power consumption.
These technological advances have resulted in increased demand for higher
performance linear/mixed signal test systems.
Digital ICs
Digital ICs include microprocessors, microcontrollers, programmable DSPs
(digital signal processing), microperipherals and logic/ASIC (application
specific IC) devices. These ICs are used for computing, controlling and
calculating functions, and are at the heart of most electronic products. The
most well known of these devices is the microprocessor, which is the enabler of
personal computer technology. Microcontrollers, however, are much more broadly
used in automobiles, appliances, home entertainment products and many other
electronic products which utilize electronic control functions. Microprocessors
can cost hundreds or even thousands of dollars, while microcontrollers typically
cost tens of dollars. However, testing of microcontrollers can be as complex as
microprocessors and requires high performance test systems.
System-on-a-Chip ICs
System-on-a-chip ICs incorporate VLSI logic cores, embedded memory and
mixed signal interfaces on a single device and, therefore, can be used as a
product's entire electronic system. System-on-a-chip ICs will enable the
graphics, display, multimedia capabilities and communications functions of the
next generation of electronics products. These products include advanced pagers,
digital cameras, and cellular phones; digital
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high-definition TVs and home satellite set-top boxes; mobile Internet terminals
and modems; personal digital assistants with real-time audio and video; active
suspension and automotive collision avoidance systems; powerful graphics
accelerators; and digital motor controls. The need to test system-on-a-chip ICs
at both the subcomponent level and the system level will require test equipment
with high performance logic, memory and mixed signal capabilities.
LINEAR/MIXED SIGNAL PRODUCTS
LTX offers two product lines for testing linear/mixed signal ICs, the
Synchro Series and Ninety.
Synchro Series
Synchro test systems are designed for high throughput testing of linear
devices and for testing mixed signal devices that require high digital pattern
rates and high digital pin counts along with analog signal generation and
measurement requirements. The Synchro features DSP (digital signal
processing) -- per-pin architecture which allows for concurrent control of both
linear and digital resources at each pin of the IC under test. This design
permits the generation of test signals and measurements on many device pins at
the same time, producing faster test times on high pin count ICs. The Synchro
systems are modular in design which enables customers to add new options to
their systems in the future. This allows customers to increase the capability of
their Synchro system to meet their new test requirements. Since its
introduction, the Company has significantly upgraded the performance and
capabilities of the Synchro through the introduction of new hardware and
software.
The Synchro Series includes the Synchro II, Synchro Plus and Synchro
ProductionPAC test systems:
Synchro II. The configuration of the Synchro II test system is flexible.
This permits LTX customers to choose from a wide array of options to meet the
test requirements of a broad range of linear/mixed signal devices.
Synchro Plus. The Synchro Plus test system is configured with SuperSpeed
Data Pins which can test mixed signal devices at data rates of up to 400 MHz.
The Synchro Plus system addresses the test requirements of new, high speed
devices used in applications such as disk drives for personal computers and
advanced ATM(Asynchronous Transfer Mode) interface boards used to support the
development of the information superhighway.
Synchro ProductionPAC.
The Synchro ProductionPAC test systems are lower cost, smaller footprint,
specifically focused configurations that address the production requirements of
high volume, low cost mixed signal devices. The RFPAC system is configured to
test devices used in the rapidly expanding wireless communications market. The
PowerPAC addresses "smart" power devices that are being increasingly used in
automobiles and consumer electronics. The TelePAC addresses commodity ICs used
in telecommunications. The ConverterPAC is focused on devices used in multimedia
applications.
All Synchro Series test systems are fully compatible in hardware, software
and specification.
Ninety
The Ninety system is an improved version of the LTX77, the Company's first
linear/mixed signal test system introduced in 1977. Although the Synchro has
largely superseded the Ninety, the Company has continued to manufacture the
Ninety for customers who are already using the Ninety or LTX77 systems and
desire to expand capacity. Many of the Ninety or LTX77 systems the Company has
previously sold are currently still in use. In the past, the Company has
upgraded the performance and capabilities of the Ninety system through the
introduction of new hardware and software.
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Software Tools
The Company offers two software options to facilitate the development of
test solutions off-line, called Device Tool and Synchro Models Toolbox. These
software tools work in conjunction with IC design and simulation software
allowing test solutions to be designed and debugged with a model of the IC.
Device Tool and the Synchro Models Toolbox allow the development of test
solutions concurrent with the design of the IC, reducing customers time to
market for the IC.
DIGITAL PRODUCTS
LTX offers two product lines for testing digital ICs, the Delta/STE and the
Master Series. The Delta/STE and Master Series are based on a resource-per-pin
architecture which allows for a complete set of the test system's key features
(timing generators, waveform formatting and pattern memory) for each pin channel
of the test system. The Company believes that this architecture provides for
faster, simpler characterization and engineering debugging of new ICs, better
system timing accuracy, and simplified interfacing with computer-aided design
systems. The Company's enVision test development software is sold with both the
Delta/STE and the Master Series.
Delta/STE
The Delta/STE, introduced in fiscal 1996, incorporates mixed signal
technology with digital technology to address the test requirements of a new
generation of devices with high performance analog signal interfaces to complex
digital functions. These new devices are enabling the development of powerful,
yet low cost consumer electronic products in areas such as multimedia and
portable communications. The Delta/STE operates with the Company's enVision
graphical software environment providing customers with compatibility among
these systems.
In fiscal 1993, the Company entered into a development, manufacturing and
marketing agreement with Ando, a Japanese STE manufacturer and majority-owned
subsidiary of NEC, relating to the Company's Delta resource-per-pin digital test
system. Under the agreement, the Company granted Ando exclusive rights in Japan
to manufacture digital test systems based on the Company's Delta
resource-per-pin digital technology. The Company retained exclusive
manufacturing rights outside of Japan. Ando has the exclusive right in Japan to
sell its test systems based upon the Delta resource-per-pin digital technology
and the Company has exclusive marketing rights to these test systems for the
rest of the world, with certain exceptions in each case.
Master Series
The Master Series product line includes the Deltamaster and Micromaster
test systems, which are enhanced versions of the Company's original digital test
system. The Deltamaster is capable of testing up to 256 pins at data rates of up
to 80 MHz. The Micromaster is a lower-priced system that can test up to 256 pins
at data rates of up to 40 MHz. The Micromaster is device interface and software
compatible with the Deltamaster. Although the Delta/STE has essentially replaced
the Master Series, the Company has continued to sell the Master Series test
systems to customers who are already using these systems and desire to expand
capacity.
enVision
enVision, the Company's object-oriented programming software is designed
for use on all of its digital test systems. In earlier generation software
languages, programming commands made direct reference to the hardware of the
test system, which required the user to have a detailed knowledge of the
system's hardware. In contrast, this detailed knowledge is not required when
using enVision, thereby allowing the programmer to focus attention on refining
the test program for the specific IC under test. Thus, the Company has designed
enVision to be more device oriented than tester oriented. enVision permits a
user to test multiple devices at the same time, significantly improving the
throughput of the Company's digital test systems. enVision is an integral
feature of the Delta/STE and can be purchased by customers of the Master Series
product line.
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DISCRETE PRODUCTS
The Company's iPTest systems are used to test discrete components, such as
power transistors, as well as arrays of these components. The Company expects
that arrays of discrete components, such as multi-device modules, will replace
transistors in electric motor control and will permit a wider use of
semiconductors in extremely high power applications, such as air conditioners,
domestic appliances, electric locomotives and automobiles. These arrays of
discrete components are mostly constructed from IGBT (insulated gate bipolar
transistor) technology and include devices such as intelligent power modules and
power MOSFETS. In fiscal 1996, the Company introduced the iPTest PowerTrak
system to address intelligent power modules (IPM) as well as the iPTest high
speed parallel test MosTrak system to address discrete power MOSFETS and IGBT
transistors.
In fiscal 1995, the Company entered into a development, manufacturing and
marketing agreement with Asia Electronics, a Japanese STE manufacturer which is
50% owned by Toshiba, relating to a discrete component test system for testing
integrated power modules. As part of the agreement, Asia Electronics paid the
Company $1.5 million and may make royalty payments in the future based on sales
of this system. The Company granted Asia Electronics exclusive manufacturing
rights in Japan and the right to sell these systems to its customers in Japan.
SERVICE
The Company considers service to be an important aspect of its business.
The Company's worldwide service organization is capable of performing
installations and all necessary maintenance of test systems sold by the Company,
including routine servicing of components manufactured by third parties. The
Company provides a one-year parts and three-month labor warranty on test systems
or options designed and manufactured by the Company, and a three-month labor
warranty on components that have been purchased from other manufacturers and
incorporated into the Company's test systems. The Company also provides training
on the maintenance and operation of test systems sold to its customers.
The Company offers a wide range of service contracts which gives its
customers flexibility to select the maintenance program best suited to their
needs. Customers may purchase service contracts which extend maintenance beyond
the initial warranty provided by the Company with the sale of its test systems.
Many customers enter into annual or multiple-year service contracts over the
life of the equipment. The pricing of contracts is based upon the level of
service provided to the customer and the time period of the service contract. As
the installed base of LTX test systems has grown, service revenues have been
increasing on an annual basis. The Company believes that service revenues should
be less affected by the cyclicality of the semiconductor industry than sales of
test equipment. The Company maintains 22 service centers around the world.
SALES AND DISTRIBUTION
The Company sells its products primarily through its worldwide sales
organization. In Japan, the Company sells, services and supports its products
through its joint venture with SMI, except that Ando has the right to
manufacture and sell digital test systems, based on the Delta resource-per-pin
digital technology, to certain customers in Japan. The Company will share with
its SMI joint venture specified portions of the royalties to be paid by Ando on
any sales of its digital test systems. Asia Electronics also has the right to
sell the Company's iPTest systems to certain customers in Japan. The Company
uses a small number of independent sales representatives in certain other
regions of the world.
Sales to customers outside the United States are subject to risks,
including the imposition of governmental controls, the need to comply with a
wide variety of foreign and United States export laws, political and economic
instability, trade restrictions, changes in tariffs and taxes, longer payment
cycles typically associated with international sales, and the greater difficulty
of administering business overseas as well as general economic conditions. Sales
by the Company to customers outside the United States are primarily denominated
in United States dollars. Sales by the Company to customers outside North
America were 67%, 64% and 66% of total sales of the Company in fiscal 1997, 1996
and 1995, respectively.
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CUSTOMERS
The Company's customers include many of the world's leading semiconductor
manufacturers. The Company's major customers in fiscal 1997 included:
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Intel Samsung
Hitachi SGS Thomson
National Semiconductor Siemens
Philips STATS
Rockwell Texas Instruments
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Sales to these major customers accounted for approximately 55% of net sales
in fiscal 1997. Sales to Intel and National Semiconductor accounted for 13% and
12% of net sales in fiscal 1997, respectively. Sales to Philips accounted for
17% of net sales in fiscal 1995. No single customer accounted for 10% or more of
net sales in fiscal 1996.
ENGINEERING AND PRODUCT DEVELOPMENT
The STE market is characterized by rapid technological change and new
product introductions, as well as advancing industry standards. The Company's
ability to remain competitive will depend upon its ability to successfully
enhance existing test systems and develop new generations of test systems and to
introduce these new products on a timely and cost-effective basis. Accordingly,
the Company devotes a significant portion of its personnel and financial
resources to engineering and product development programs and seeks to maintain
close relationships with its customers in order to be responsive to their
product needs. The Company's expenditures for engineering and product
development were $23.4 million, $22.9 million and $19.8 million during fiscal
1997, 1996 and 1995, respectively.
The Company's engineering strategy is to develop its test systems in an
evolutionary manner so that they may be progressively upgraded. This approach
preserves its customers' substantial investments in test programs, and, in
general, maintains market acceptance for the Company's test systems. In order to
implement this strategy, the Company works closely with its customers to define
new product features and to identify emerging applications for its products.
MANUFACTURING AND SUPPLY
LTX's principal manufacturing operations consist of component parts
assembly, final assembly and testing at its manufacturing facilities in
Westwood, Massachusetts and San Jose, California. In addition, the Company
outsources certain subassemblies to contract manufacturers. The Company uses
standard components and prefabricated parts manufactured to the Company's
specifications. 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. Although LTX believes that all single-source components
currently are available in adequate amounts, there can be no assurance that
shortages will not develop in the future. Any disruption or termination of
supply of certain single-source components could have an adverse effect on the
Company's business and results of operations.
COMPETITION
The STE industry is highly competitive, with many other domestic and
foreign companies participating in the markets for each of the Company's
products. The Company's major competitors in the market for digital test systems
are Schlumberger Limited, Teradyne, Inc. and Credence Systems Corporation,
except in Japan where the Company's major competitor is Advantest Corporation
(an affiliate of Fujitsu Limited). The Company's principal competitor for
linear/mixed signal test systems is Teradyne, Inc. The Company's principal
competitor for discrete component test systems is Tesec, Ltd. Most of the
Company's major competitors are also suppliers of other types of automatic test
equipment and have significantly greater financial and other resources than the
Company.
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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. Although the Company believes that it
competes favorably with respect to each of these factors, 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 or future 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.
BACKLOG
At July 31, 1997, the Company's backlog of unfilled orders for all products
and services was $65.1 million, compared with $65.5 million at July 31, 1996.
The Company expects to deliver approximately 90% of its July 31, 1997 backlog in
fiscal 1998. While backlog is calculated on the basis of firm orders, no
assurance can be given that customers will purchase the equipment subject to
such orders. As a result, the Company's backlog at a particular date is not
necessarily indicative of actual sales for any succeeding period.
PROPRIETARY RIGHTS
The development of the Company's products is largely based on proprietary
information. The Company relies upon a combination of contract provisions,
copyright, trademark and trade secret laws to protect its proprietary rights in
products. It also has a policy of seeking patents on technology considered of
particular strategic importance. Although the Company believes that the
copyrights, trademarks and patents it owns are of value, the Company believes
that they will not determine the Company's success, which depends principally
upon its engineering, manufacturing, marketing and service skills. However, the
Company intends to protect its rights when, in its view, these rights are
infringed upon.
The Company licenses some software programs from third party developers and
incorporates them in the Company's products. Generally, such agreements grant to
the Company non-exclusive licenses with respect to the subject program and
terminate only upon a material breach by the Company. The Company believes that
such licenses are generally available on commercial terms from a number of
licensors.
The use of patents to protect hardware and software has increased in the
STE industry. The Company has at times been notified of claims that it may be
infringing patents issued to others. 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. As to any claims asserted
against the Company, the Company may seek or be required to obtain a license
under the third party's intellectual property rights. There can be no assurance,
however, that a license will be available under reasonable terms or at all. In
addition, the Company could decide to resort to litigation to challenge such
claims or a third party could resort to litigation to enforce such claims. Such
litigation could be expensive and time consuming and could materially adversely
affect the Company's business and results of operations.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, as of October 1, 1997, are as
follows:
<TABLE>
<CAPTION>
EXECUTIVE OFFICER AGE POSITION
----------------------------------------- --- ---------------------------------------
<S> <C> <C>
Roger W. Blethen......................... 46 President, Chief Executive Officer and
Director
Kenneth E. Daub.......................... 61 Senior Vice President
</TABLE>
Executive officers are chosen by and serve at the discretion of the Board
of Directors of the Company.
Roger W. Blethen was appointed Chief Executive Officer of the Company in
September 1996. Mr. Blethen has been a President since 1994 and has been a
Director since 1980. He had been a Senior Vice President of the Company from
1985 until February 1994. Mr. Blethen was a founder of LTX and has served in a
number of senior management positions with the Company since its formation in
1976.
8
<PAGE> 11
Kenneth E. Daub was appointed a Senior Vice President of the Company in
1991 and is responsible for business development. From 1991 until March 1997,
Mr. Daub was responsible for North American and Pacific Rim sales. From the time
he joined the Company in 1987 until 1991, Mr. Daub served as Vice President
responsible for North American Sales. Prior to joining the Company in 1987, Mr.
Daub held various senior positions with Schlumberger Limited.
EMPLOYEES
At July 31, 1997, the Company had a total of 950 employees, including 248
in engineering and product development, 204 in service and customer support, 294
in manufacturing and 204 in sales, marketing and administration. Many of the
Company's employees are highly skilled, and the Company believes its future
success will depend in large part on its ability to attract and retain such
employees. None of the Company's employees are represented by a labor union, and
the Company has experienced no work stoppages.
ENVIRONMENTAL AFFAIRS
The Company's manufacturing facilities are subject to numerous laws and
regulations designed to protect the environment. The Company does not anticipate
that compliance with these laws and regulations will have a material effect on
its capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
All of the Company's facilities are leased. The Company maintains its
headquarters in Westwood, Massachusetts, where corporate administration, sales
and customer support and manufacturing and engineering for its mixed signal
products are located in a 167,000 square foot facility under a lease which
expires in 2007. In May 1995, the Company subleased to a third party a 208,000
square foot facility in Westwood, Massachusetts for a ten year term. The
Company's lease of this facility expires in 2010. Manufacturing and engineering
for the Company's digital products are located in a 70,000 square foot facility
in San Jose, California. The Company's lease of this facility expires in 1999.
The Company has a five year option to extend this lease. The Company also leases
seven sales and customer support offices at various locations in the United
States totaling approximately 40,000 square feet.
The Company's European headquarters is located in Woking, United Kingdom.
The Company also maintains sales and support offices at four other locations in
Europe. The manufacturing and engineering facilities for the Company's iPTest
systems are located in Guildford, United Kingdom. The Company also maintains
sales and support offices in six locations in the Far East. Office space leased
in Europe and the Far East totals approximately 100,000 square feet.
The headquarters of LTX Co., Ltd., the Company's joint venture with SMI, is
located in Kawasaki, Japan. The joint venture also leases additional offices in
two other locations in Japan. Office space leased in Japan totals approximately
10,000 square feet.
The Company believes that its existing facilities are adequate to meet its
current and foreseeable future requirements.
ITEM 3. LEGAL PROCEEDINGS
In June 1996, the Company was notified by Korean semiconductor manufacturer
Daewoo that certain purchase agreements aggregating $50.1 million were not
properly authorized and would not be honored.
The Company initiated litigation seeking to enforce those agreements in
June 1996. In September 1997, a federal district court judge in Boston,
Massachusetts determined that the court does not have jurisdiction in this
lawsuit. The Company is appealing the decision. These purchase agreements were
not included in the Company's backlog at July 31, 1997 or July 31, 1996.
The Company has no other material pending legal proceedings other than
routine litigation relating to its business.
9
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the fourth
quarter of fiscal 1997.
PART II
ITEM 5. MARKET VALUE FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The information required by this Item is set forth in Registrant's 1997
Annual Report, at page 39 under the caption "Market Prices for Common Stock",
which information is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this Item is set forth in Registrant's 1997
Annual Report, at page 18 under the caption "Selected Financial Information",
which information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is set forth in Registrant's 1997
Annual Report, at page 19 to 23 under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations", which information is
incorporated herein by reference.
10
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in Registrant's 1997
Annual Report, at pages 25 to 39, which information is incorporated herein by
reference.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, included in this Form 10-K, into LTX Corporation's previously
filed registration statements on Form S-8 (File No. 2-77475, File No. 2-90698,
File No. 33-7018, File No. 33-14179, File No. 33-32140, File No. 33-32141, File
No. 33-33614, File No. 33-38675, File No. 33-51683, File No. 33-51685, File No.
33-57457, File No. 33-57459, File No. 33-65245 and File No. 33-65247).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 27, 1997
11
<PAGE> 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under these Items is included in Item 1. of Part I of
this report and in the Proxy Statement for the Annual Meeting of Stockholders to
be held on December 9, 1997, under the headings "Certain Stockholders,"
"Election of Directors," and "Compensation of Executives," which information is
incorporated herein by reference. Such Proxy Statement shall be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
Company's fiscal year, July 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company included in
the Company's Annual Report to Stockholders for the fiscal year ended July 31,
1997, are incorporated by reference:
Report of Independent Public Accountants
Consolidated Balance Sheet -- July 31, 1997 and 1996
Consolidated Statement of Operations for the years ended July 31, 1997,
1996 and 1995
Consolidated Statement of Stockholders' Equity for the years ended July
31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows for the years ended July 31, 1997,
1996 and 1995
Notes to the Consolidated Financial Statements
(A) 2. SCHEDULES
Separate financial statements of LTX Corporation (parent only) have been
omitted since they are not required.
All other schedules have been omitted since they are not required, not
applicable or the information is included in the financial statements or notes
thereto.
(A) 3. EXHIBITS
Certain of the exhibits listed hereunder have previously been filed with
the Commission as exhibits to the Company's Registration Statement No. 2-75470
on Form S-1 filed December 23, 1981, as amended (the 1981 Registration
Statement); to the Company's Registration Statement No. 2-94218 on Form S-1
filed November 8, 1984, as amended (the 1984 Registration Statement); to the
Company's Registration Statement No. 33-35401 on Form S-4 filed June 26, 1990,
as amended (the 1990 Registration Statement No. 1); to the Company's
Registration Statement No. 33-39610 on Form S-3 filed June 10, 1991, as amended
(the 1991 Registration Statement No. 1); to the Company's Amendment No. 1 to
Registration Statement No. 33-62125 on Form S-3 filed September 11, 1995 (the
1995 Registration Statement No. 1); to the Company's Form 8A/A filed September
30, 1993 amending the Company's Registration Statement on Form 8-A filed
November 24, 1982 (the 1993 8A/A); to the Company's Current Report on Form 8-K,
filed May 11, 1989; or the Company's Annual Reports on Form 10-K for one of the
years ended July 31, 1996, 1995, 1994, 1993,
12
<PAGE> 15
1992, 1991, 1990, 1989, 1988, 1987, 1986, 1985, 1984 and 1983 and are hereby
incorporated by reference. The location of each document so incorporated by
reference is noted parenthetically.
(a) LISTING OF EXHIBITS
<TABLE>
<C> <C> <S>
(3)(A) -- Articles of Organization, as amended. (Exhibit 3.1 to the 1995 Registration
Statement No. 1)
(3)(B) -- By-laws, as amended. (Exhibit 3.3 to the 1995 Registration Statement No. 1)
(4)(A) -- Indenture dated April 15, 1986 between the Company and The First National
Bank of Boston. (Exhibit 4(A) to the 1990 Registration Statement No. 1)
(4)(A)(ii) -- Indenture dated June 15, 1990 between the Company and The First National
Bank of Boston. (Exhibit 4(A)(ii) to the 1990 Annual Report on Form 10-K)
(4)(C) -- Rights Agreement. (Exhibit 1 of the Registrant's Current Report on Form 8-K,
filed May 11, 1989), as amended by Amendment No. 1 to Rights Agreement dated
as of September 17, 1993 (Exhibit 4(C) to the 1993 Annual Report on Form
10-K)
(10)(B)+ -- 1990 Stock Option Plan. (Exhibit 10(B) to the 1995 Annual Report on Form
10-K)
(10)(D)+ -- 1993 Employees' Stock Purchase Plan. (Exhibit 10(D) to the 1994 Annual
Report on Form 10-K)
(10)(E)+ -- 1983 Non-Qualified Stock Option Plan. (Exhibit 10(E) to the 1983 Annual
Report on Form 10-K)
(10)(F) -- LTX Corporation Growth and Investment Program, as restated. (Exhibit 10(F)
to the 1993 Annual Report on Form 10-K)
(10)(I) -- Lease dated as of March 8, 1984 relating to land and building at McCandless
Park, San Jose, California. (Exhibit 10(I) to the 1984 Registration
statement)
(10)(J) -- Lease dated as of July 16, 1984 relating to Company's administration
facility on Rosemont Avenue, Westwood, Massachusetts. (Exhibit 10(J) to the
1984 Registration Statement)
(10)(K) -- Lease dated as of February 27, 1985 relating to land and building at
McCandless Park, San Jose, California. (Exhibit 10(K) to the 1985 Annual
Report on Form 10-K)
(10)(M) -- Lease dated as of November 26, 1980 relating to Company's manufacturing
facility at 5 Rosemont Avenue, Westwood, Massachusetts, and Amendment dated
as of April 29, 1982, and Third Amendment and Restatement of Lease dated
April 29, 1982. (Exhibit 10(M) to the 1993 Annual Report on Form 10-K)
(10)(N) -- Joint Venture Agreement dated May 14, 1990 among Sumitomo Metal Industries,
Ltd., LTX Corporation and LTX Co., Ltd. (Exhibit 10(N) to the 1990
Registration Statement No. 1)
(10)(O) -- License Agreement dated May 14, 1990 between LTX Corporation and LTX Co.,
Ltd. (Exhibit 10(O) to the 1990 Registration Statement No. 1)
(10)(P) -- Distribution and Supply Agreement between LTX Corporation and LTX Co., Ltd.
(Exhibit 10(P) to the 1990 Registration Statement No. 1)
(10)(Q) -- Securities Purchase Agreement for sale of LTX Common Stock, $0.05 par value,
and 10 1/2% Convertible Subordinated Debentures Due 2010 to Sumitomo Metal
Industries, Ltd. (Exhibit 10(Q) to the 1990 Registration Statement No. 1)
(10)(R)* -- License and Development Agreement dated as of January 28, 1993 between LTX
Corporation and Ando Electric Co., Ltd. (Exhibit 10(R) to the 1993 Annual
Report on Form 10-K)
(10)(S)* -- Distribution and Supply Agreement dated as of January 28, 1993 between LTX
Corporation and Ando Electric Co., Ltd. (Exhibit 10(S) to the 1993 Annual
Report on Form 10-K)
</TABLE>
13
<PAGE> 16
<TABLE>
<C> <C> <S>
(10)(T)* -- Letter Agreement dated as of January 29, 1993 between LTX Corporation and
Ando Electric Co., Ltd. (Exhibit 10(T) to the 1993 Annual Report on Form
10-K)
(10)(U) -- Credit Agreement dated as of June 30, 1997 between LTX Corporation and
BankBoston, N.A. and Silicon Valley Bank (Exhibit 10(U) hereto)
(10)(V) -- Loan Agreement dated as of July 20, 1994 between LTX Corporation and Ando
Electric Co., Ltd. (Exhibit 10(V) to the 1994 Annual Report on Form 10-K)
(10)(W)* -- Amendment No. 1 to License and Development Agreement dated as of July 20,
1994 Between LTX Corporation and Ando Electric Co., Ltd. (Exhibit 10(W) to
the 1994 Annual Report on Form 10-K)
(10)(X) -- Employment Agreement dated as of January 1, 1997 between LTX Corporation and
Kenneth E. Daub. (Exhibit 10(X) hereto)
(13) -- Annual Report to Security Holders (to be deemed filed only to the extent
required by the instructions to exhibits for Annual Reports on Form 10-K)
(22) -- Subsidiaries of Registrant
(27) -- Financial Data Schedules (Exhibit 27 hereto)
</TABLE>
- ---------------
+ This exhibit is a compensatory plan or arrangement in which executive officers
or directors of the Company participate.
* Confidential treatment requested as to certain portions thereof. The
confidential portion has been omitted and filed separately with the
Commission.
Pursuant to Item 601 of Regulation S-K, certain instruments with respect to
long-term debt not exceeding 10% of the total assets of the Company and its
subsidiaries on a consolidated basis are not filed herewith. The Company hereby
agrees to furnish to the Commission a copy of each such instrument upon request.
ITEM 14(B). REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of fiscal 1997.
ITEM 14(C). EXHIBITS
Exhibit 22 -- Subsidiaries of Registrant
<TABLE>
<CAPTION>
JURISDICTION
COMPANY OF ORGANIZATION OWNERSHIP
------------------------------------------------ ----------------- ---------
<S> <C> <C>
LTX Co., Ltd.................................... Japan 67.0%
LTX (Europe) Limited............................ United Kingdom 100%
LTX International, Inc., Domestic International
Sales Corporation (DISC)...................... Delaware 100%
LTX (Deutschland) GmbH.......................... West Germany 100%
LTX France S.A.................................. France 100%
LTX Test Systems Corporation.................... Delaware 100%
LTX (Italia) S.r.l.............................. Italy 100%
LTX Benelux B.V................................. The Netherlands 100%
LTX International B.V........................... The Netherlands 100%
LTX (Foreign Sales Corporation) B.V............. The Netherlands 100%
LTX Asia International, Inc..................... Delaware 100%
LTX Israel Limited.............................. Israel 100%
LTX (Malaysia) SDN.BHD.......................... Malaysia 100%
iPTest (Holdings) Limited....................... United Kingdom 100%
</TABLE>
The subsidiaries listed are all included in the consolidated financial
statements of the Company.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/S/ ROGER W. BLETHEN
By..................................
ROGER W. BLETHEN
CHIEF EXECUTIVE OFFICER, PRESIDENT
AND DIRECTOR
October 28, 1997
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ -----------------
<C> <S> <C>
/s/ GRAHAM C. C. MILLER Chairman of the Board October 28, 1997
........................................
(GRAHAM C. C. MILLER)
/s/ ROGER W. BLETHEN Chief Executive Officer, October 28, 1997
........................................ President and Director
(ROGER W. BLETHEN) (Principal Executive
Officer)
/s/ GLENN W. MELONI Controller (Principal October 28, 1997
........................................ Financial and Accounting
(GLENN W. MELONI) Officer)
/s/ ROBERT J. BOEHLKE Director October 28, 1997
........................................
(ROBERT J. BOEHLKE)
/s/ JACQUES BOUYER Director October 28, 1997
........................................
(JACQUES BOUYER)
/s/ STEPHEN M. JENNINGS Director October 28, 1997
........................................
(STEPHEN M. JENNINGS)
/s/ ROGER J. MAGGS Director October 28, 1997
........................................
(ROGER J. MAGGS)
/s/ ROBERT E. MOORE Director October 28, 1997
........................................
(ROBERT E. MOORE)
/s/ SAMUEL RUBINOVITZ Director October 28, 1997
........................................
(SAMUEL RUBINOVITZ)
</TABLE>
15
<PAGE> 1
Exhibit 10u
================================================================================
CREDIT AGREEMENT
$20,000,000 Working Capital Revolving Line of Credit
$5,000,000 Equipment Lease Line of Credit
LTX CORPORATION
Dated as of June 30, 1997
--------------------
BANKBOSTON, N.A.
SILICON VALLEY BANK
================================================================================
<PAGE> 2
TABLE OF CONTENTS
Section Page
------- ----
Recitals ................................................................. 1
SECTION I DEFINITIONS..................................................... 1
1.1 Definitions.................................................... 1
1.2 Accounting Terms............................................... 11
SECTION II DESCRIPTION OF CREDIT.......................................... 11
2.1 The Credits.................................................... 11
2.2 Notice and Manner of Borrowing of Loans........................ 12
2.3 Commitment Fee................................................. 14
2.4 The Note....................................................... 14
2.5 Interest Rates and Payments of Interest........................ 15
2.6 Certain Provisions Relating to LIBOR Pricing Option............ 15
2.7 Changes in Circumstances; Yield Protection..................... 16
2.8 Capital Requirements........................................... 17
2.9 Payments and Prepayments of the Loans.......................... 18
2.10 Method of Payment.............................................. 18
2.11 Overdue Payments............................................... 18
2.12 Computation of Interest and Fees............................... 18
2.13 Borrowing Base Reports......................................... 18
2.14 Agent's Fee.................................................... 19
2.15 Field Audit Expenses........................................... 19
SECTION III CONDITIONS OF LOANS........................................... 19
3.1 Conditions Precedent to Initial Loan........................... 19
3.2 Conditions Precedent to all Loans.............................. 20
SECTION IV REPRESENTATIONS AND WARRANTIES................................. 20
4.1 Organization and Qualification................................. 20
4.2 Corporate Authority............................................ 21
4.3 Valid Obligations.............................................. 21
4.4 Consents or Approvals.......................................... 21
4.5 Title to Properties; Absence of Encumbrances................... 21
4.6 Financial Statements........................................... 21
4.7 Changes........................................................ 22
4.8 Defaults....................................................... 22
4.9 Taxes.......................................................... 22
4.10 Litigation..................................................... 22
4.11 Use of Proceeds................................................ 22
4.12 Subsidiaries................................................... 23
4.13 Investment Company Act......................................... 23
4.14 Compliance with ERISA.......................................... 23
4.15 Environmental Matters.......................................... 23
SECTION V AFFIRMATIVE COVENANTS............................................ 25
5.1 Financial Statements and other Reporting Requirements........... 25
5.2 Conduct of Business............................................. 27
5.3 Maintenance and Insurance....................................... 27
5.4 Taxes........................................................... 27
5.5 Inspection by the Agent......................................... 27
5.6 Maintenance of Books and Records................................ 28
5.7 Bank Accounts................................................... 28
5.8 Profitability................................................... 28
(i)
<PAGE> 3
5.9 Consolidated Quick Ratio........................................ 28
5.10 Consolidated Total Liabilities to Consolidated
Tangible Net Worth Ratio...................................... 28
5.11 Trailing Consolidated Operating Cash Flow to Rolling
Consolidated Total Debt Service............................... 28
5.12 Further Assurances.............................................. 29
SECTION VI NEGATIVE COVENANTS.............................................. 29
6.1 Indebtedness.................................................... 29
6.2 Contingent Liabilities.......................................... 29
6.3 Capital Leases.................................................. 30
6.4 Sale and Leaseback.............................................. 30
6.5 Encumbrances.................................................... 30
6.6 Merger; Consolidation; Sale or Lease of Assets.................. 31
6.7 Additional Stock Issuance....................................... 32
6.8 Equity Distributions............................................ 32
6.9 Capital Expenditures............................................ 32
6.10 Investments..................................................... 32
6.11 ERISA........................................................... 32
6.12 Transactions with Affiliates.................................... 32
6.13 Amendment to Debt Documents..................................... 33
SECTION VII DEFAULTS....................................................... 33
7.1 Events of Default............................................... 33
7.2 Remedies........................................................ 35
7.3 Distribution of Proceeds........................................ 35
SECTION VIII CONSENTS; AMENDMENTS; WAIVERS; REMEDIES....................... 36
8.1 Consents; Amendments; Waivers; Remedies......................... 36
SECTION IX THE AGENT....................................................... 37
9.1 Appointment of Agent............................................ 37
9.2 Exercise of Powers.............................................. 37
9.3 No Liability.................................................... 37
9.4 Responsibilities................................................ 37
9.5 Direction by Court.............................................. 38
9.6 Treatment of Payees............................................. 38
9.7 Agent as Bank................................................... 38
9.8 Sharing of Costs and Expenses................................... 38
SECTION X MISCELLANEOUS.................................................... 39
10.1 Notices......................................................... 39
10.2 Expenses........................................................ 40
10.3 Set-Off......................................................... 40
10.4 Term of Agreement............................................... 40
10.5 No Waivers...................................................... 40
10.6 Governing Law................................................... 40
10.7 Amendments...................................................... 41
10.8 Binding Effect of Agreement..................................... 41
10.9 Counterparts.................................................... 41
10.10 Partial Invalidity.............................................. 41
10.11 Captions........................................................ 41
10.12 WAIVER OF JURY TRIAL............................................ 41
10.13 Entire Agreement................................................ 41
EXECUTION.................................................................. 43
(ii)
<PAGE> 4
EXHIBITS
EXHIBIT A - Form of Promissory Note
EXHIBIT B - Form of Notice of Borrowing
EXHIBIT C - Form of Pricing Notice
EXHIBIT D - Form of Borrowing Base Report
EXHIBIT E - Indebtedness; Encumbrances
EXHIBIT F - Litigation
EXHIBIT G - Subsidiaries; stock etc.
EXHIBIT H - Environmental Issues
EXHIBIT I - Form of Report of Chief Financial Officer
EXHIBIT J - Restricted Payments
EXHIBIT K - Applicable LIBOR Rate
(iii)
<PAGE> 5
CREDIT AGREEMENT
This CREDIT AGREEMENT is made as of June 30, 1997, by and between LTX
Corporation (the "Company"), a Massachusetts corporation having its chief
executive office at 5 Rosemont Road, Westwood, Massachusetts and BankBoston,
N.A. (the "BKB"), a national banking association, Silicon Valley Bank, a state
commercial bank ("SVB") and BKB, as Agent (the "Agent").
Recitals
--------
WHEREAS, the Company desires to establish a credit facility for working
capital purposes and acquisition of equipment;
WHEREAS, the Banks are willing to establish such credit facility on the
terms and conditions set forth herein;
NOW THEREFORE, for good and valuable consideration, the Company, the Banks
and the Agent hereby agree as follows:
SECTION I
---------
DEFINITIONS
-----------
1.1 DEFINITIONS
All capitalized terms used in this Agreement or in any certificate, report
or other document made or delivered pursuant to this Agreement (unless otherwise
defined therein) shall have the meanings assigned to them below:
ACCOUNTS RECEIVABLE. All rights of the Company to payment for goods sold,
leased or otherwise marketed in the ordinary course of business and all rights
of the Company to payment for services rendered in the ordinary course of
business and all sums of money or other proceeds due thereon pursuant to
transactions with account debtors.
ADVANCE. Any loan or extension of credit from the Banks to the Company
pursuant to this Agreement.
AFFILIATE. Shall mean (a) any director or officer of the Company or its
Subsidiaries and (b) any Person that controls, is controlled by or is under
common control with the Company. For purposes of this definition, "control" of a
Person shall mean the possession, directly or indirectly, of the power to direct
or cause the direction of its management or policies, whether through the
ownership of voting securities, by contract or otherwise.
AGREEMENT. This Agreement, as it may be supplemented or amended from time
to time.
ALTERNATE BASE RATE. The higher of the Base Rate or the Federal Funds
Effective Rate plus one-half percent (.5%).
ANDO. Ando Electric Co., Ltd.
APPLICABLE LIBOR RATE. The sum of the LIBOR Rate plus two percent (2.0%);
provided, however, the Applicable LIBOR Rate shall change if the Company meets
certain ratios of Trailing Consolidated Cash Flow to Rolling Consolidated Total
Debt Service as set forth on EXHIBIT K hereto.
APPROVED EQUIPMENT. Shall mean equipment to be used in the Company's
business that
<PAGE> 6
the Agent in the exercise of its reasonable discretion has approved as
acceptable for acquisition with Equipment Funds.
AVAILABILITY. The sum of (i) the Borrowing Base, less (ii) any outstanding
Revolving Loans.
BANKS. BKB and SVB.
BASE RATE. The rate of interest announced from time to time by the Agent at
its head office in Boston, Massachusetts as its "Base Rate."
BASE RATE LOAN. Any Loan bearing interest at a fluctuating rate determined
by reference to the Alternate Base Rate.
BORROWING BASE. An amount determined by reference to the most recent
Borrowing Base Report delivered to the Agent pursuant to Section 2.13, which is
equal to the sum of:
(a) 80% of Domestic Eligible Accounts Receivable; PLUS
(b) 50% of International Eligible Accounts Receivable;
provided, that the aggregate amount included in the Borrowing Base under clause
(b) of this definition shall not exceed 20% of the Borrowing Base at any time.
BORROWING BASE REPORT. A Borrowing Base Report signed by the chief
financial officer or corporate controller of the Company in substantially the
form of EXHIBIT D hereto.
BUSINESS DAY. Any day other than a Saturday, Sunday, legal holiday or other
day on which banks in Boston, Massachusetts, are required or permitted by law to
close.
CLOSING DATE. The first date on which the conditions set forth in Section
3.1 have been satisfied.
CODE. The Internal Revenue Code of 1986 and the rules and regulations
thereunder, collectively, as the same may from time to time be supplemented or
amended and remain in effect.
COMMITMENT AMOUNT. Shall mean, as to each Bank, with respect to each
Revolving Loan, an amount equal to the Maximum Revolving Credit TIMES such
Bank's Commitment Percentage and with respect to each Equipment Funds, an amount
equal to the Maximum Equipment Credit TIMES such Bank's Commitment Percentage.
COMMITMENT PERCENTAGE. Shall mean as to each Bank the percentage figure set
forth opposite such Bank's name below:
BKB 60%
SVB 40%
COMPANY. See Preamble.
CONSOLIDATED CURRENT LIABILITIES. At any date as of which the amount
thereof shall be determined, all amounts that should, in accordance with
generally accepted accounting principles, be included as current liabilities on
the consolidated balance sheet of the Company and its Subsidiaries as at such
date.
2
<PAGE> 7
CONSOLIDATED NET INCOME OR CONSOLIDATED NET DEFICIT. Shall mean the net
income (or deficit) of the Borrower and its Subsidiaries, after taxes,
determined in accordance with generally accepted accounting principles.
CONSOLIDATED OPERATING CASH FLOW. Shall mean operating profit, plus
depreciation, plus amortization, minus cash taxes, minus capital expenditures of
the Borrower and its Subsidiaries, determined in accordance with generally
accepted accounting principles, for the applicable quarter.
CONSOLIDATED QUICK ASSETS. At any date as of which the amount thereof shall
be determined, the consolidated cash and cash equivalents (as defined by
generally accepted accounting principles) with maturities not to exceed 90 days
and Accounts Receivable, of the Company and its Subsidiaries.
CONSOLIDATED TANGIBLE NET WORTH. At any date as of which the amount thereof
shall be determined, the consolidated total assets of the Company and its
Subsidiaries (i) MINUS the sum of any amounts attributable to (a) goodwill, (b)
intangible items such as unamortized debt discount and expense, patents, trade
and service marks and names, copyrights and research and development expenses
except prepaid expenses, (c) all reserves not already deducted from assets, (d)
any write-up in the book value of assets resulting from any revaluation thereof
subsequent to the date of the financial statements referred to in Section 4.6
and (e) the value of any minority interests in Subsidiaries and (ii) minus
Consolidated Total Liabilities.
CONSOLIDATED TOTAL DEBT SERVICE. Shall mean the sum of (a) current
maturities of long term outstanding indebtedness of the Borrower and its
Subsidiaries, plus (b) current maturities of capitalized lease obligations of
the Borrower and its Subsidiaries, determined in accordance with generally
accepted accounting principles.
CONSOLIDATED TOTAL LIABILITIES. At any date as of which the amount thereof
shall be determined, all obligations that should, in accordance with generally
accepted accounting principles consistently applied, be classified as
liabilities on the consolidated balance sheet of the Company and its
Subsidiaries, including in any event all Indebtedness.
CONTROLLED GROUP. All trades or businesses (whether or not incorporated)
under common control that, together with the Company, are treated as a single
employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA.
CREDIT PERIOD. The period beginning on the date of this Agreement and
extending through and including the Termination Date or such earlier date on
which the commitment to make Loans and provide Equipment Funds is terminated or
the Commitment Amount is reduced to zero in accordance with the terms hereof.
DEFAULT. An Event of Default or event or condition that, but for the
requirement that time elapse or notice be given, or both, would constitute an
Event of Default.
DOLLARS. Lawful money of the United States of America.
DOMESTIC ELIGIBLE ACCOUNTS RECEIVABLE. Eligible Accounts Receivable due and
payable from account debtors located within the United States of America or its
territories.
ELIGIBLE ACCOUNTS RECEIVABLE. The aggregate of the unpaid portions of
Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other
adjustments of commissions payable to third parties that are adjustments to such
Accounts Receivable) (a) that the Company reasonably and in good faith
determines to be collectible; (b) that are with account debtors that (i) are not
Affiliates of the Company, (ii) purchased the goods or services giving rise to
the relevant Account Receivable in an arm's length transaction, (iii) are not
insolvent or involved in any case
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or proceeding, whether voluntary or involuntary, under any bankruptcy,
reorganization, arrangement, insolvency, adjustment of debt, dissolution,
liquidation or similar law of any jurisdiction except to the extent such
Accounts Receivable are insured by credit insurance and (iv) are, in the Bank's
reasonable judgment, creditworthy; (c) that are in payment of obligations that
have been fully performed and, if subject to dispute, the Company has
established appropriate reserves; (d) that are not subject to any pledge,
restriction, security interest or other lien or encumbrance other than those
permitted under the Loan Documents; (e) that are not outstanding for more than
ninety (90) days past the invoice date specified in the respective invoices
therefor; (f) that are not due from any single account debtor if more than
twenty percent (20%) of the aggregate amount of all Accounts Receivable owing
from such account debtor would otherwise not be Eligible Accounts Receivable;
and (g) that are payable in Dollars.
ENCUMBRANCES. See Section 6.5.
ENVIRONMENTAL LAWS. Any and all applicable foreign, federal, state and
local environmental, health or safety statutes, laws, regulations, rules,
ordinances, and policies or common law (whether now existing or hereafter
enacted or promulgated), of all governmental agencies, bureaus or departments
which may now or hereafter have jurisdiction over the Company or any of its
Subsidiaries and all applicable judicial and administrative and regulatory
decrees, judgments and orders, including common law rulings and determinations,
relating to injury to, or the protection of, human health or the environment,
including, without limitation, all requirements pertaining to reporting,
licensing, permitting, investigation, remediation and removal of emissions,
discharges, releases or threatened releases of Hazardous Materials, chemical
substances, pollutants or contaminants whether solid, liquid or gaseous in
nature, into the environment or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of such
Hazardous Materials, chemical substances, pollutants or contaminants.
EQUIPMENT FUNDS. Funds made available by the Banks pursuant to Section
2.1(b) hereof.
EQUIPMENT LEASE DOCUMENTS. Shall have the meaning set forth in Section
2.1(b).
ERISA. The Employee Retirement Income Security Act of 1974 and the rules
and regulations thereunder, collectively, as the same may from time to time be
supplemented or amended and remain in effect.
EVENT OF DEFAULT. Any event described in Section 7.1.
FEDERAL FUNDS EFFECTIVE RATE. For any day, a fluctuating interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day that is a Business Day, the
average of the quotations for such day on such transactions received by the
Agent from three Federal funds brokers of national recognized standing selected
by the Agent.
FUNDING LIABILITY (a) Any deposit which was used (or deemed by Section
2.2(c) to have been used) to fund any portion of the Advances subject to a LIBOR
Pricing Option, and (b) any portion of the Advances subject to a LIBOR Pricing
Option funded (or deemed by Section 2.2(c) to have been funded) with the
proceeds of any such deposit.
GUARANTEES. As applied to the Company and its Subsidiaries, all guarantees,
endorsements (other than endorsements of negotiable instruments for collection
in the ordinary course of business) or other contingent or surety obligations
with respect to obligations of others whether or not reflected on the
consolidated balance sheet of the Company and its Subsidiaries,
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including any obligation to furnish funds, directly or indirectly (whether by
virtue of partnership arrangements, by agreement to keep-well or otherwise),
through the purchase of goods, supplies or services, or by way of stock
purchase, capital contribution, advance or loan, or to enter into a contract for
any of the foregoing, for the purpose of payment of obligations of any other
person or entity.
HAZARDOUS MATERIAL. Any substance (i) the presence of which requires or
shall hereafter require notification, investigation or remediation under any
Environmental Law; (ii) which is or becomes defined as a "hazardous waste",
"hazardous material" or "hazardous substance" or "controlled industrial waste"
or "pollutant" or "contaminant" under any present or future Environmental Law or
amendments thereto including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601
ET SEQ.) and any applicable local statutes and the regulations promulgated
thereunder; (iii) which is toxic, explosive, corrosive, flammable, infectious,
radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes
regulated by any governmental authority, agency, department, commission, board,
agency or instrumentality of any foreign country, the United States, any state
of the United States, or any political subdivision thereof to the extent any of
the foregoing has or had jurisdiction over the Company; or (iv) without
limitation, which contains gasoline, diesel fuel or other petroleum products,
asbestos or polychlorinated biphenyls ("PCB's").
INDEBTEDNESS. As applied to the Company and its Subsidiaries, (i) all
obligations for borrowed money or other extensions of credit whether or not
secured or unsecured, absolute or contingent, including, without limitation,
unmatured reimbursement obligations with respect to letters of credit or
guarantees issued for the account of or on behalf of the Company and its
Subsidiaries and all obligations representing the deferred purchase price of
property, other than accounts payable and accrued expenses arising in the
ordinary course of business, (ii) all obligations evidenced by bonds, notes,
debentures or other similar instruments, (iii) all obligations secured by any
mortgage, pledge, security interest or other lien on property owned or acquired
by the Company or any of its Subsidiaries whether or not the obligations secured
thereby shall have been assumed, (iv) that portion of all obligations arising
under capital leases that is required to be capitalized on the consolidated
balance sheet of the Company and its Subsidiaries, (v) all Guarantees, and (vi)
all obligations that are immediately due and payable out of the proceeds of or
production from property now or hereafter owned or acquired by the Company or
any of its Subsidiaries.
INTEREST PERIOD. Shall mean with respect to each LIBOR Rate Loan, the
period commencing on the date of such LIBOR Rate Loan and ending one, two or
three months thereafter, as the Company may request as provided in Section
2.2(c) hereof, PROVIDED, THAT:
(a) any Interest Period (other than an Interest Period determined
pursuant to clause (c) below) that would otherwise end on a day that is not
a Business Day shall be extended to the next succeeding Business Day unless
such Business Day falls in the next calendar month, in which case such
Interest Period shall end on the immediately preceding Business Day;
(b) any Interest Period that begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall,
subject to clause (c) below, end on the last Business Day of a calendar
month;
(c) any Interest Period that would otherwise end after the Termination
Date shall end on the Termination Date; and
(d) notwithstanding clause (c) above, no Interest Period shall have a
duration of less than thirty (30) days, and if any Interest Period
applicable to any LIBOR
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Rate Loan would be for a shorter period, such Interest Period shall not be
available hereunder.
INTERNATIONAL ELIGIBLE ACCOUNTS RECEIVABLE. Eligible Accounts Receivable
(i) due and payable from account debtors located outside the United States or
its territories and (ii) such account debtors have received and continue to hold
a rating of no less than A1P1 from Standard & Poor or similar rating agency
satisfactory to the Agent.
INVESTMENT. As applied to the Company and its Subsidiaries, the purchase or
acquisition of any share of capital stock, partnership interest, evidence of
indebtedness or other equity security of any other person or entity, any loan,
advance or extension of credit as an investment to, or contribution to the
capital of, any other person or entity, any real estate held for sale or
investment, any commodities futures contracts held other than in connection with
bona fide hedging transactions, any other investment in any other person or
entity, and the making of any commitment or acquisition of any option to make an
Investment. Investment shall not include accounts receivable or similar
extensions of credit arising in the ordinary course of business, advances or
deposits for the purchase of goods or services arising in the ordinary course of
business, advances for expenses or loans to employees, or securities received in
connection with a workout or the bankruptcy reorganization of a customer.
LEGAL REQUIREMENT. Any present or future requirement imposed upon the Banks
or the Company by any law, statute, rule, regulation, directive, order, decree
or guideline (or any interpretation thereof by courts or of administrative
bodies) of the United States of America, or any jurisdiction in which any LIBOR
Office is located or any state or political subdivision of any of the foregoing,
or by any board, governmental or administrative agency, central bank or monetary
authority of the United States of America, any jurisdiction in which any LIBOR
Office is located, or any political subdivision of any of the foregoing. Any
such law, statute, rule, regulation, directive, order, decree, guideline or
interpretation imposed on the Bank not having the force of law shall be deemed
to be a Legal Requirement for purposes of Section 2 if any of the Banks
reasonably believe that compliance therewith is customary commercial practice.
LIBOR OFFICE. Any such non-United States office or international banking
facility of the Agent as the Agent may from time to time select.
LIBOR PRICING OPTION. The option granted to the Company pursuant to Section
2.2(c) hereof to have interest on all or a portion of the Advances computed on
the basis of the Applicable LIBOR Rate for an applicable Interest Period.
LIBOR RATE. For any Interest Period for any LIBOR Rate Loan, the quotient
of (i) the rate of interest determined by the Agent, at about 10:00 a.m. (Boston
time) on the LIBOR Rate Fixing Day as being the rate at which deposits in U.S.
dollars are offered to it by first-class banks in the London interbank market
for deposit for such Interest Period in amounts comparable to the aggregate
principal amount of LIBOR Rate Loans to which such Interest Period relates,
divided by (ii) the difference between one (1) minus the Reserve Requirement
(expressed as a decimal) applicable to that Interest Period. The LIBOR Rate
shall be adjusted automatically as of the effective date of any change in the
Reserve Requirement.
LIBOR RATE FIXING DAY. In the case of any LIBOR Rate Loan, the second
Business Day preceding the Business Day on which an Interest Period begins.
LIBOR RATE LOAN. Any Loan hereunder upon which interest will accrue on the
basis of a formula including as a component thereof the LIBOR Rate. The
expiration date of any LIBOR Rate Loan shall be the last day of the Interest
Period applicable to such LIBOR Rate Loan.
LOAN. A Revolving Loan made to the Company by the Banks pursuant to
Section II
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of this Agreement, and "Loans" means all of such loans, collectively.
LOAN DOCUMENTS. The Agreement, the Note, Subordination Agreement and any
other documents executed in connection with this Agreement including, without
limitation, the documents set forth in Section 3.1.
MAXIMUM CREDIT. $25,000,000 or any lesser amount, including zero, resulting
from termination or reduction of such amount in accordance with Section 2.3 or
Section 7.2.
MAXIMUM EQUIPMENT CREDIT. $5,000,000, or any lesser amount, including zero,
resulting from termination or reduction of such amount in accordance with
Section 2.3 or Section 7.2.
MAXIMUM REVOLVING CREDIT. $20,000,000 or any lesser amount, including zero,
resulting from a reduction or termination of such amount in accordance with
Section 2.3 or Section 7.2, PROVIDED, HOWEVER, the Maximum Credit shall not
exceed $17,700,000 until such time as all obligations of the Company to Ando
under the Loan Agreement dated as of July 20, 1994 between the Company and Ando,
the subordinated promissory note dated as of July 20, 1994, in the original
principal amount of $20,000,000 of the Company to Ando and all documents,
agreements and instruments related thereto, are subordinated to the Obligations
on terms acceptable to the Banks.
NOTES. Promissory notes of the Company, substantially in the forms of
EXHIBIT A hereto, evidencing the obligation of the Company to the Banks to repay
the Loans.
NOTICE OF BORROWING. See Section 2.2.
OBLIGATIONS. Any and all obligations or liabilities (including, without
limitation, Indebtedness) of the Company to the Banks (or their affiliates under
the Equipment Lease Documents) of every kind and description, direct or
indirect, absolute or contingent, primary or secondary, due or to become due,
now existing or hereafter arising, regardless of how they arise or by what
agreement or instrument, if any, and including obligations to perform acts and
refrain from taking action as well as obligations to pay money and any
liabilities with respect to letters of credit.
PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to
any or all of its functions under ERISA.
PERMITTED ENCUMBRANCES. See Section 6.5.
PERSON. Shall mean an individual, corporation, partnership, joint venture,
association, estate, joint stock company, trust, organization, business, or a
government or agency or political subdivision thereof.
PLAN. At any time, an employee pension or other benefit plan that is
subject to Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by the Company or any
member of the Controlled Group for employees of the Company or any member of the
Controlled Group or (ii) if such Plan is established, maintained pursuant to a
collective bargaining agreement or any other arrangement under which more than
one employer makes contributions and to which the Company or any member of the
Controlled Group is then making or accruing an obligation to make contributions
or has within the preceding five Plan years made contributions.
PRICING NOTICE. See Section 2.2(e).
QUALIFIED INVESTMENTS. As applied to the Company and its Subsidiaries,
investments in
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(i) note, bonds or other obligations of the United States of America or any
agency thereof that as to principal and interest constitute direct obligations
of or are guaranteed by the United States of America; (ii) certificates of
deposit or other deposit instruments, accounts notes, and acceptances of banks
or trust companies organized under the laws of the United States or any state
thereof that have capital and surplus of at least $100,000,000; (iii) commercial
paper that is rated not less than prime-one or A-1 or their equivalents by
Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively,
or their successors (the "Rating Agencies"); (iv) floating rate notes rated not
less than BAA1/BBB+ or better by the Rating Agencies; (v) Eurodollar time
deposits; (vi) money market mutual funds that are regulated by Securities
Exchange Commission Rule 2a-7; (vii) tax exempt municipal securities rated
MIGI/SP1/A1 for fixed rate securities and VMIG1/A1 for variable rate securities;
(viii) medium term promissory notes that mature within one year of date of
issuance; and (ix) any repurchase agreement secured by any one or more of the
foregoing.
REQUIRED BANKS. The Banks having at least 65% of the aggregate principal
amount of the Loans outstanding or, if no Loans shall be outstanding, such Banks
holding at least 65% of the aggregate Commitment Amount.
RESERVE REQUIREMENT. The maximum aggregate reserve requirement (including
all basic, supplemental, marginal and other reserves) which is imposed under
Regulation D of the Board of Governors of the Federal Reserve System on the Bank
against "Euro-currency Liabilities" as defined in said Regulation D.
REVOLVING LOAN. A loan made to the Company by the Banks pursuant to Section
2.1(a) hereof, and "Revolving Loans" shall mean all such Loans, collectively.
SUBORDINATED DEBENTURES. Shall mean the 7 % Convertible Subordinated
Debentures due 2011 issued by the Company on April 25, 1986.
SUBORDINATION AGREEMENT. The Subordination Agreement dated as of June 30,
1997, among the Company, Banks, Agent and Ando.
SUBSIDIARY. Any corporation, association, joint stock company, business
trust or other similar organization of which 50% or more of the ordinary voting
power for the election of a majority of the members of the board of directors or
other governing body of such entity is held or controlled by the Company or a
Subsidiary of the Company; or any other such organization the management of
which is directly or indirectly controlled by the Company or a Subsidiary of the
Company through the exercise of voting power or otherwise; or any joint venture,
whether incorporated or not, in which the Company or any of its Subsidiaries has
a 50% or more ownership interest.
TAX. Any present or future tax, levy, duty, impost, deduction, withholding
or other charges of whatever nature at any time required by any Legal
Requirement (a) to be paid by the Banks or (b) to be withheld or deducted from
any payment otherwise required hereby to be made to the Banks, in each case on
or with respect to its obligations hereunder, the Advances, any payment in
respect of the Obligations or any Funding Liability not included in the
foregoing; PROVIDED, HOWEVER, that the term "Tax" shall not include taxes
imposed upon or measured by the net income to the Banks (other than withholding
taxes) or franchise taxes.
TERMINATION DATE. July __, 1998.
TRAILING CONSOLIDATED OPERATING CASH FLOW. Shall have the meaning set forth
in Section 5.11.
1.2 ACCOUNTING TERMS. All terms of an accounting character shall have the
meanings
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assigned thereto by generally accepted accounting principles applied on a basis
consistent with the financial statements referred to in Section 4.6 of this
Agreement, modified to the extent, but only to the extent, that such meanings
are specifically modified herein.
SECTION II
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DESCRIPTION OF CREDIT
---------------------
2.1 THE CREDITS
(a) REVOLVING LOANS. Subject to the terms and conditions hereof, the
Banks will make Loans to the Company, from time to time until the close of
business on the Termination Date, in such sums as the Company may request,
PROVIDED that the aggregate principal amount of all Loans at any one time
outstanding hereunder (after giving effect to all amounts requested) shall not
exceed (i) as to each Bank, the amount of each Bank's Commitment Amount, and
(ii) as to all of the Banks the lesser of (a) the Borrowing Base, or (b) the
Maximum Revolving Credit. The Company may borrow, prepay pursuant to Section 2.9
and reborrow, from the date of this Agreement until the Termination Date, the
full amount of the Commitment Amount or any lesser sum; provided, however, that
the Bank shall have no obligation to make Loans during the occurrence of a
Default or in the event the Company has not delivered a current Borrowing Base
Report in accordance with Section 2.13.
(b) EQUIPMENT FINANCING. Subject to the terms and conditions hereof,
the Banks will make Equipment Funds available from time to time until close of
business on the Termination Date, in such sums as the Company may request to
acquire Approved Equipment, PROVIDED that the aggregate principal amount of all
Equipment Funds at any one time outstanding hereunder (after giving effect to
all amounts requested) shall not exceed (i) as to each Bank, the amount of each
Bank's Commitment Amount, and (ii) as to all of the Banks, the Maximum Equipment
Credit. The Equipment Funds will be used by the Agent or its affiliate to
acquire Approved Equipment in the name of the Banks. The Company shall provide
the Agent with five (5) Business Days written notice identifying in detail the
equipment it desires to be deemed Approved Equipment and leased to the Company
pursuant to the Equipment Lease Documents, including without limitation, type,
size, location, purchase price. Once the Agent has designated such equipment as
Approved Equipment, the Agent or its affiliate will use reasonable efforts to
acquire such Approved Equipment, subject to the terms hereof, and lease it to
the Company in accordance with the Equipment Lease Documents. The Agent, its
affiliates or the Banks shall not be liable to Company for any failure or delay
in obtaining any Approved Equipment or making delivery thereof. It being
understood that the Banks will not own items of Approved Equipment or each lease
transaction jointly. The Agent and/or its affiliate will use its best efforts to
allocate ownership of each lease transaction among the Banks in accordance with
each Bank's Commitment Percentage. Upon acquisition of the Approved Equipment,
the Agent or its affiliate will lease such equipment to the Company pursuant to
equipment leases, schedules and related documents reasonably satisfactory to the
Agent (the "Equipment Lease Documents"). The Equipment Lease Documents shall
include without limitation the following terms:
(i) Term: lesser of useful life of equipment or 36 months
(ii) Market rent
(iii) Delivery and return of equipment
(iv) Restrictions on sub-leasing
(v) Tax and general indemnities
(vi) Purchase options at fair market value
(vii) Customary representations, warranties and covenants
(viii) Defaults, cross-defaults, remedies
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2.2 NOTICE AND MANNER OF BORROWING OF LOANS
(a) Whenever the Company desires to obtain a Loan the Company shall
notify the Agent (which notice shall be irrevocable) no later than 12:00 noon
Boston time the day on which the requested Loan is to be made either by
facsimile or telephone. Such notice shall specify the effective date and amount
of each Loan subject to the limitations set forth in Section 2.1. If notice is
given under this paragraph, each such notification (a "NOTICE OF BORROWING")
shall be immediately followed by a written confirmation thereof by the Company
in substantially the form of EXHIBIT B hereto, PROVIDED that if such written
confirmation differs in any material respect from the action taken by the Agent,
the records of the Agent shall control absent manifest error.
The Agent shall give the Banks notice of each Notice of Borrowing in
accordance with the Agent's customary practice. The Company agrees to indemnify
and hold the Agent and the Banks harmless for any action, including the making
of any Loan hereunder, or loss or expense, taken or incurred by the Agent or
Banks in good faith reliance upon any such request.
(b) Subject to the terms and conditions hereof, each Bank shall make
available at such times as may be agreed upon by such Bank and the Agent, at the
office of the Agent set forth in Section 10.1 hereof in immediately available
funds, such Bank's Commitment Percentage of each Loan. After Agent's receipt of
such funds and upon fulfillment of the applicable conditions set forth in
Section III hereof the Agent will credit the amount of such funds to the
Company's demand deposit account with the Agent.
(c) Unless the Agent shall have received notice from a Bank prior to
the date of any Loan that such Bank will not make available to the Agent such
Bank's Commitment Percentage of such Loan, the Agent may assume that such Bank
has made such funds available to the Agent on the date of such Loan in
accordance with and as provided in this Section 2.2, and the Agent may, in
reliance upon such assumption, (but shall have no obligation to) make available
on such date a corresponding amount to the Company. If and to the extent any
Bank shall not have made its Commitment Percentage of any Loan available to the
Agent and the Agent shall have made available a corresponding amount to the
Company, such Bank agrees to pay to the Agent forthwith on demand, and the
Company agrees to repay to the Agent within three (3) Business Days after demand
(but only after demand for payment has first been made to such Bank and such
Bank has failed to make such payment), an amount equal to such corresponding
amount together with interest thereon for each day from the date the Agent shall
have made such amount available to the Company until the date such amount is
paid or repaid to the Agent, at an interest rate equal to the interest rate
applicable at the time to the Loans. If such Bank shall pay to the Agent such
corresponding amount, such amount so paid shall constitute such Bank's Loan for
purposes of this Agreement. If the Company makes a repayment required by the
foregoing provisions of this Section 2.2(c) and thereafter the applicable Bank
or Banks make the payments to the Agent required by this Section 2.2(c), the
Agent shall promptly refund the amount of the Company's payment.
(d) The failure of any Bank to make any Loan shall not relieve any
other Bank of its obligation, if any, hereunder to make its Commitment
Percentage of such Loan on the date of such Loan, but no Bank shall be
responsible for the failure of any other Bank to make the Loan to be made by
such other Bank.
(e) Subject to all the terms and conditions hereof, the Company may,
by delivering a notice (a "PRICING NOTICE") to the Agent received prior to 12:00
noon Boston time on the date two Business Days prior to the commencement of the
Interest Period selected in such Pricing Notice, elect to have all or a portion
of the outstanding Advances, as the Company may specify in such Pricing Notice,
accrue and bear daily interest during the Interest Period so selected at a per
annum rate equal to the Applicable LIBOR Rate for such Interest Period;
PROVIDED, HOWEVER, that any such election made with respect to the Advances
shall be in an
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amount not less than $1,000,000 and increments of $500,000 thereafter and not
more than five (5) LIBOR Rate Loans shall be in effect at any time. Interest on
Loans bearing interest at the Applicable LIBOR Rate shall be paid for the
applicable Interest Period on the last day of such Interest Period and when such
Loan is due (whether at maturity, by reason of acceleration or otherwise). Each
Pricing Notice shall be substantially in the form of EXHIBIT C attached hereto
and shall specify: (i) the selection of a LIBOR Pricing Option or Alternative
Base Rate; (ii) the effective date and amount of Advances subject to such LIBOR
Pricing Option, subject to the limitations set forth herein; and (iii) the
duration of the applicable Interest Period, if any. Each Pricing Notice shall be
irrevocable. No election of a LIBOR Pricing Option shall become effective if,
prior to the commencement of any such LIBOR Interest Period, the Agent
determines that (a) the electing or granting of the LIBOR Pricing Option in
question would violate a Legal Requirement, (b) deposits in an amount comparable
to the principal amount of the Advances as to which such LIBOR Pricing Option
has been elected and which have a term corresponding to the proposed LIBOR
Interest Period are not readily available in the London inter-bank market or (c)
by reason of circumstances affecting the London inter-bank market, adequate and
reasonable methods do not exist for ascertaining the interest rate applicable to
such deposits for the proposed LIBOR Interest Period.
(f) The Agent may fund any portion of the Advances subject to a LIBOR
Pricing Option out of any funds available to the Agent. Regardless of the source
of the funds actually used by the Agent to fund any portion of the Advances
subject to a LIBOR Pricing Option, all amounts payable hereunder, including the
interest rate applicable to any such portion of the Advances and the amounts
payable under Sections 2.6 and 2.7, shall be computed as if the Agent had
actually funded such portion of the Advances through the purchase of deposits in
such amount of the type by which the LIBOR Rate was determined with a maturity
the same as the applicable LIBOR Interest Period relating thereto and through
the transfer of such deposits from an office of the Bank having the same
location as the applicable LIBOR Office to one of the Agent's offices in the
United States of America.
2.3 COMMITMENT FEE. The Company shall pay to the Agent for the ratable
benefit of the Banks during the Credit Period a commitment fee computed at the
rate of two tenths of one percent (0.20%) per annum on the average daily amount
of (i) the unborrowed portion of the Maximum Revolving Credit and (ii) the
unused portion of the Maximum Equipment Credit, during each or portion thereof.
Commitment fees shall be payable quarterly in arrears, on the first day of each
March, June, September and December beginning June 1, 1997, and ending on the
last day of the Credit Period. The Company may by thirty (30) days prior written
notice to the Bank reduce the Maximum Revolving Credit or Maximum Equipment
Credit at any time after 90 days from the date of this Agreement. Any such
reduction shall be permanent.
2.4 THE NOTE
(a) The Loans shall be evidenced by the Notes, payable to the order of
each Bank. Each Note shall be in the original amount of the applicable Bank's
commitment percentage of the Maximum Credit. Each Note shall be dated on or
before the date of the first Loan and shall have the blanks therein
appropriately completed.
(b) Each Bank shall, and is hereby irrevocably authorized by the
Company to, enter on the schedule forming a part of the Note or otherwise in its
records appropriate notations evidencing the date and the amount of each Loan
and the date and amount of each payment of principal made by the Company with
respect thereto; and in the absence of manifest error, such notations shall
constitute conclusive evidence thereof. The Agent will provide the Company with
a monthly statement of all Loans made to and payments by the Company and all
interest charged on the Loans. Each Bank is hereby irrevocably authorized by the
Company to attach to and make a part of the Note a continuation of any such
schedule as and when required. No failure on the part of the Banks to make any
notation as provided in this subsection (b) shall in
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any way affect any Loan or the rights or obligations of the Banks or the Company
with respect thereto.
2.5 INTEREST RATES AND PAYMENTS OF INTEREST. Subject to the terms of this
Agreement relating to LIBOR Pricing Options, each Loan shall bear interest on
the outstanding principal amount thereof at a rate per annum equal to the
Alternate Base Rate, which rate shall change contemporaneously with any change
in the Base Rate. Such interest shall be payable on the first day of each month,
commencing August 1, 1997 and when such Loan is due (whether at maturity, by
reason of acceleration or otherwise). The Agent may, and the Company hereby
authorizes the Agent to, debit the amount of any payments not made by such time
to the demand deposit account of the Company with the Agent.
2.6 CERTAIN PROVISIONS RELATING TO LIBOR PRICING OPTION.
(a) If any portion of the Advances subject to a LIBOR Pricing
Option is repaid, or any LIBOR Pricing Option is terminated for any reason
(including acceleration of maturity, but excluding a Legal Requirement not
having the force of law), on a date which is prior to the last Business Day of
the LIBOR Interest Period applicable to such LIBOR Pricing Option, the Company
will pay to the Agent, in addition to any amounts of interest otherwise payable
hereunder, an amount equal to the present value (calculated in accordance with
this Section 2.6) of interest for the unexpired portion of such LIBOR Interest
Period on the portion of the Loan so repaid, or as to which a LIBOR Pricing
Option was so terminated, at a per annum rate equal to the excess, if any, of
(i) the LIBOR Rate applicable to such LIBOR Pricing Option MINUS (ii) the LIBOR
Rate then applicable to a deemed LIBOR Interest Period having a maturity date
approximating the last Business Day of such LIBOR Interest Period. The present
value of such additional interest shall be calculated by discounting the amount
of such interest for each day in the unexpired portion of such LIBOR Interest
Period from such day to the date of such repayment or termination at a per annum
interest rate equal to the interest rate determined pursuant to clause (ii) of
the preceding sentence, and by adding all such amounts for all such days during
such period. The determination by the Agent of such amount of interest shall, in
the absence of manifest error, be conclusive. For purposes of this Section 2.6,
if any portion of the Advances which was to have been subject to a LIBOR Pricing
Option is not outstanding on the first day of the LIBOR Interest Period
applicable to such LIBOR Pricing Option other than for reasons described in
Section 2.2(c), the Company shall be deemed to have terminated such LIBOR
Pricing Option.
(b) If any Legal Requirement shall prevent any of the Banks from
funding or maintaining through the purchase of deposits in the London inter-bank
market any portion of the Advances subject to a LIBOR Pricing Option or
otherwise from giving effect to such Bank's obligations as contemplated by
Section 2.2(c), then not earlier than the latest day permitted by such Legal
Requirement, (i) such Bank may by notice to the Company terminate all of the
affected LIBOR Pricing Options, (ii) the portion of the Advances subject to such
terminated LIBOR Pricing Options shall immediately be converted to Base Loans
and (iii) the Company shall make any payment required by paragraph (a) above.
2.7 CHANGES IN CIRCUMSTANCES; YIELD PROTECTION.
(a) If any Legal Requirement shall (i) impose, modify, increase or
deem applicable any insurance assessment, reserve, special deposit or similar
requirement against any Funding Liability, (ii) impose, modify, increase or deem
applicable any other requirement or condition with respect to any Funding
Liability, or (iii) change the basis of taxation of Funding Liabilities (other
than changes in the rate of taxes measured by the overall net income of any such
Bank) and the effect of any of the foregoing shall be to increase the cost to
such Bank of issuing, making, funding or maintaining any portion of an Advance
subject to a LIBOR Pricing Option, to reduce the amounts received or receivable
by such Bank under this Agreement or to require such Bank to make any payment or
forego any amounts otherwise payable to the Bank under this
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Agreement (other than any Tax or any reserves that are included in computing the
Reserve Requirement), such Bank may claim compensation from the Company under
paragraph (e) below.
(b) All payments of the Obligations shall be made without set-off or
counterclaim and free and clear of any deductions, including deductions for
Taxes, unless the Company is required by law to make such deductions. If (i) any
of the Banks shall be subject to any Tax with respect to any payment of the
Obligations or its obligations hereunder, or (ii) the Company shall be required
to withhold or deduct any Tax on any payment of the Obligations, then such Bank
may claim compensation from the Company under paragraph (e) below. Whenever
Taxes must be withheld by the Company with respect to any payment of the
Obligations, the Company shall promptly furnish to the Agent official receipts
(to the extent that the relevant governmental authority delivers such receipts)
evidencing payment of any such Taxes so withheld. If the Company fails to pay
any such Taxes when due or fails to remit to the Agent the required receipts
evidencing payment of any such Taxes so withheld or deducted, the Company shall
indemnify such Bank for any incremental Taxes and interest or penalties that may
become payable by such Bank as a result of any such failure. In the event the
Bank receives a refund of any Taxes for which it has received payment from the
Company under this Section 2.7(b), such Bank shall promptly pay the amount of
such refund to the Company, together with any interest thereon actually earned
by such Bank.
(c) If any of the Banks shall determine in good faith that compliance
by such Bank with any change in Legal Requirements after the date hereof
regarding capital adequacy of banks or bank holding companies has or would have
the effect of reducing the rate of return on the capital of such Bank as a
consequence of such Bank's commitment to make the extensions of credit
contemplated hereby, to a level below that which such Bank could have achieved
but for such compliance (taking into consideration the policies of such Bank
with respect to capital adequacy immediately before such compliance and assuming
that the capital of such Bank was fully utilized prior to any such compliance)
by an amount deemed by such Bank to be material, then such Bank may claim
compensation from the Company under paragraph (e) below.
(d) If any of the Banks shall determine in good faith that (i) any
change in any Legal Requirement (including any new Legal Requirement) after the
date hereof shall directly or indirectly (A) reduce the amount of any sum
received or receivable by such Bank with respect to an Advance or the return to
be earned by such Bank on an Advance, (B) impose an additional cost on such Bank
that is attributable to the making or maintaining of, or such Bank's commitment
to make, its portion of an Advance or (C) require such Bank to make any payment
on, or calculated by reference to, the gross amount of any amount received by
such Bank under any of the Loan Documents (other than Taxes or income or
franchise taxes), and (ii) such reduction, increased cost or payment shall not
be fully compensated for by an adjustment in the interest rate on the Advances,
then such Bank may claim compensation from the Company under paragraph (e)
below.
(e) Within 15 days after the receipt by the Company of a certificate
from any of the Banks setting forth why it is claiming compensation under this
Section 2.7 and computations (in reasonable detail) of the amount thereof, the
Company shall pay to such Bank such additional amounts as such Bank sets forth
in such certificate as sufficient fully to compensate it on account of the
foregoing provisions of this Section 2.7, together with interest on such amount
from the 15th day after receipt of such certificate until payment in full
thereof at the Base Rate. The determination by such Bank of the amount to be
paid to it and the basis for computation thereof hereunder shall be presumed
correct unless rebutted by clear evidence. In determining such amount, such Bank
may use any reasonable averaging and attribution methods.
(f) The Banks shall take such commercially reasonable steps as they
may determine are not materially disadvantageous to it, including changing
lending offices to the extent
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feasible, in order to reduce amounts otherwise payable by the Company to the
Banks pursuant to this Section 2.7 or to make LIBOR Pricing Options available
under Section 2.2. In addition, the Company shall not be responsible for costs
(i) under this Section 2.7 arising more than 90 days prior to receipt by the
Company of the certificate from the Bank pursuant to this Section 2.7 or (ii)
under Section 2.6 from the termination of LIBOR Pricing Options occurring more
than 90 days prior to the demand by the Bank for payment under Section 2.6.
2.8 CAPITAL REQUIREMENTS. If after the date hereof any of the Banks
determines in good faith that (i) the adoption of or change in any law, rule,
regulation or guideline of any applicable governmental authority regarding
capital requirements for banks or bank holding companies, or any change in the
interpretation or application thereof by any governmental authority charged with
the administration thereof, or (ii) compliance by such Bank or its parent bank
holding company with any guideline, request or directive of any such entity
regarding capital adequacy (whether or not having the force of law), has the
effect of reducing the return on such Bank's or such holding company's capital
as a consequence of such Bank's commitment to make Loans hereunder to a level
below that which such Bank or such holding company could have achieved but for
such adoption, change or compliance (taking into consideration such Bank's or
such holding company's then existing policies with respect to capital adequacy
and assuming the full utilization of such entity's capital) by any amount deemed
by such Bank to be material, then such Bank shall notify the Company thereof.
The Company agrees to pay to such Bank the amount of such reduction of capital
as and when such reduction is determined, upon presentation by such Bank of a
statement in the amount and setting forth such Bank's calculation thereof, which
statement shall be presumed correct unless rebutted by clear evidence. In
determining such amount, such Bank may use any reasonable averaging and
attribution methods.
2.9 PAYMENTS AND PREPAYMENTS OF THE LOANS. Loans outstanding in excess of
the Borrowing Base or in excess of the Maximum Revolving Credit, shall be paid
immediately without notice or demand. All Loans shall be paid without notice or
demand on the Termination Date, or earlier as provided in Section 7.2 upon the
occurrence of an Event of Default. Loans may be prepaid at any time, without
premium or penalty, upon one Business Day's notice. Any interest accrued on the
amounts so prepaid to the date of such payment must be paid at the time of any
such payment. No prepayment of the Loans during the Credit Period shall affect
the Commitment Amount or impair the Company's right to borrow as set forth in
Section 2.1.
2.10 METHOD OF PAYMENT. All payments and prepayments of principal and all
payments of interest shall be made by the Company to the Agent at its head
office in Boston, Massachusetts in immediately available funds, on or before
10:00 a.m. Boston time on the due date thereof, free and clear of, and without
any deduction or withholding for, any taxes or other payments. The Agent may,
and the Company hereby authorizes the Agent to, debit the amount of any payment
not made by such time to the demand deposit account of the Company with the
Agent.
2.11 OVERDUE PAYMENTS. Overdue principal (whether at maturity, by reason of
acceleration or otherwise) and, to the extent permitted by applicable law,
overdue interest and fees or any other amounts payable hereunder or under the
Note shall bear interest from and including the due date thereof until paid at a
rate per annum equal to 4% above the rate then applicable to Loans, which
interest shall be payable on demand.
2.12 COMPUTATION OF INTEREST AND FEES. Interest and all fees payable
hereunder shall be computed daily on the basis of a year of 360 days and paid
for the actual number of days for which due. If the due date for any payment of
principal is extended by operation of law, interest shall be payable for such
extended time. If any payment required by this Agreement becomes due on a day
that is not a Business Day such payment may be made on the next succeeding
Business Day, and such extension shall be included in computing interest in
connection with such payment. For the purposes of computing interest, all
payments will be credited to the Loans one
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(1) Business Day after receipt by the Agent.
2.13 BORROWING BASE REPORTS. The Company shall deliver a Borrowing Base
Report and an aging report monthly prepared as of the close of business at the
end of the preceding month within thirty (30) days after the end of such month;
provided, however, that (i) the Borrowing Base Report shall only be delivered
quarterly (thirty (30) days after the end of such quarter) if there are no
outstanding Advances at the end of any month that is not at the end of a fiscal
quarter and (ii) the Banks may require more frequent reports during the
occurrence of a Default.
2.14 AGENT'S FEE. The Company shall pay to the Agent on the Closing Date an
agency fee as previously agreed. Such fee shall be fully earned upon the date
due and shall not be pro rated in the event of a reduction in or termination of
the Commitment Amount.
2.15 FIELD AUDIT EXPENSES. The Company shall pay to the Agent on demand the
Agent's customary fee for audit reviews by employees of the Agent (currently
$350 per day plus out-of-pocket expenses); provided that, unless an Event of
Default shall exist, the Company shall not be obligated to pay for more than one
audit in any fiscal year of the Company.
SECTION III
-----------
CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL LOAN. The obligation of the Banks to
make their initial Loans is subject to the condition precedent that the Agent
shall have received, in form and substance satisfactory to the Agent and its
counsel, the following:
(a) this Agreement and the Notes, duly executed by the Company;
(b) a certificate from a recording officer of the Company with respect
to resolutions of the Board of Directors authorizing the execution and delivery
of this Agreement and the other Loan Documents and identifying the officer(s)
authorized to execute, deliver and take all other actions required under this
Agreement, and providing specimen signatures of such officers;
(c) the charter documents of the Company and all amendments and
supplements thereof, filed in the office of the Secretary of State of
Massachusetts, each certified by said Secretary of State as being a true and
correct copy thereof;
(d) the Bylaws of the Company and all amendments and supplements
thereto, certified by a recording officer of the Company as being a true and
correct copy thereof;
(e) a certificate of the Secretary of State of Massachusetts, as to
legal existence and good standing of the Company in such state;
(f) the Subordination Agreement duly executed by the Company, the
Banks, Agent and Ando;
(g) an opinion addressed to the Agent and Banks from Joseph A. Hedal,
General Counsel of the Company; and
(h) such other documents, and completion of such other matters
(including without limitation, due diligence review and completion of a field
audit examination), as counsel for the Agent may deem necessary or appropriate.
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3.2 CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Banks to make
each Loan, including the initial Loan, is further subject to the following
conditions:
(a) timely receipt by the Agent of the Notice of Borrowing as provided
in Section 2.2(a), the Pricing Notice as provided in Section 2.2(e), and a
current Borrowing Base Report as provided in Section 2.13;
(b) the representations and warranties contained in Section IV shall
be true and accurate in all material respects on the effective date of the
making, continuation or conversion of each Loan as though made at and as of each
such date (except to the extent that such representations and warranties
expressly relate to an earlier date) and no Default shall have occurred and be
continuing, or would result from such Loan;
(c) the resolutions referred to in Section 3.1(b) shall remain in full
force and effect; and
(d) no change shall have occurred in any law or regulation or
interpretation thereof that, in the reasonable opinion of counsel for the Agent,
would make it illegal or against the policy of any governmental agency or
authority for the Banks to make Loans hereunder and no material adverse change
in the performance, prospects or ownership of the Company.
The making of each Loan shall be deemed to be a representation and warranty
by the Company on the date of the making or continuation of such Loan as to the
accuracy of the facts referred to in subsection (b) of this Section 3.2.
SECTION IV
----------
REPRESENTATIONS AND WARRANTIES
------------------------------
In order to induce the Banks and Agent to enter into this Agreement and for
the Banks to make Loans and provide equipment financing hereunder, the Company
represents and warrants to the Banks and Agent that:
4.1 ORGANIZATION AND QUALIFICATION.. Each of the Company and its
Subsidiaries (a) is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, (b) has all
requisite corporate power to own its property and conduct its business as now
conducted and as presently contemplated and (c) is duly qualified and in good
standing as a foreign corporation and is duly authorized to do business in each
jurisdiction where the nature of its properties or business requires such
qualification, except for such jurisdictions in which such failure to be so
qualified will not have a material adverse effect on the Company and its
Subsidiaries taken as a whole.
4.2 CORPORATE AUTHORITY. The execution, delivery and performance of this
Agreement and the other Loan Documents and the transactions contemplated hereby
are within the corporate power and authority of the Company and have been
authorized by all necessary corporate proceedings, and do not and will not (a)
require any consent or approval of the stockholders of the Company, (b)
contravene any provision of the charter documents or by-laws of the Company or
any law, rule or regulation applicable to the Company, (c) contravene any
provision of, or constitute an event of default or event that, but for the
requirement that time elapse or notice be given, or both, would constitute an
event of default under, any other material agreement, instrument, order or
undertaking binding on the Company, or (d) result in or require the imposition
of any Encumbrance on any of the properties, assets or rights of the Company.
4.3 VALID OBLIGATIONS. This Agreement and the other Loan Documents and all
of
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their respective terms and provisions are the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms except as limited by bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally, and except as the remedy of specific performance or of
injunctive relief is subject to the discretion of the court before which any
proceeding therefor may be brought.
4.4 CONSENTS OR APPROVALS. The execution, delivery and performance of this
Agreement and the other Loan Documents and the transactions contemplated herein
do not require any approval or consent of, or filing or registration with, any
governmental or other agency or authority, or any other party.
4.5 TITLE TO PROPERTIES; ABSENCE OF ENCUMBRANCES. Each of the Company and
its Subsidiaries has good and marketable title to all of the properties, assets
and rights of every name and nature now purported to be owned by it, including,
without limitation, such properties, assets and rights as are reflected in the
financial statements referred to in Section 4.6 (except such properties, assets
or rights as have been disposed of in the ordinary course of business since the
date thereof), free from all Encumbrances except Permitted Encumbrances or those
Encumbrances disclosed in EXHIBIT E hereto, and, except as so disclosed, free
from all defects of title that might materially adversely affect such
properties, assets or rights, taken as a whole.
4.6 FINANCIAL STATEMENTS. The Company has furnished the Bank its
consolidated balance sheet as of July 31, 1996 and its consolidated statements
of income, changes in stockholders' equity and cash flow for the fiscal year
then ended, and related footnotes, audited and certified by Arthur Andersen LLP.
The Company has also furnished the Bank its consolidated balance sheet as of
April 30, 1997 and its consolidated statements of income, changes in
stockholders equity and cash flow for the fiscal period then ended, certified by
the principal financial officer of the Company but subject, however, to the
absence of footnotes and normal, recurring year-end adjustments that are not
reasonably expected in the aggregate to be material in amount. All such
financial statements were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
specified and present fairly in all material respects the financial position of
the Company and its Subsidiaries on a consolidated basis as of such date and the
results of the operations of the Company and its Subsidiaries on a consolidated
basis for such period. There are no known liabilities, contingent or otherwise,
not disclosed in such financial statements that involve a material amount.
4.7 CHANGES. Since the date of the most recent financial statements
referred to in Section 4.6, there have been no changes in the assets,
liabilities, financial condition, or business of the Company or any of its
Subsidiaries other than changes in the ordinary course of business, the effect
of which has not, in the aggregate, been materially adverse to the Company and
its Subsidiaries taken as a whole.
4.8 DEFAULTS. As of the date of this Agreement, no Default exists.
4.9 TAXES. The Company and each Subsidiary have filed all federal, state
and other tax returns required to be filed by it, and all taxes, assessments and
other governmental charges due from the Company and each Subsidiary have been
fully paid except (i) for taxes, the validity of which are being contested in
good faith by appropriate proceedings diligently pursued and available to the
Company or its Subsidiary (as the case may be) with respect to which adequate
reserves have been set aside on their books and (ii) to the extent failure to
have filed any such return or paid any such amount will not have a material
adverse effect on the Company and its Subsidiaries taken as a whole. The Company
has established on its books reserves adequate for the payment of all federal,
state and other tax liabilities.
4.10 LITIGATION. Except as set forth on EXHIBIT F hereto, there is no
litigation, arbitration, proceeding or investigation pending, or, to the
knowledge of the Company's or any
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Subsidiary's officers, threatened, against the Company or any Subsidiary that,
if adversely determined, would reasonably be expected to result in a material
judgment not fully covered by insurance, to result in a forfeiture of all or any
substantial part of the property of the Company and its Subsidiaries taken as a
whole, or to otherwise have a material adverse effect on the assets, business or
financial condition of the Company and its Subsidiaries taken as a whole.
4.11 USE OF PROCEEDS. No portion of any Loan is to be used for the "purpose
of purchasing or carrying" any "margin stock" as such terms are used in
Regulations U and X of the Board of Governors of the Federal Reserve System, 12
C.F.R. 221 and 224, as amended; and following the application of the proceeds of
each Loan, the value of all "margin stock" of the Company will not exceed 25% of
the value of the total assets of the Company.
4.12 SUBSIDIARIES. As of the date of this Agreement, all the Subsidiaries
of the Company are listed on EXHIBIT G hereto. The Company or a Subsidiary of
the Company is the owner, free and clear of all liens and encumbrances, of all
of the issued and outstanding stock of each Subsidiary, except as set forth on
EXHIBIT G. All shares of such stock have been validly issued and are fully paid
and nonassessable, and no rights to subscribe to any additional shares have been
granted, and no options, warrants or similar rights are outstanding, except as
set forth on EXHIBIT G.
4.13 INVESTMENT COMPANY ACT. Neither the Company nor any of its
Subsidiaries is subject to regulation under the Investment Company Act of 1940,
as amended.
4.14 COMPLIANCE WITH ERISA. The Company and each member of the Controlled
Group have fulfilled their obligations under the minimum funding standards of
ERISA and the Code with respect to each Plan and are in compliance in all
material respects with the applicable provisions of ERISA and the Code, and have
not incurred any liability to the PBGC or a Plan under Title IV of ERISA; and no
"prohibited transaction" or "reportable event" (as such terms are defined in
ERISA) has occurred with respect to any Plan.
4.15 ENVIRONMENTAL MATTERS
(a) The Company and each of its Subsidiaries have obtained all
permits, licenses and other authorizations which are required under all
applicable Environmental Laws to own and operate their respective businesses,
except to the extent failure to have any such permit, license or authorization
would not have a material adverse effect on the business, financial condition or
operations of the Company and its Subsidiaries taken as a whole. The Company and
each of its Subsidiaries are in compliance with the terms and conditions of all
such permits, licenses and authorizations, and are also in compliance with all
other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in any applicable
Environmental Law or in any regulation, code, plan, order, decree, judgment,
injunction, notice or demand letter issued, entered, promulgated or approved
thereunder, except to the extent failure to comply would not have a material
adverse effect on the business, financial condition or operations of the Company
and its Subsidiaries taken as a whole.
(b) Except as disclosed on EXHIBIT H, no notice, notification, demand,
request for information, citation, summons or order has been received, no
complaint has been served, no penalty has been assessed in writing and, to the
Company's knowledge, no investigation or review is pending or threatened by any
governmental or other entity with respect to any alleged failure by the Company
or any of its Subsidiaries to have any permit, license or authorization required
in connection with the conduct of its business or with respect to any applicable
Environmental Laws, including, without limitation, applicable Environmental Laws
relating to the generation, treatment, storage, recycling, transportation,
disposal or release of any Hazardous Materials, except to the extent that such
notice, complaint, penalty or investigation is not reasonably expected to result
in the remediation of any property owned or used by the Company
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or any of its Subsidiaries costing in excess of $200,000 per occurrence or
$500,000 in the aggregate.
(c) Except as disclosed on EXHIBIT H, to the best of the Company's
knowledge no material oral or written notification of a release of a Hazardous
Material has been filed by or on behalf of the Company or any of its
Subsidiaries and no property now or previously owned, leased or used by the
Company or any of its Subsidiaries is listed or proposed for listing on the
National Priorities List under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, or on any similar state list
of sites requiring investigation or clean-up.
(d) Except as disclosed on EXHIBIT H, to the best of the Company's
knowledge, there are no liens or encumbrances arising under or pursuant to any
Environmental Laws on any of the real property or properties owned, leased or
used by the Company or any of its Subsidiaries and no governmental actions have
been taken or, to the best of the Company's knowledge are in process which could
subject any of such properties to such liens or encumbrances or as a result of
which the Company or any of its Subsidiaries would be required to place any
notice or restriction relating to the presence of Hazardous Materials at any
property owned by it in any deed to such property.
(e) Except as disclosed on EXHIBIT H, or as would not have a material
adverse effect on the Company and its Subsidiaries taken as a whole, neither the
Company nor any of its Subsidiaries nor, to the best knowledge of the Company
based upon inquiry of senior management of the Company, any previous owner,
tenant, occupant or user of any property owned, leased or used by the Company or
any of its Subsidiaries has (i) engaged in or permitted any operations or
activities upon or any use or occupancy of such property, or any portion
thereof, for the purpose of or in any way involving the handling, manufacture,
treatment, storage, use, generation, release, discharge, refining, dumping or
disposal (whether legal or illegal, accidental or intentional) of any Hazardous
Materials on, under, in or about such property, except to the extent commonly
used in day-to-day operations of such property and in such case only in
compliance with all applicable Environmental Laws, or (ii) transported any
Hazardous Materials to, from or across such property except to the extent
commonly used in day-to-day operations of such property and, in such case, in
compliance with all applicable Environmental Laws; nor to the best knowledge of
the Company have any Hazardous Materials migrated from other properties upon,
about or beneath such property, nor, to the best knowledge of the Company, are
any Hazardous Materials presently constructed, deposited, stored or otherwise
located on, under, in or about such property except to the extent commonly used
in day-to-day operations of such property and, in such case, in compliance with
all applicable Environmental Laws.
(f) The representations in foregoing subsections (b) through (e) are
made only as of the date of this Agreement. The Company's disclosure requirement
with respect to such matters in the future are subject INTER ALIA to subsections
5.1(j) and (k).
SECTION V
---------
AFFIRMATIVE COVENANTS
---------------------
So long as the Banks have any commitment to lend hereunder or any Loan or
other Obligation remains outstanding, the Company covenants as follows:
5.1 FINANCIAL STATEMENTS AND OTHER REPORTING REQUIREMENTS. The Company
shall furnish to the Agent (and to the Banks at the Agent's request):
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(a) as soon as available to the Company, but in any event within 90
days after the end of each of its fiscal years, a consolidated and consolidating
balance sheet as of the end of, and a related consolidated and consolidating
statement of income, changes in stockholders equity and cash flow for, such
year, audited and certified by Arthur Andersen LLP (or other independent
certified public accountants acceptable to the Banks) in the case of such
consolidated statements, and certified by the chief financial officer in the
case of such consolidating statements; and, concurrently with such financial
statements, a copy of said certified public accountants management report and a
written statement by such accountants that, in the making of the audit necessary
for their report and opinion upon such financial statements they have obtained
no knowledge of any Default or, if in the opinion of such accountants any such
Default exists, they shall disclose in such written statement the nature and
status thereof;
(b) in the event any Revolving Loans are outstanding, as soon as
available to the Company, but in any event within thirty (30) days after the end
of each of its fiscal months, a consolidated and consolidating balance sheet as
of the end of, and a related consolidated and consolidating statement of income
for, the period then ended, a detailed accounts receivable aging and Borrowing
Base Report, each certified and prepared by the chief financial officer of the
Company but subject, however, to the absence of footnote and normal, recurring
year-end adjustments that are not reasonably expected in the aggregate to be
material in amount;
(c) within forty-five (45) days after the end of each of its fiscal
quarters, a compliance certificate in substantially the form of EXHIBIT J
hereto, a detailed accounts receivable aging report, a consolidated and
consolidating balance sheet, and a statement of income and cash flow for such
quarter, each certified on behalf of the Company by its chief financial officer;
(d) within the time period set forth in Section 2.13, Borrowing Base
Reports.
(e) prior to the end of each fiscal year, projections for the next
fiscal year prepared on a quarter-to-quarter basis indicating the Company's
expected operating results, and capital expenditures (and five (5) days after
the Company's Board of Directors approval, any change in such projections or
related plan).
(f) promptly after the receipt thereof by the Company, copies of any
reports submitted to the Company by independent public accountants in connection
with any interim review of the accounts of the Company made by such accountants;
(g) promptly after the same are available, copies of all proxy
statements, financial statements and reports as the Company shall send to its
stockholders or, within five (5) days of filing, as the Company may file with
the Securities and Exchange Commission or any governmental authority at any time
having jurisdiction over the Company or its Subsidiaries;
(h) if and when the Company gives or is required to give notice to the
PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with
respect to any Plan that might constitute grounds for a termination of such Plan
under Title IV of ERISA, or knows that any member of the Controlled Group or the
plan administrator of any Plan has given or is required to give notice of any
such Reportable Event, a copy of the notice of such Reportable Event given or
required to be given to the PBGC;
(i) immediately upon becoming aware of the existence of any condition
or event that constitutes a Default, written notice thereof specifying the
nature and duration thereof and the action being or proposed to be taken with
respect thereto;
(j) promptly upon becoming aware of any litigation or of any
investigative proceedings by a governmental agency or authority commenced or
threatened against the Company or any of its Subsidiaries of which it has
notice, the outcome of which would
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reasonably be expected to have a materially adverse effect on the assets,
business or financial condition of the Company or the Company and its
Subsidiaries on a consolidated basis, written notice thereof and the action
being or proposed to be taken with respect thereto;
(k) promptly upon becoming aware of any investigative proceedings by a
governmental agency or authority commenced or threatened against the Company or
any of its Subsidiaries regarding any potential violation of Environmental Laws
or any spill, release, discharge or disposal of any Hazardous Material the
outcome of which would reasonably be expected to have a material adverse effect
on the business, financial condition or operations of the Company and its
Subsidiaries on a consolidated basis, written notice thereof and the action
being or proposed to be taken with respect thereto; and
(l) from time to time, such other financial data and information about
the Company or its Subsidiaries as the Agent may reasonably request.
5.2 CONDUCT OF BUSINESS. The Company shall, and shall cause each of its
Subsidiaries to:
(a) duly observe and comply in all material respects with all
applicable laws and valid requirements of any governmental authorities relative
to its corporate existence, rights and franchises, to the conduct of its
business and to its property and assets (including without limitation all
Environmental Laws and ERISA), and shall maintain and keep in full force and
effect all licenses and permits necessary in any material respect to the proper
conduct of its business;
(b) maintain its corporate existence; and
(c) remain engaged substantially in the business of designing,
manufacturing and servicing semiconductor test equipment and substantially
related applications support and any business substantially related thereto.
5.3 MAINTENANCE AND INSURANCE. The Company shall, and shall cause each of
its Subsidiaries to, maintain its properties in good repair, working order and
condition as required for the normal conduct of its business. Each of the
Company and its Subsidiaries shall at all times maintain liability and casualty
insurance with financially sound and reputable insurers in such amounts as the
officers of the Company in the exercise of their reasonable judgment deem to be
adequate. In the event of failure to provide and maintain insurance as herein
provided, the Agent may, at its option, provide such insurance and charge the
amount thereof to the account of the Company or any of its Subsidiaries with the
Agent. The Company shall furnish to the Agent certificates or other evidence
satisfactory to the Agent of compliance with the foregoing insurance provisions.
5.4 TAXES. The Company shall pay or cause to be paid all taxes,
assessments or governmental charges on or against it or any of its Subsidiaries
or its or their properties on or prior to the time when they become due;
PROVIDED that this covenant shall not apply to any tax, assessment or charge
that is being contested in good faith by appropriate proceedings and with
respect to which adequate reserves have been established and are being
maintained in accordance with generally accepted accounting principles
consistently applied.
5.5 INSPECTION BY THE AGENT. The Company shall permit the Agent or its
designees, at any reasonable time, and upon reasonable notice (or if a Default
shall have occurred and is continuing, at any time and without prior notice), to
(i) visit and inspect the properties of the Company and its Subsidiaries, (ii)
examine and make copies of and take abstracts from the books and records of the
Company and its Subsidiaries, and (iii) discuss the affairs, finances and
accounts of the Company and its Subsidiaries with their appropriate officers,
employees and
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accountants. In handling such information the Agent shall exercise the same
degree of care that it exercises with respect to its own proprietary information
of the same types to maintain the confidentiality of any non-public information
thereby received or received pursuant to Section 5.1 except that disclosure of
such information may be made (i) to the subsidiaries or affiliates of the Agent
in connection with their present or prospective business relations with the
Company, (ii) to prospective transferees or purchasers of an interest in the
Loans, (iii) as required by law, regulation, rule or order, subpoena, judicial
order or similar order and (iv) as may be required in connection with the
examination, audit or similar investigation of the Agent.
5.6 MAINTENANCE OF BOOKS AND RECORDS. The Company shall, and shall cause
each of its Subsidiaries to, keep adequate books and records of account, in
which true and complete entries will be made reflecting in all material respects
all of its business and financial transactions, and such entries will be made in
accordance with generally accepted accounting principles consistently applied
and applicable law.
5.7 BANK ACCOUNTS. The Company shall maintain the Agent as its primary
depository for its operating, concentration and disbursement accounts.
5.8 PROFITABILITY. The Company (i) shall not have a Consolidated Net
Deficit for two consecutive fiscal quarters at the end of any quarter, (ii)
shall not have a Consolidated Net Deficit for any quarter greater than
$5,000,000 at the end of any such quarter and (iii) shall earn Consolidated Net
Income of at least $1 for each fiscal year commencing with the fiscal year
ending July 31, 1998.
5.9 CONSOLIDATED QUICK RATIO. The Company and its Subsidiaries shall not
permit the ratio of Consolidated Quick Assets to Consolidated Current
Liabilities to be less than 1.75-to-1 as at the end of any fiscal quarter.
5.10 CONSOLIDATED TOTAL LIABILITIES TO CONSOLIDATED TANGIBLE NET WORTH
RATIO. The Company and its Subsidiaries shall not permit the ratio of
Consolidated Total Liabilities to Consolidated Tangible Net Worth to be greater
than 0.60-to-1 as at the end of any fiscal quarter.
5.11 TRAILING CONSOLIDATED OPERATING CASH FLOW TO ROLLING CONSOLIDATED
TOTAL DEBT SERVICE. The ratio of Trailing Consolidated Operating Cash Flow to
Rolling Consolidated Total Debt Service shall not be less than: (i) .15 for each
of the fourth quarter of fiscal year 1997 and first quarter of fiscal year 1998;
(ii) .25 for the second quarter of fiscal year 1998; (iii) .35 for the third
quarter of fiscal year 1998; and (iv) .50 for the fourth quarter of fiscal year
1998.
Trailing Consolidated Operating Cash Flow shall be calculated by adding the
current fiscal quarter's Consolidated Operating Cash Flow to the three prior
consecutive quarters' Consolidated Operating Cash Flow; provided, however, that
(i) with respect to the fourth quarter of fiscal year 1997, Trailing
Consolidated Operating Cash Flow shall be calculated by annualizing the third
and fourth quarters of fiscal year 1997; and (ii) with respect to the first
quarter of fiscal year 1998, Trailing Consolidated Operating Cash Flow shall be
calculated by annualizing the third and fourth quarters of fiscal year 1997 and
the first quarter of fiscal year 1998. Rolling Consolidated Total Debt Service
shall mean the projected Consolidated Total Debt Service for the next four
consecutive fiscal quarters following the applicable quarter.
5.12 FURTHER ASSURANCES. At any time and from time to time the Company
shall, and shall cause each of its Subsidiaries to, execute and deliver such
further instruments and take such further action as may reasonably be requested
by the Agent to effect the purposes of this Agreement and the Note.
SECTION VI
----------
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NEGATIVE COVENANTS
------------------
So long as the Banks have any commitment to lend hereunder or any Loan or
other Obligation remains outstanding, the Company covenants as follows:
6.1 INDEBTEDNESS. Neither the Company nor any of its Subsidiaries shall
create, incur, assume, pay, guarantee or be or remain liable with respect to any
Indebtedness other than the following:
(a) Indebtedness of the Company or any of its Subsidiaries to the
Banks or any of their affiliates;
(b) Indebtedness existing as of the date of this Agreement and
disclosed on EXHIBIT E hereto or in the financial statements referred to in
Section 4.6;
(c) Indebtedness secured by Permitted Encumbrances;
(d) Indebtedness that is subordinate to the Obligations on terms
acceptable to the Agent including without limitation such subordinated
Indebtedness for acquisitions permitted under Section 6.6 hereof; and
(e) other Indebtedness of the Company in an aggregate outstanding
principal amount not exceeding $5,000,000.
6.2 CONTINGENT LIABILITIES. Neither the Company nor any of its
Subsidiaries shall create, incur, assume, guarantee or remain liable with
respect to any Guarantees other than the following:
(a) Guarantees in favor of the Banks or any of their affiliates;
(b) Guarantees existing on the date of this Agreement and disclosed on
EXHIBIT E hereto or in the financial statements referred to in Section 4.6;
(c) Guarantees resulting from the endorsement of negotiable
instruments for collection in the ordinary course of business;
(d) Guarantees with respect to surety, appeal performance and
return-of-money and other similar obligations incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money) not
exceeding in the aggregate at any time $1,000,000; and
(e) Guarantees of trade debt relating to the acquisition of goods and
supplies arising in the ordinary course of business.
6.3 CAPITAL LEASES. Neither the Company nor any of its Subsidiaries shall
during any fiscal year enter into any capital leases of real or personal
property as lessee, except as permitted by Section 6.9.
6.4 SALE AND LEASEBACK. Neither the Company nor any of its Subsidiaries
shall enter into any arrangement, directly or indirectly, whereby it shall sell
or transfer any property owned by it in order to lease such property or lease
other property that the Company or any such Subsidiary intends to use for
substantially the same purpose as the property being sold or transferred, except
(i) in connection with use of Equipment Funds and (ii) any such arrangements
where the property transferred does not exceed $5,000,000 of value in the
aggregate for all of
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such arrangements at any time outstanding.
6.5 ENCUMBRANCES. Neither the Company nor any of its Subsidiaries shall
create, incur, assume or suffer to exist any mortgage, pledge, security
interest, lien or other charge or encumbrance, including the lien or retained
security title of a conditional vendor upon or with respect to any of its
property or assets ("ENCUMBRANCES"), or assign or otherwise convey any right to
receive income, including the sale, discount or factoring of accounts receivable
with or without recourse, except the following ("PERMITTED ENCUMBRANCES"):
(a) Encumbrances in favor of the Banks;
(b) Encumbrances existing as of the date of this Agreement and
disclosed in EXHIBIT E hereto;
(c) liens for taxes, fees, assessments and other governmental charges
to the extent that payment of the same may be postponed or is not required in
accordance with the provisions of Section 5.4;
(d) landlords' and lessors' liens in respect of rent not in default or
liens in respect of pledges or deposits under worker's compensation,
unemployment insurance, social security laws, or similar legislation (other than
ERISA) or in connection with appeal and similar bonds incidental to litigation,
mechanics', laborers and materialmen's, processor's and similar liens, if the
obligations secured by such liens are not then delinquent or are being contested
in good faith; liens securing the performance of bids, tenders, contracts (other
than for the payment of money); and statutory obligations incidental to the
conduct of its business and that do not in the aggregate materially detract from
the value of its property or materially impair the use thereof in the operation
of its business;
(e) judgment liens that shall not have been in existence for a period
longer than 60 days after the creation thereof or, if a stay of execution shall
have been obtained, for a period longer than 60 days after the expiration of
such stay;
(f) rights of lessors under capital leases;
(g) Encumbrances in respect of any obligations under purchase money
security interests for tangible property used in its business that at any time
shall not exceed $3,000,000, PROVIDED that any such Encumbrances shall not
extend to property and assets of the Company or any such Subsidiary not financed
by such a purchase money obligation;
(h) easements, rights of way, restrictions and other similar charges
or Encumbrances relating to real property and not interfering in a material way
with the ordinary conduct of its business;
(i) Encumbrances on its property or assets created in connection with
the refinancing of Indebtedness secured by Permitted Encumbrances on such
property, PROVIDED that the amount of Indebtedness secured by any such
Encumbrance shall not be increased as a result of such refinancing and no such
Encumbrance shall extend to property and assets of the Company or any such
Subsidiary not encumbered prior to any such refinancing;
(j) liens on life insurance policies to secure borrowings from the
issuer thereof against the cash surrender value of such policies;
(k) factoring arrangements with the Banks;
(l) assignments of accounts receivable to reputable collection
agencies for
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<PAGE> 29
collection on behalf of the Company, provided the invoice amount of such
accounts receivable does not to exceed $2,000,000 in the aggregate at any time
and, provided further, such accounts receivable are more than 90 days past the
invoice date and the Company has used diligent efforts to collect the same; and
(m) other Encumbrances approved in writing by the Banks.
6.6 MERGER; CONSOLIDATION; SALE OR LEASE OF ASSETS. Neither the Company
nor any of its Subsidiaries shall sell, lease or otherwise dispose of assets or
properties (other than in the ordinary course of business); or liquidate, merge
or consolidate into or with any other person or entity, PROVIDED that if no
Default has occurred and is continuing or would result from any of the
following, (A) any Subsidiary of the Company may merge or consolidate into or
with (i) the Company, if the Company is the surviving company, or (ii) any other
wholly-owned Subsidiary of the Company and (B) the Company may acquire assets,
stock and properties not to exceed $15,000,000 per acquisition or $25,000,000 in
the aggregate without the prior written consent of the Banks.
6.7 ADDITIONAL STOCK ISSUANCE. The Company shall not permit any of its
Subsidiaries to issue any additional shares of its capital stock or other equity
securities, any options therefor or any securities convertible thereto other
than to the Company. Neither the Company nor any of its Subsidiaries shall sell,
transfer or otherwise dispose of any of the capital stock or other equity
securities of a Subsidiary, except (i) to the Company or any of its wholly-owned
Subsidiaries, or (ii) in connection with a transaction permitted by Section 6.6.
6.8 EQUITY DISTRIBUTIONS. The Company shall not (i) pay or declare any
dividend on any class of its stock or make any other distribution on account of
any class of its stock and (ii) redeem, purchase or otherwise acquire, directly
or indirectly, any shares of its stock, except as set forth on EXHIBIT I.
6.9 CAPITAL EXPENDITURES. Neither the Company nor any of its Subsidiaries
shall purchase or agree to purchase, or incur any obligations (including rental
obligations arising under capital leases) for any equipment or other property
constituting fixed assets in excess of $15,000,000 in the aggregate per year.
For purposes of computing this limitation, the total amount of the rental
obligations incurred under a capital lease shall be considered a capital
expenditure.
6.10 INVESTMENTS. Neither the Company nor any of its Subsidiaries shall
make or maintain any Investments other than (i) existing Investments in
Subsidiaries, (ii) Qualified Investments and (iii) Investments for acquisitions
permitted under Section 6.6 hereof.
6.11 ERISA. Neither the Company nor any member of the Controlled Group
shall permit any Plan maintained by it to (i) engage in any "prohibited
transaction" (as defined in Section 4975 of the Code, (ii) incur any
"accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or
not waived, or (iii) terminate any Plan in a manner that could result in the
imposition of a lien or encumbrance on the assets of the Company or any of its
Subsidiaries pursuant to Section 4068 of ERISA.
6.12 TRANSACTIONS WITH AFFILIATES. Neither the Company nor any of its
Subsidiaries shall enter into a transaction, including, without limitation, the
purchase, sale or exchange of property or the rendering of any service, with any
Affiliate, except the Company and its Subsidiaries may pay salaries, fees and
bonuses, grant stock options, make advances in the ordinary course of business,
issue shares under employee stock purchase plans and other forms of compensation
to its directors, officers and employees as are usual and customary in the
Borrower's or its Subsidiaries' business.
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6.13 AMENDMENT TO DEBT DOCUMENTS. The Company shall not at any time while
this Agreement is in effect modify or amend any terms of the Subordinated
Debentures, its obligations to Ando under the Loan Agreement dated July 20, 1994
by and between Ando and the Company, the $20,000,000 promissory note issued in
connection therewith and any related documents, agreements or instruments or any
obligations in excess of $500,000 for borrowed monies or any documents,
agreements or instruments executed in connection therewith.
SECTION VII
-----------
DEFAULTS
--------
7.1 EVENTS OF DEFAULT. There shall be an Event of Default hereunder if any
of the following events occurs:
(a) the Company shall fail to pay when due (i) any amount of principal
of any Loans, or (ii) any amount of interest thereon or any fees or expenses
payable hereunder or under the Notes within five days of the due date therefor;
or
(b) The Company shall fail to perform any term, covenant or agreement
contained in Sections 5.1, 5.5, 5.8 through 5.11, 6.1 through 6.11 or 6.13; or
(c) the Company shall fail to perform any term, covenant or agreement
contained in this Agreement (other than the Sections enumerated in Section
7.1(b) above) and such default shall continue for 30 days after written notice
thereof has been sent to the Company by the Agent; or
(d) any representation or warranty of the Company made in this
Agreement or in the Note or any other documents or agreements executed in
connection with the transactions contemplated by this Agreement or in any
certificate delivered hereunder shall prove to have been false in any material
respect upon the date when made or deemed to have been made; or
(e) the Company fails to perform any term covenant or agreement
contained in any Equipment Lease Document or any document or agreement executed
in connection therewith; or
(f) the Company or any of its Subsidiaries shall fail to pay at
maturity, or within any applicable period of grace, any obligations owing to
Ando or any other Indebtedness in excess of $100,000, the result of which
failure is to cause such Indebtedness to become due prior to its stated maturity
or is declared to be due, (i) for borrowed monies or advances (including without
limitation any obligations under the Subordinated Debentures), (ii) for the use
of real or personal property, or fail to observe or perform any term, covenant
or agreement evidencing or securing such obligations for borrowed monies or
advances, or (iii) relating to such use of real or personal property; or
(g) the Company or any of its Subsidiaries shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, liquidator or similar official of itself or of all or a
substantial part of its property, (ii) be generally not paying its debts as such
debts become due, (iii) make a general assignment for the benefit of its
creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as
now or hereafter in effect), (v) take any action or commence any voluntary case
or proceeding under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts, or any other law providing for
the relief of debtors, (vi) fail to contest in a timely or appropriate manner,
or acquiesce in writing to, any petition filed against it in an involuntary case
under the Federal Bankruptcy Code or other law, (vii) take any action under the
laws of its jurisdiction of
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<PAGE> 31
incorporation or organization similar to any of the foregoing, or (viii) take
any corporate action for the purpose of effecting any of the foregoing; or
(h) a proceeding or case shall be commenced, without the application
or consent of the Company or any of its Subsidiaries in any court of competent
jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding
up, or composition or readjustment of its debts, (ii) the appointment of a
trustee, receiver, custodian, liquidator or the like of it or of all or any
substantial part of its assets, or (iii) similar relief in respect of it, under
any law relating to bankruptcy, insolvency, reorganization, winding-up or
composition or adjustment of debts or any other law providing for the relief of
debtors, and such proceeding or case shall continue undismissed, or unstayed and
in effect, for a period of 90 days; or an order for relief shall be entered in
an involuntary case under the Federal Bankruptcy Code, against the Company or
such Subsidiary; or action under the laws of the jurisdiction of incorporation
or organization of the Company or any of its Subsidiaries similar to any of the
foregoing shall be taken with respect to the Company or such Subsidiary and
shall continue unstayed and in effect for any period of 90 days; or
(i) a judgment or order for the payment of money shall be entered
against the Company or any of its Subsidiaries by any court, or a warrant of
attachment or execution or similar process shall be issued or levied against
property of the Company or such Subsidiary, that in the aggregate exceeds
$500,000 in value and such judgment, order, warrant or process shall continue
undischarged or unstayed for 90 days; or
(j) the Company or any member of the Controlled Group shall fail to
pay when due an amount or amounts aggregating in excess of $100,000 that it
shall have become liable to pay to the PBGC or to a Plan under Title IV of
ERISA; or notice of intent to terminate a Plan or Plans shall be filed under
Title IV of ERISA by the Company, any member of the Controlled Group, any plan
administrator or any combination of the foregoing where the termination is
reasonably expected to result in acceleration of a liability of the Company in
excess of $100,000; or the PBGC shall institute proceedings under Title IV of
ERISA to terminate or to cause a trustee to be appointed to administer any such
Plan or Plans or a proceeding shall be instituted by a fiduciary of any such
Plan or Plans against the Company and such proceedings shall not have been
dismissed within 90 days thereafter; or a condition shall exist by reason of
which the PBGC would be entitled to obtain a decree adjudicating that any such
Plan or Plans must be terminated.
7.2 REMEDIES. Upon the occurrence of an Event of Default, at any time
thereafter while such Event of Default is continuing, the Agent may, and upon
the request of the Required Banks, shall proceed to protect and enforce the
rights of the Agent and the Banks by suit in equity, action at law and/or other
appropriate proceeding either for specific performance of any covenant or
condition contained in this Agreement or any other Loan Document or in any
instrument delivered to the Agent or the Banks pursuant hereto or thereto, or in
aid of the exercise of any power granted in this Agreement, any Loan Document or
any such instrument, and (unless there shall have occurred an Event of Default
described in subsections 7.1(g) and (h), in which case the unpaid balance of all
Obligations shall automatically become due and payable without notice demand) by
notice in writing to the Company declare all or any part of the unpaid balance
of the Obligations then outstanding to be forthwith due and payable, whereupon
such unpaid balance or part thereof shall become so due and payable without
presentation, protest or further demand or notice of any kind, all of which are
hereby expressly waived, and the Agent may proceed to enforce payment of such
balance or part thereof in such manner as it may elect, and the Agent and each
Bank may offset and apply toward the payment of such balance or part thereof any
Indebtedness of it to the Company, or to any obligor on the Obligations,
including any Indebtedness represented by deposits in any general or special
account maintained with the Agent or any Bank.
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<PAGE> 32
7.3 DISTRIBUTION OF PROCEEDS. Notwithstanding anything to the contrary
contained herein, in the event that following the occurrence or during the
continuance of any Event of Default, the Agent or any Bank receives any monies
on account of the Obligations from the Company or otherwise, such monies shall
be distributed for application as follows:
(a) First, to the payment of or the reimbursement of, the Agent for or
in respect of all costs, expenses, disbursements and losses which shall have
been incurred or sustained by the Agent in connection with the collection of
such monies by the Agent, or in connection with the exercise, protection or
enforcement by the Agent of all or any of the rights, remedies, powers and
privileges of the Agent and/or the Banks under this Agreement or any other Loan
Documents;
(b) Second, to the payment of all interest, including interest on
overdue amounts, and late charges, then due and payable with respect to the
Loans;
(c) Third, to the payment of the outstanding principal balance of the
Loans, allocated among the Banks in proportion to their respective shares of the
Loans then outstanding;
(d) Fourth, to any other outstanding Obligations, allocated among the
Banks in proportion to their respective interests in such Obligations; and
(e) Fifth, the excess, if any, shall be returned to the Company or to
such other persons as are entitled thereto.
SECTION VIII
------------
CONSENTS; AMENDMENTS; WAIVERS; REMEDIES
---------------------------------------
8.1 CONSENTS; AMENDMENTS; WAIVERS; REMEDIES. Except as otherwise expressly
set forth in any particular provision of this Agreement, any consent or approval
required or permitted by this Agreement to be given by the Banks may be given,
and any term of this Agreement or of any other instrument related hereto or
mentioned herein may be amended, and the performance or observance by the
Company of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively) with, but only
with, the written consent of the Company and the Required Banks; provided,
however, that without the written consent of such Banks as hold 100% of the
aggregate principal amount of the Loans hereunder (or, if no Loans have been
made, such Banks having 100% of the Commitments hereunder):
(a) no reduction in the principal of, or the interest rates on, or any
fees relating to, the Loans shall be made;
(b) no extension or postponement of the stated time of payment of the
principal amount of, interest on, or fees relating to the Loans shall be made;
(c) no increase in the amount of the Maximum Credit, or extension of
the term of the Credit Period beyond those provided for hereunder and no
extension of the maturity dates or termination of the Loans shall be made;
(d) no change in the definition of the term "Required Banks" shall be
made; and
(e) no change in the language of this Article VIII shall be made.
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No delay or omission on the Agent's or any Bank's part in exercising its rights
and remedies against the Company or any other interested party shall constitute
a waiver. The waiver of the Company's breach in one or more instances shall not
constitute or otherwise be an implicit waiver of subsequent breaches. To the
extent permitted by applicable law, the Company hereby agrees to waive, and does
hereby absolutely and irrevocably waive (i) all presentments, demands for
performance, notices of nonperformance, protests, notices of protest and notices
of dishonor in connection with any of the Indebtedness evidenced by the Note,
(ii) any requirement of diligence or promptness on the Agent's or any Bank's
part in the enforcement of its rights under the provisions of this Agreement or
any Loan Document, and (iii) except for such notices as are specifically
required under this Agreement, any and all notices of every kind and description
which may be required to be given by any statute or rule of law with respect to
its liability (A) under this Agreement or in respect of the Indebtedness
evidenced by the Note or any other Obligation, or (B) under any other Loan
Document. No course of dealing between the Company and the Agent or any Bank
shall operate as a waiver of any of the Agent's or any Bank's rights under this
Agreement or any Loan Document or with respect to any of the Obligations. The
Agent's and the Banks rights and remedies under this Agreement and under all
subsequent agreements between the Agent, the Banks, or the Company shall be
cumulative and any rights and remedies expressly set forth herein shall be in
addition to, and not in limitation of, any other rights and remedies which may
be available to the Agent and the Banks in law or at equity.
SECTION IX
----------
THE AGENT
---------
9.1 APPOINTMENT OF AGENT. Each Bank by becoming a party to this Agreement
does hereby appoint, and consent to the appointment of, the Agent as agent for
the ratable benefit of the Banks hereunder. The Agent is authorized to take such
action on behalf of each of the Banks and to exercise all such powers as are
hereunder and in related documents delegated to the Agent, together with such
powers as are reasonably incidental thereto.
9.2 EXERCISE OF POWERS. The Agent may exercise its powers and execute its
duties by or through employees or agents and shall be entitled to take, and to
rely on, advice of counsel concerning all matters pertaining to its rights and
duties under this Agreement. The Agent may utilize the services of such persons
as the Agent in its sole discretion may reasonably determine is necessary, and
all reasonable fees and expenses of any such persons shall be paid by the
Company.
9.3 NO LIABILITY. Neither the Agent nor any of its shareholders,
directors, officers or employees nor any other Person assisting them in their
duties nor any agent or employee of any such person, shall be liable for any
waiver, consent or approval given or any action taken, or omitted to be taken,
in good faith by it or them hereunder, or in connection herewith or therewith,
or be responsible for the consequences of any oversight or error of judgment
whatsoever, except that the Agent or such other Person, as the case may be, may
be liable for losses due to its willful misconduct or gross negligence.
9.4 RESPONSIBILITIES. The Agent shall not be responsible for the execution
or validity or enforceability of this Agreement, or any instrument at any time
constituting, or intended to constitute, collateral security for the Loans, or
for the value of any such collateral security or for the validity,
enforceability or collectibility of any such amounts owing with respect to the
Loans, or for any recitals or statements, warranties or representations herein
or made in any certificate or instrument hereafter furnished to it by or on
behalf of the Company, or be bound to ascertain or inquire as to the performance
or observance of any of the terms, conditions, covenants or agreements herein or
in any instrument at any time constituting, or intended to constitute,
collateral security for the Loans. The Agent shall not be bound to ascertain
whether any notice,
29
<PAGE> 34
consent, waiver or request delivered to it by the Company or any holder of any
of the Loans shall have been duly authorized or is true, accurate and complete.
The Agent has not made nor does it now make any representations or warranties,
express or implied, nor does it assume any liability to the Banks with respect
to the creditworthiness or financial condition of the Company or any of its
Subsidiaries and each Bank represents and warrants to the Agent that it has made
its own independent evaluation of the creditworthiness of the Company and its
Subsidiaries and has a not relied upon the Agent or any material or information
furnished by the Agent in making such evaluation.
9.5 DIRECTION BY COURT. If, in the opinion of the Agent, the distribution
of any amount received by it in such capacity hereunder might involve it in
liability, it may refrain from making distribution until its right to make
distribution shall have been adjudicated by a court of competent jurisdiction.
If a court of competent jurisdiction shall adjudge that any amount received and
distributed by the Agent is to be repaid, each person to whom any such
distribution shall have been made shall either repay to the Agent its
proportionate share of the amount so adjudged to be repaid or shall pay over the
same in such manner and to such Persons as shall be determined by such court.
With respect to obligations of the Company hereunder, a payment to the Agent
shall be deemed to be payment to the Banks.
9.6 TREATMENT OF PAYEES. The Agent may deem and treat the payee of any
Note as the absolute owner thereof for all purposes hereof until it shall have
been furnished in writing with a different name by such payee or by a subsequent
holder.
9.7 AGENT AS BANK. In its individual capacity, BankBoston, N.A. shall have
the same obligations and the same rights, powers and privileges in respect to
its Commitment Amount and the Loans made by it hereunder, as it would have were
it not also the Agent.
9.8 SHARING OF COSTS AND EXPENSES. To the extent not paid by the Company,
each Bank agrees to pay its proportionate share of all costs and expenses
incurred by the Agent in its capacity as Agent hereunder, in accordance with the
respective Commitment Amounts of the Banks hereunder. The costs and expenses to
be shared by the Banks pursuant to this Section 9.8 shall not include any costs
or expenses incurred by the Agent as an individual Bank in connection with the
Loans made by it.
SECTION X
---------
MISCELLANEOUS
-------------
10.1 NOTICES. Unless otherwise specified herein, all notices hereunder to
any party hereto shall be in writing and shall be deemed to have been given when
delivered by hand, two (2) Business Days after deposited in the mails postage
prepaid, when sent by telex, answerback received, or electronic facsimile
transmission, or one (1) Business Day after delivery to the telegraph company or
overnight courier, addressed to such party at its address indicated below:
If to the Company, at
LTX Corporation
5 Rosemont Road
Westwood, MA 02090
Attention: Chief Financial Officer
Facsimile: 617-329-8836
If to the Agent, at
30
<PAGE> 35
BankBoston, N.A.
100 Federal Street
Boston, MA 02110
Attention: Stephen C. Buzzell
Facsimile: 617-434-0819
If to the Banks, at
Silicon Valley Bank
40 William Street
Suite 350
Wellesley, MA 02181
Attention: Mark Pasculano
Facsimile: 617/431-9906
BankBoston, N.A.
100 Federal Street
Boston, MA 02110
Attention: Stephen C. Buzzell
Facsimile: 617-434-0819
or at any other address specified by such party in writing.
10.2 EXPENSES. The Company will pay on demand all expenses of the Agent in
connection with the preparation, waiver or amendment of this Agreement, the Note
or other Loan Documents, or the administration, default or collection of the
Loans or other Obligations or in connection with the Agent's and Banks'
exercise, preservation or enforcement of any of its rights, remedies or options
thereunder, including, without limitation, reasonable fees of outside legal
counsel or reasonable allocated costs of in-house legal counsel, reasonable
accounting, consulting, brokerage or other similar professional fees or expenses
reasonably incurred, and any reasonable fees or expenses associated with any
travel or other costs relating to any appraisals or examinations conducted in
connection with the Obligations or any collateral therefor, and the amount of
all such expenses shall bear interest at the rate applicable to principal
hereunder (including any default rate) from a date thirty (30) days after the
date of invoice to the Company.
10.3 SET-OFF. Regardless of the adequacy of any collateral or other means
of obtaining repayment of the Obligations, any deposits, balances or other sums
credited by or due from the head office of any Bank or any of their branch
offices to the Company may, at any time and from time to time during the
continuation of an Event of Default hereunder, to the extent permitted by law,
without notice to the Company or compliance with any other condition precedent
now or hereafter imposed by statute, rule of law, or otherwise (all of which are
hereby expressly waived to the extent permitted by law) be set off,
appropriated, and applied by such Bank against any and all obligations of the
Company to the Bank in such manner as the head office of such Bank or any of its
branch offices in its sole discretion may determine regardless of the adequacy
of other Collateral. The Agent will endeavor to provide notice to the Company
after any setoff; however, failure to provide such notice shall not be deemed a
breach of this agreement by the Banks or Agent, diminish and rights or remedies
of the Banks or Agent under the Loan Documents (including without limitation
their rights of setoff) or waive and requirements or obligations of the Company
under the Loan Documents.
10.4 TERM OF AGREEMENT. This Agreement shall continue in force and effect
so long as any Bank has any commitment to make Loans hereunder or any Loan or
any Obligation shall be outstanding.
31
<PAGE> 36
10.5 NO WAIVERS. No failure or delay by the Agent or Banks in exercising
any right, power or privilege hereunder or under the Notes or under any other
documents or agreements executed in connection herewith shall operate as a
waiver thereof; nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies herein and in the Notes provided are
cumulative and not exclusive of any rights or remedies otherwise provided by
agreement or law.
10.6 GOVERNING LAW. This Agreement and the Notes shall be deemed to be
contracts made under seal and shall be construed in accordance with and governed
by the laws of the Commonwealth of Massachusetts (without giving effect to any
conflicts of laws provisions contained therein).
10.7 AMENDMENTS. Neither this Agreement nor the Notes nor any provision
hereof or thereof may be amended, waived, discharged or terminated except by a
written instrument signed by the Agent, the Banks and, in the case of
amendments, the Company.
10.8 BINDING EFFECT OF AGREEMENT. This Agreement shall be binding upon and
inure to the benefit of the Company and the Banks and their respective
successors and assigns; PROVIDED that the Company may not assign or transfer its
rights or obligations hereunder. The Banks may sell, transfer or grant
participations in the Notes without the prior written consent of the Company,
and the Company agrees that any participant shall be entitled to the rights
provided in Section 10.3 to the same extent as if such participant were a Bank
hereunder; provided that notwithstanding any such participation, the Company
may, for all purposes of this Agreement, treat the Banks as the person entitled
to exercise all rights hereunder and under the Notes and to receive all payments
with respect thereto. Notwithstanding the foregoing, absent an existing Event of
Default, each of the Banks agrees to retain at least a 20% Commitment
Percentage, exclusive of any participation it may have granted or transferred.
10.9 COUNTERPARTS. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument.
10.10 PARTIAL INVALIDITY. The invalidity or unenforceability of any one or
more phrases, clauses or sections of this Agreement shall not affect the
validity or enforceability of the remaining portions of it.
10.11 CAPTIONS. The captions and headings of the various sections and
subsections of this Agreement are provided for convenience only and shall not be
construed to modify the meaning of such sections or subsections.
10.12 WAIVER OF JURY TRIAL. THE AGENT, BANKS AND THE COMPANY AGREE THAT
NEITHER OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY
LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT
OF, THIS AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR
THE RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY
SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT
BEEN WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE
AGENT, BANKS AND THE COMPANY, AND THESE PROVISIONS SHALL BE SUBJECT TO NO
EXCEPTIONS. NEITHER THE AGENT, BANKS NOR THE COMPANY HAS AGREED WITH OR
REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY
ENFORCED IN ALL INSTANCES.
10.13 ENTIRE AGREEMENT. This Agreement, the Notes and the documents and
agreements executed in connection herewith constitute the final agreement of the
parties hereto and supersede any prior agreement or understanding, written or
oral, with respect to the matters
32
<PAGE> 37
contained herein and therein.
[End of Text]
33
<PAGE> 38
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the day and year first above written.
LTX CORPORATION
By:
--------------------------------------
Title:
BANKBOSTON, N.A.
By:
--------------------------------------
Title:
SILICON VALLEY BANK
By:
--------------------------------------
Title:
BANKBOSTON, N.A., as Agent
By:
--------------------------------------
Title:
34
<PAGE> 39
EXHIBIT A
---------
LTX CORPORATION
PROMISSORY NOTE
$8,000,000 Boston, Massachusetts
June __, 1997
For value received, the undersigned hereby promises to pay to BankBoston,
N.A. (the "Bank"), or order, at the head office of the Bank at 100 Federal
Street, Boston, Massachusetts, the principal amount of Eight Million Dollars
($8,000,000) or such lesser amount as shall equal the principal amount of the
Loans outstanding hereunder on June __, 1998 (the "Termination Date") in lawful
money of the United States of America and in immediately available funds, and to
pay interest on the unpaid principal balance hereof from time to time
outstanding, at said office and in like money and funds, (i) in the case of a
Base Rate Loan, at a rate per annum which shall at all times equal the Alternate
Base Rate and (ii) in the case of a LIBOR Rate Loan, at a rate per annum equal
to the Applicable LIBOR Rate. Except as otherwise set forth in the Credit
Agreement with respect to Applicable Libor Rate Loans, interest shall be payable
in arrears on the first day of each month beginning on August 1, 1997 and when
the principal balance hereof is due (whether at maturity, by reason of
acceleration or otherwise).
The terms "Loans", "Alternate Base Rate" and "Base Rate" shall have the
meanings set forth in the Agreement referred to below. The rate of interest
shall vary from time to time as the Alternate Base Rate varies, and any change
in the rate of interest will become effective on the effective date of a change
in the Base Rate. The term "Applicable LIBOR Rate" shall have the meaning set
forth in the Agreement referred to below. Interest shall be computed on the
basis of a 360-day year for the actual number of days elapsed.
Overdue payments of principal (whether at stated maturity, by acceleration
or otherwise), and, to the extent permitted by law, overdue interest, shall bear
interest, at a rate per annum equal to four percent (4%) above the rate that
would otherwise be applicable to principal hereunder. Nothing in the preceding
sentence shall affect the rights of the Bank or Agent (as defined in the
Agreement) to exercise any of their rights and remedies provided in the
Agreement (as defined below) if an Event of Default (as defined in the
Agreement) has occurred.
This Note is issued pursuant to, and entitled to the benefits of, and is
subject to, the provisions of a certain Credit Agreement dated as of June __,
1997 by and between the undersigned, the Agent and the Banks (herein, as the
same may from time to time be amended or extended, referred to as the
"Agreement"), but neither this reference to the Agreement nor any provision
thereof shall affect or impair the absolute and unconditional obligation of the
undersigned maker of this Note to pay the principal of and interest on this Note
as herein provided.
In case an Event of Default (as defined in the Agreement) shall occur, and
be continuing, the aggregate unpaid principal of and accrued interest on this
Note shall become or may be declared to be due and payable in the manner and
with the effect provided in the Agreement.
The undersigned may at its option prepay all or any part of the principal
of this Note before maturity upon the terms provided in the Agreement.
The undersigned maker hereby waives presentment, demand, notice of
dishonor, protest
35
<PAGE> 40
and all other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Note.
THE BANK AND THE UNDERSIGNED MAKER AGREE THAT NEITHER OF THEM NOR ANY
ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING,
COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS NOTE, THE
AGREEMENT, ANY RELATED INSTRUMENTS, ANY COLLATERAL OR THE DEALINGS OR THE
RELATIONSHIP BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO CONSOLIDATE ANY SUCH
ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN
WAIVED. THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY DISCUSSED BY THE BANK
AND THE UNDERSIGNED MAKER, AND THESE PROVISIONS SHALL BE SUBJECT TO NO
EXCEPTIONS. NEITHER THE BANK NOR THE UNDERSIGNED MAKER HAS AGREED WITH OR
REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY
ENFORCED IN ALL INSTANCES.
36
<PAGE> 41
This instrument shall have the effect of an instrument executed under seal
and shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts (without giving effect to any conflicts of laws
provisions contained therein).
WITNESS: LTX CORPORATION
By:
- ---------------------------------- -------------------------------------
Title:
37
<PAGE> 42
SCHEDULE I TO PROMISSORY NOTE
AMOUNT
OF AMOUNT NOTATION
DATE LOAN PAID MADE BY
- ---- ---- ---- -------
38
<PAGE> 43
EXHIBIT B
---------
LTX CORPORATION
BankBoston, N.A.
100 Federal Street
Boston, MA 02110
Re: Credit Agreement Dated as
of June __, 1997 (the "Agreement")
Ladies and Gentlemen:
Pursuant to Section 2.2(a) of the Agreement the undersigned hereby confirms
its request made on ____________, 19__ for a Loan in the amount of $__________
on ____________, 199__.
The representations and warranties contained or referred to in Section IV
of the Agreement are true and accurate in all material respects on and as of the
effective date of the Loan as though made at and as of such date (except to the
extent that such representations and warranties expressly relate to an earlier
date); and no Default has occurred and is continuing or will result from the
Loan.
LTX CORPORATION
----------------------------------------
Title:
- -----------------------------------
Date
39
<PAGE> 44
EXHIBIT C
---------
FORM OF PRICING NOTICE
----------------------
________________, 199_
BankBoston, N.A.
100 Federal Street
Boston, MA 02110
Re: CREDIT AGREEMENT DATED AS OF JUNE , 1997 (THE "AGREEMENT")
Ladies and Gentlemen:
Pursuant to Section 2.2(e) of the Agreement, the undersigned hereby
confirms its request made on _______________, for a [LIBOR Rate] [Alternative
Base Rate] Loan in the amount of $__________ comprising all or a portion of the
outstanding Advances, effective __________.
The Interest Period applicable to said LIBOR Rate Loan will be [ONE, TWO OR
THREE months.]
Said LIBOR Rate Loan represents a [CONVERSION/CONTINUATION] of the
[ALTERNATE BASE] [LIBOR] Rate Loan in the same amount made on __________.
LTX CORPORATION
By:
-------------------------------------
Name:
40
<PAGE> 45
EXHIBIT D
---------
BORROWING BASE REPORT
---------------------
41
<PAGE> 46
EXHIBIT E
---------
INDEBTEDNESS; ENCUMBRANCES
--------------------------
[TO BE PROVIDED BY THE COMPANY]
42
<PAGE> 47
EXHIBIT F
---------
LITIGATION
----------
[TO BE PROVIDED BY THE COMPANY]
43
<PAGE> 48
EXHIBIT G
---------
SUBSIDIARIES, STOCK, ETC.
-------------------------
[TO BE PROVIDED BY THE COMPANY]
44
<PAGE> 49
EXHIBIT H
---------
ENVIRONMENTAL ISSUES
--------------------
[To be provided by the Company]
45
<PAGE> 50
EXHIBIT I
---------
RESTRICTED PAYMENTS
-------------------
46
<PAGE> 51
EXHIBIT J
---------
LTX CORPORATION
REPORT OF CHIEF FINANCIAL OFFICER
LTX CORPORATION (the "Company") HEREBY CERTIFIES that:
This Report is furnished pursuant to Section 5.1(c) of the Credit Agreement
dated as of June __, 1997 by and among the Company, BankBoston, N.A. and
Silicon Valley Bank (the "Agreement"). Unless otherwise defined herein, the
terms used in this Report have the meanings given to them in the Agreement.
As required by Section 5.1 of the Agreement, consolidated financial
statements of the Company and its Subsidiaries for the [YEAR/MONTH/QUARTER]
ended ____________, 19__ (the "Financial Statements") prepared in accordance
with generally accepted accounting principles consistently applied accompany
this Report. The Financial Statements present fairly in all material respects
the consolidated financial position of the Company and its Subsidiaries as at
the date thereof and the consolidated results of operations of the Company and
its Subsidiaries for the period covered thereby (subject to the absence of
footnote and normal recurring year-end adjustments).
The figures set forth in Schedule A for determining compliance by the
Company with the financial covenants contained in the Agreement and the
borrowing base computations set forth in Schedule B are true and complete in all
material respects as of the date hereof.
The activities of the Company and its Subsidiaries during the period
covered by the Financial Statements have been reviewed by the Chief Financial
Officer or by employees or agents under his immediate supervision. Based on such
review, to the best knowledge and belief of the Chief Financial Officer, and as
of the date of this Report, no Default has occurred.*
WITNESS my hand this _____ day of _____________, 19__.
LTX CORPORATION
By:
--------------------------------------
Title:
- -------------
* If a Default has occurred, this paragraph is to be modified with an
appropriate statement as to the nature thereof, the period of existence thereof
and what action the Company has taken, is taking, or proposes to take with
respect thereto.
47
<PAGE> 52
SCHEDULE A
to
EXHIBIT J
---------
FINANCIAL COVENANTS
-------------------
PROFITABILITY (SECTION 5.8)
- ---------------------------
REQUIRED: $
================
ACTUAL: $
================
CONSOLIDATED QUICK RATIO (SECTION 5.9)
- --------------------------------------
REQUIRED: 1.75-to-1
ACTUAL:
Ratio of Consolidated Total Liabilities to Consolidated Tangible
NET WORTH (SECTION 5.10)
- ----------------------------------------------------------------
REQUIRED: .60-to-1
=========
ACTUAL:
TRAILING CONSOLIDATED OPERATING CASH FLOW COVERAGE TO ROLLING
- -------------------------------------------------------------
CONSOLIDATED TOTAL DEBT SERVICE (SECTION 5.11)
- ------------------------------- --------------
REQUIRED:
================
ACTUAL:
================
48
<PAGE> 53
EXHIBIT K
---------
(Applicable LIBOR RATE)
The ratio of Trading
Consolidated Operating Cash
Flow to Rolling Consolidated LIBOR
TOTAL DEBT SERVICE = X RATE PLUS
- ---------------------- ---------
X<2.0 200 bps
2.0<=4.0<4.0 175 bps
4.0<=X<5.0 150 bps
X=>5.0 125 bps
49
<PAGE> 54
WITNESS my hand this _____ day of __________, 19__.
LTX CORPORATION
By:
--------------------------------------
Title:
50
<PAGE> 1
EXHIBIT 10X
EMPLOYMENT AGREEMENT
This Agreement (the "Agreement") made and entered into to be effective on
the 1st day of January, 1997, by and between LTX Corporation, a corporation duly
organized and existing under Massachusetts law, having a principal place of
business located at LTX Park at University Avenue, Westwood, Massachusetts,
("Employer"), and Kenneth E. Daub, an individual resident of Los Gatos,
California, ("Employee");
W I T N E S S E T H:
WHEREAS, Employee has been employed by Employer for ten (10) continuous
years in various capacities including the following: Vice President, Western
Operations; Vice President, North American Sales; Senior Vice President, North
American Sales; and Senior Vice President, North American Sales and Asia Pacific
Operations; and
WHEREAS, Employer desires to employ employee in a new capacity at its
business location based in Westwood, Massachusetts; and
WHEREAS, Employer and Employee wish to set forth their understanding
concerning Employee's new employment position in the business conducted by the
Employer.
NOW, THEREFORE, in consideration of these premises and covenants
hereinafter contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. TERM OF EMPLOYMENT. Employer hereby employs in the capacity, and under
the title, of Senior Vice President, Business Development ("Senior Vice
President") effective as of the date first set forth above (hereinafter called
the "Employment Date"), and Employee hereby accepts such employment effective as
of the Employment Date, on the terms and conditions hereinafter set forth. The
initial term of this Agreement shall be one (1) year beginning on the Employment
Date (the "Initial Term"), and thereafter the employment relationship shall be
at will until terminated in accordance with one of the clauses of Paragraph 6
(such entire period being referred to hereinafter as the "Employment Period").
2. SERVICES. In his capacity as Senior Vice President, the Employee shall
be responsible for the day to day business and operations of the Employer's
division, which shall include the performance of such duties consistent with his
position as Senior Vice President as shall be specified by the Employer's
President. During the Employment Period, the Employee shall devote his full
working time and attention to the performance of his duties hereunder, and shall
comply to the best of his abilities with all reasonable directions given him by
the President of the Employer.
<PAGE> 2
3. COMPENSATION.
a. SALARY AND BONUS. As payment for the services to be rendered
hereunder, and subject to the full performance of all such services, Employer
shall pay to the employee a base salary (the "Base Salary") at the annual rate
of $226,000, payable in conformity with the Employer's regular payroll dates for
salaried personnel. In addition to the Base Salary, Employer shall pay to the
Employee, within forty-five (45) days following the close of the fiscal year
ending July 31, 1997 an annual cash bonus (the "Bonus") if the Company's income
before income taxes and minority interest, without regard to inventory and
restructuring charges ("Pretax Income") for fiscal 1997 is at least $1,100,000.
The amount of the Bonus shall be $50,000 plus 1.667% of Pretax Income in excess
of $1,100,000 up to a maximum total Bonus for fiscal 1997 of $150,000. During
the Employment Period, the Compensation Committee of the Board of Directors of
the Employer shall review the Base Salary and Bonus for the purpose of
determining increases to the Base Salary and Bonus at the time of review of
compensation of other executive officers of the Employer.
b. SPECIAL BONUS, TERMINATION BY EMPLOYEE. In the event that a Change
of Control (as hereinafter defined) shall occur, then the Employee may, at his
election, terminate his employment hereunder and this Agreement upon written
notice given at any time not earlier than six (6) months after nor later than
twelve (12) months after the occurrence of such event. In the event the Employee
voluntarily terminates his employment with Employer in accordance with the
foregoing sentence, then at or before the Employee's last day of employment with
the Employer, the Employer will pay to the Employee as compensation for services
rendered to the Employer, a lump sum cash amount equal to the then current
annual Base Salary. For the purposes of this provision a "Change of Control"
shall be deemed to have taken place if (a) a party other than Employer or
Employee, including a "Group" as defined in Section 13(d)(3) of the Securities
Act of 1934, acquires shares of the Employer, with the result that such party
then owns a majority of the total number of votes that may be cast for the
election of directors of the Employer, or (b) as a result of any cash tender or
exchange offer, merger or other business combination or transactions
("Transaction"), the persons who were directors of the Employer before the
Transaction cease to constitute a majority of the Board of Directors of the
Employer or any successor to the Employer.
c. FRINGE BENEFITS. Employee shall be entitled to such fringe benefits
as are set forth in the attached EXHIBIT A, which EXHIBIT A is incorporated by
reference herein.
-2-
<PAGE> 3
4. EXPENSES. Employer shall reimburse Employee for reasonable business
expenses incurred in direct furtherance of the business of Employer in
accordance with the Employer's standard expense policy.
5. VACATIONS. Employee shall be entitled to an annual vacation of four (4)
weeks in accordance with the Employer's standard policy, during which time his
Base Salary shall be paid and his bonus compensation shall continue to accrue.
6. TERMINATION. Notwithstanding the provisions of paragraph 1, Employee's
employment under this Agreement shall terminate prior to the expiration of the
Initial Term, or thereafter, under the following circumstances:
a. DEATH: Upon the death of the Employee;
b. DISABILITY: Upon the permanent disability of the Employee. For
purposes of this Section 6.b "permanent disability" shall mean the substantial
inability of the Employee, due to illness or physical or mental disability, to
perform his duties as an officer or employee if such inability is likely to
continue for a period of more than one hundred eighty (180) continuous days. The
determination of permanent disability shall be made by mutual agreement of the
parties or, if they cannot agree, by a physician or psychiatrist acceptable to
both the Employer and Employee. If the parties cannot agree upon the selection
of a physician or psychiatrist, each shall select an arbitrator in accordance
with the commercial arbitration rules of the American Arbitration Association,
and such arbitrator shall select a physician or psychiatrist. In either case,
the opinion of such physician or psychiatrist shall be binding on and
non-appealable by the parties. The Employer or Employee may request an
examination, and the Employee shall submit to examination at reasonable times
and under reasonable conditions. For purposes hereof, a continuous period of
incapacity shall be deemed interrupted when the employee returns to
substantially full-time work for a continuous period of at least five (5)
business days;
c. BY THE EMPLOYEE UPON A CHANGE OF CONTROL: Upon an election by the
Employee to terminate this Agreement following a Change of Control, as provided
in Paragraph 3.b;
d. BY THE EMPLOYEE UPON WRITTEN NOTICE: Upon thirty (30) days prior
written notice by Employee;
e. BY THE EMPLOYER FOR CAUSE: The Employer shall have the right to
terminate this Agreement and Employee's employment for cause immediately and
without prior written notice. For purposes of this Paragraph 6.e, the following
shall constitute "cause" for termination by the Employer:
-3-
<PAGE> 4
(1) Employee's repeated or willful failure or unwillingness to
perform the responsibilities of his position or such duties
and responsibilities as shall be reasonably assigned to him
by the Employer's President;
(2) theft, embezzlement, fraud, or other criminal conduct or
dishonesty occurring in connection with the Employee's
performance of his duties hereunder;
(3) Employee's prolonged or repeated unexcused absences from
duty without the consent of the Employer;
(4) willful violation by the Employee of any material provision
of this Agreement or violation of any written policy of the
Employer.
Upon termination of the Employee's employment for cause or under any of the
circumstances described in Paragraphs 6.a, 6.b or 6.d, the Employee shall be
entitled to receive only his Base Salary through the date of termination of
employment, and the Employee shall not be entitled to any other or further
compensation, bonus, severance or other fringe benefits except as otherwise
explicitly provided by law.
f. BY THE EMPLOYER WITHOUT CAUSE: The Employer may at any time upon
thirty (30) days prior written notice or payment in lieu of notice terminate the
Employee's employment without cause. In the event of a termination without cause
during the Initial Term, the Employee shall continue to receive his Base Salary
for the remainder of the Initial Term, and the Employee shall receive in
addition thereto severance payments at his then Base Salary for a period of one
year beyond the Initial Term. If the Employer terminates the Employee's
employment without cause after the Initial Term, then, notwithstanding that the
employment may be otherwise "at will", the Employee shall receive severance
payments at his then Base Salary for a period of one year from the date of
termination. Notwithstanding any other provision of this Paragraph 6.f, it shall
be a condition of the Employee's receipt of severance payments under this
Paragraph that, upon termination, the Employee execute a general release of
claims against the Employer in a form reasonably satisfactory to counsel for the
Employer.
7. NON-COMPETITION. During the Employment Period and for a period of six
(6) months following the end of the Employment Period, Employee shall not,
directly or indirectly (as owner, partner, director, trustee, agent, employee or
otherwise), establish or engage in any business which sells any item of
manufacture which is similar to or used in connection with the products
manufactured by Employer during the one (1) year period ending on the date of
termination of this Agreement. The Employee will not be deemed
-4-
<PAGE> 5
to have breached his obligations under this Paragraph 7 if (i) he shall have
notified the Employer in writing at least thirty (30) days prior to any proposed
new employment, investment or other business relationship of the name of the
proposed new employer or person, firm, corporation, association or other entity
and the nature of his duties, investment or business relationship, and (ii) the
Employer shall have failed to notify him in writing within fifteen (15) days
after its receipt of such notice from him that it considers such employment,
investment or relationship in violation of any provision of this Paragraph 7; or
if, in the case of passive ownership only, the Employee's equity interest in the
aggregate is less than ten percent (10%) of the value of all outstanding shares
of capital stock or other evidence of equitable ownership of such person, firm,
corporation, association, or other entity, whether such class of equitable
ownership is privately held or publicly traded.
8. NON-INTERFERENCE WITH EMPLOYEES. During the Employment Period and for a
period of one (1) year from the end of the Employment Period, the Employee will
not, without the Employer's prior written approval, engage the services of any
employee of the Employer, whether as employee, consultant, agent or otherwise,
for any business (other than the business of Employer) in which he might be
associated as owner, stockholder, partner, consultant, employee, agent or
otherwise.
9. NON-INTERFERENCE WITH CUSTOMERS. During the Employment Period, and for a
period of six (6) months following the end of the Employment Period, the
Employee agrees not, without the Employer's prior written approval, to perform
services (other than in the capacity as agent of the Employer), whether as an
employee, consultant, agent, or otherwise, for any then-existing customer or
client of the Employer.
10. CONFIDENTIAL INFORMATION. The Employee agrees never, directly or
indirectly, to use, publish, disseminate or otherwise disclose any confidential
information without the prior written consent of the Employer. For the purposes
of this Agreement, "confidential information" shall mean that secret proprietary
information of the Employer of whatever kind or nature disclosed to or known by
the Employee (whether or not invented, discovered or developed by the Employee)
as a consequence of or through his employment by the Employer, including,
without limitation, sources of supply and material, operating and other cost
data, lists of present, past or prospective clients or customers, pricing
information, and records of the Employer, particularly those legended or
otherwise identified by the Employer as confidential information.
11. RETURN OF DOCUMENTS. Upon termination of the Employee's employment for
any reason, all documents, procedural manuals, guides, specifications, plans,
drawings, designs and similar materials, lists of present,
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<PAGE> 6
past or prospective clients or customers, client or customer proposals,
invitations to submit proposals, price lists and data relating to pricing of the
Employer's products and services, records, notebooks and similar repositories of
or containing confidential information, including all copies thereof, then in
the Employee's possession or control, whether prepared by the Employee or
others, will be left with or forthwith returned by the Employee to the Employer.
12. SURVIVAL; REMEDIES. The duties and obligations of Employee under
Paragraphs 7 through 11, inclusive, of this Agreement shall survive the
termination of the Employee's employment with the Employer. The Employee
acknowledges that a remedy at law for any breach or threatened breach by the
Employee of Paragraphs 7 through 11 of this Agreement may be inadequate, and the
Employee therefore agrees that the Employer shall be entitled, without limiting
any other of its legal rights, to injunctive relief and other equitable remedies
in case of any such breach or threatened breach.
13. RESTRICTION AGAINST EMPLOYEE ASSIGNMENT. The services to be rendered by
Employee pursuant to this Agreement are personal in nature and therefore the
Employee shall not assign or transfer this Agreement or any rights or
obligations hereunder without the written consent of Employer.
14. NOTICES. All notices required hereunder or voluntarily given shall be
in writing and shall be deemed given when personally delivered or when sent by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the party for which it is intended at their following respective
address, or at such other address as either party may designate to the other by
like notice:
If to Employer: Attn: President
LTX Corporation
5 Rosemont Road
Westwood, Massachusetts 02090
If to Employee: Kenneth E. Daub
145 Teresita Way
Los Gatos, California 95032
15. GOVERNING LAW. This Agreement shall be construed and governed by the
laws of the Commonwealth of Massachusetts exclusive of conflict of law
principles.
16. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provisions had
never been contained herein. If, moreover, any provision contained in this
Agreement shall for any reason be held to be excessively broad as to duration,
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<PAGE> 7
geographical scope, activity or subject matter, such provision shall be
construed by limiting and reducing it by the minimum extent necessary to render
it enforceable under applicable law.
17. BENEFIT; PERSONS BOUND. This Agreement shall inure to the benefit of
and bind the Employer and Employee and their respective heirs, executors,
administrators, successors and permitted assigns, if any.
18. CONSTRUCTION. The headings in this Agreement are for purposes of
reference only and shall not be considered in construing this Agreement.
19. ARBITRATION. In the event of any dispute between the parties hereto
arising out of the Employee's employment or relating to the validity,
construction, enforcement or performance of this Agreement, such dispute shall
be settled by arbitration before a single arbitrator conducted at Boston,
Massachusetts, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The decision of the arbitrator shall be final
and binding on all parties thereto, and judgment upon any award entered in such
proceeding may be entered in any court having jurisdiction thereof. Each party
to such arbitration shall pay one-half of all costs and expenses of such
arbitration and each such party shall pay their respective attorneys' fees. The
determination of the arbitrator shall be conclusive on the matter of which party
is successful for purposes hereof.
In no event, however, shall this Paragraph 19 be deemed to preclude a party
hereto from instituting legal action seeking relief in the nature of a
restraining order, an injunction or the like in order to protect his or its
rights pending the outcome of an arbitration hereunder. With respect to matters
submitted to arbitration other than claims for payment of monies due, the
parties shall continue to perform their obligations hereunder relative to said
matters pending resolution of the dispute by arbitration.
20. INDEMNIFICATION. During and after the term of this Agreement, the
Employer will indemnify the Employee against all claims brought against him
which arise in the course of his employment by the Employer pursuant to this
Agreement to the maximum extent permitted under the laws of the Commonwealth of
Massachusetts, notwithstanding any provision of the By-laws of the Employer or
any action by the Board of Directors of the Employer, either before or after the
Employment Date, which is to the contrary or inconsistent with this provision.
This Paragraph 20 shall survive termination of the Agreement except a
termination For Cause based upon the same facts as those based on which the
claim against the Employee is made for which he seeks indemnification.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
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<PAGE> 8
EMPLOYER:
LTX CORPORATION
BY:
--------------------------------------
Roger W. Blethen
President and CEO
EMPLOYEE:
BY:
--------------------------------------
Kenneth E. Daub,
Individually
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<PAGE> 9
EXHIBIT A
---------
FRINGE BENEFITS
---------------
The Employer shall provide the Employee with the following benefits during the
term of this Agreement:
(i) Health and disability insurance under such policies or plans as the Employer
may adopt, which policies or plans shall provide coverage comparable to the
coverage provided by Employer for the other senior executive level employees of
the Employer;
(ii) An automobile, comparable in value to automobiles furnished to other senior
executive level employees of the Employer, plus payment of all insurance
premiums, maintenance costs and gasoline charges incurred by the Employee while
engaged in the performance of his duties as Employee hereunder;
(iii) An office and staffing commensurate with the office and staffing furnished
to other senior executive level employees of the Employer;
(iv) Payment or reimbursement to Employee of all reasonable moving and job
relocation expenses (including income tax liability of Employee, if any,
incurred by Employee by reason of such payment or reimbursement, and the cash
payment for income tax thereof) incurred by Employee relating to a change of his
principal address from Los Gatos, California to the Boston, Massachusetts
metropolitan area, and from the Boston, Massachusetts metropolitan area to Los
Gatos, California, provided the latter relocation to Los Gatos, California
occurs during the Employment Period or within twelve (12) months after the
Employment Period;
(v) Such policies or plans of life insurance as Employee may adopt from time to
time having coverage amounts and limits comparable to that provided by Employer
to other senior executive level employees of the Employer; and
(vi) Employer shall provide such other fringe benefits to Employee comparable to
those provided from time to time by Employer to other senior executive level
employees of the Employer.
<PAGE> 1
EXHIBIT (13)
SELECTED FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT PER SHARE DATA AND STATISTICS)
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY
YEAR ENDED JULY 31, 1997 1996 1995 1994 1993
- ------------------------------------------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Customer Orders........................... $193.9 233.6 236.9 197.9 182.1
Order Backlog............................. $ 65.1 65.5 98.4 71.8 42.2
Sales..................................... $194.3 266.5 210.3 168.3 172.9
Cost of Sales............................. $131.8 161.8 136.7 116.9 113.5
Inventory Provision....................... $ 9.3 3.6 -- 3.5 --
Engineering and Product Development
Expenses................................ $ 23.4 22.9 19.8 19.6 19.7
Selling, General and Administrative
Expenses................................ $ 39.0 46.8 39.0 42.3 42.6
Restructuring Charges..................... $ 6.7 -- -- 14.4 --
Income (Loss) from Operations............. $(15.9) 31.4 14.8 (28.4) (2.9)
Net Income (Loss)......................... $(15.9) 30.3 10.7 (31.3) (4.3)
PER SHARE DATA
Fully Diluted Earnings (Loss) per Share... $(0.45) 0.82 0.36 (1.23) (0.20)
Weighted Average Shares................... 35.5 36.8 29.8 25.5 21.1
Book Value per Share...................... $ 3.82 4.33 2.23 1.55 2.69
FINANCIAL POSITION
Working Capital........................... $115.1 137.6 62.2 48.9 55.6
Property and Equipment.................... $ 43.0 37.9 28.4 28.9 28.3
Total Assets.............................. $213.5 235.3 145.9 130.6 138.3
Debt...................................... $ 32.4 36.3 37.1 48.7 31.0
Stockholders' Equity...................... $140.2 155.0 65.4 40.6 66.5
Current Ratio............................. 3.2 3.4 2.2 2.0 2.1
Asset Turnover............................ 0.9 1.4 1.5 1.2 1.4
Debt as a % of Total Capitalization....... %18.8 19.0 36.2 54.5 31.8
OTHER INFORMATION
Additions to Property and Equipment
(Net)................................... $ 16.1 20.0 10.2 12.7 7.8
Depreciation and Amortization............. $ 11.0 10.5 9.7 9.2 9.2
Employees................................. 950 1,032 944 880 930
Sales per Employee (000).................. $ 205 270 230 179 186
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Orders for the Company's products and services totaled $193.9 million in
fiscal 1997 as compared to $233.6 million in fiscal 1996. The decline in orders
in fiscal 1997 reflected the significant decline in demand for test equipment,
which began in the third quarter of fiscal 1996. However, the Company
experienced sequential improvement, each quarter, in orders since the fourth
quarter of fiscal 1996, as industry conditions gradually improved. With fiscal
1997 shipments at the same level as orders for the year, the Company's backlog
of $65.1 million at July 31, 1997 remained essentially unchanged from the prior
year-end.
Net sales were $194.3 million in fiscal 1997 as compared to $266.5 million
in fiscal 1996, a decline of 27%. Sales of both the Company's mixed signal and
digital test systems were down significantly, while remaining at approximately
the same proportion of total sales year-to-year. Geographically, sales to
customers outside North America were 67% of total net sales in fiscal 1997 as
compared to 64% in fiscal 1996. While sales in all geographic regions were lower
year-to-year, the Company experienced a substantial improvement in its orders
from Japan in the fourth quarter of fiscal 1997.
1
<PAGE> 2
Excluding provisions for inventories, the gross profit margin was 32.1% of
net sales in fiscal 1997 as compared to 39.3% of net sales in fiscal 1996. An
inventory provision of $9.3 million in the first quarter of fiscal 1997 reduced
the gross profit margin by 4.8% of net sales for fiscal 1997. In fiscal 1996, an
inventory provision of $3.6 million in the fourth quarter reduced the gross
profit margin by 1.4% in fiscal 1996. In fiscal 1997, the gross profit margin
was adversely affected by the lower level of sales relative to fixed
manufacturing costs and relative to the cost of the Company's applications
assistance and customer support organizations. However, as a result of a
combination of increasing sales and a reduction in manufacturing costs, the
Company's gross profit margin improved each quarter during fiscal 1997.
In the first quarter of fiscal 1997, the Company redirected its product
strategy to focus primarily on functionally complex devices known as
"systems-on-a-chip." The Company has undertaken a significant product
development program, which makes use of its digital and mixed signal test
capabilities, to introduce a new family of products designed to address this
emerging market. As a result, the Company restructured its Digital Products
Division management team in October 1996 and began emphasizing sales of its
Delta/STE mixed technology test system. The Company recorded an inventory
provision of $9.3 million in the first quarter for inventories related to
non-strategic products and a charge of $6.7 million for canceled non-strategic
development projects and related equipment, other costs resulting from the
change in product strategy and severance costs related to a workforce reduction.
During the first quarter of fiscal 1997, the Company eliminated 180 positions,
primarily in its manufacturing operations.
Engineering and product development expenses were $23.4 million, or 12.0%
of net sales, in fiscal 1997 as compared to $22.9 million, or 8.6% of net sales,
in fiscal 1996. Engineering expenditures have remained at essentially the same
level year-to-year, which reflects the Company's commitment to maintaining its
investment in developing products required to fully test "system-on-a-chip"
devices. The Company expects to increase its engineering and product development
expenses by over 10% in fiscal 1998 over fiscal 1997.
Selling, general and administrative expenses were $39.0 million, or 20.1%
of net sales, in fiscal 1997 as compared to $46.8 million, or 17.5% of net
sales, in fiscal 1996. The lower level of expenses is a result of a combination
of lower variable selling costs and variable compensation, reduced discretionary
spending, as well as a workforce reduction and the required use of vacation
during a holiday shutdown, which occurred in the first half of fiscal 1997.
Interest expense was $2.4 million in fiscal 1997 as compared to $2.5
million in fiscal 1996. The slightly lower interest expense was due to the
reduction in long-term debt resulting from sinking fund payments. Interest
income was $2.9 million in fiscal 1997 and $2.8 million in fiscal 1996.
The Company's tax provision in fiscal 1997 was $0.4 million as compared to
$1.4 million in fiscal 1996. The fiscal 1997 provision primarily reflects only
certain state and foreign provisions.
In May 1997, to allow the Company to increase sales, marketing and support
activities in Japan, the Company increased its ownership in its
majority-controlled Japanese subsidiary from 50.5% to 67.0%. The Company's
Japanese subsidiary operated at a small loss during fiscal 1997.
Excluding inventory and product line restructuring charges of $16.0 million
in the first quarter of fiscal 1997, the Company had net income of $0.1 million.
The loss for the year, including these charges, was $15.9 million, or $0.45 net
loss per share. On a quarterly basis, the Company improved its financial
performance each quarter during fiscal 1997, beginning with net income of $0.4
million, or $0.01 per share, in the second quarter and ending with net income of
$1.8 million, or $0.05 per share, in the fourth quarter.
Until backlog levels increase substantially, the Company's ability to
maintain profitable operations in the near term will continue to depend on
obtaining the required level of shippable orders to meet its quarterly sales
objectives. The Company's results of operations would be adversely affected if
it were to experience lower than anticipated order levels, extended customer
delivery requirements or lower than anticipated margins due to changes in
product mix.
2
<PAGE> 3
Fiscal 1996 Compared to Fiscal 1995
Orders of $233.6 million for the Company's products and services in fiscal
1996 were slightly lower than the fiscal 1995 level of $236.9 million. The
Company experienced strong industry demand during the first half of fiscal 1996.
However, industry conditions weakened during the Company's third fiscal quarter,
and demand for test equipment fell through the balance of the fiscal year.
Primarily as a result of these weak industry conditions, the Company's backlog
declined to $65.5 million at July 31, 1996, as compared to $98.4 million at July
31, 1995.
Net sales were $266.5 million in fiscal 1996 as compared to $210.3 million
in fiscal 1995, an increase of 27%. Sales of the Company's mixed signal test
systems were 18% higher in fiscal 1996 as compared to fiscal 1995 and sales of
digital test systems in fiscal 1996 increased 55% over fiscal 1995. The increase
in sales for both product lines in fiscal 1996 was primarily a result of strong
semiconductor industry conditions during the first half of fiscal 1996 together
with the large backlog of unshipped orders at the beginning of the fiscal year.
Sales to customers outside North America represented 64% of total sales in
fiscal 1996 as compared to 66% of total sales in fiscal 1995.
The gross profit margin was 37.9% of net sales in fiscal 1996 as compared
to 35.0% of net sales in fiscal 1995. The improvement in the gross profit margin
in fiscal 1996 was a result of proportionately lower fixed manufacturing costs
on the higher shipment levels, savings from product cost reduction programs and
higher average selling prices, particularly on the Synchro Series. These
improvements were partially offset by a provision of $3.6 million for excess and
obsolete inventories in the fourth quarter of fiscal 1996. This provision was
largely a result of obsolete components and parts due to product redesigns
associated with the Company's Delta Series test systems.
Engineering and product development expenses were $22.9 million, or 8.6% of
net sales, in fiscal 1996 as compared to $19.8 million, or 9.4% of net sales, in
fiscal 1995. The increase in engineering and product development expenses
reflected additional resources the Company invested in product development
programs relating to its Synchro, Delta and iPTest product lines.
Selling, general and administrative expenses were $46.8 million, or 17.5%
of net sales, in fiscal 1996 as compared to $39.0 million, or 18.5% of net
sales, in fiscal 1995. The increase in expenses in fiscal 1996 included the
introduction of an employee profit sharing bonus plan and matching of
contributions to the Company's 401(k) plan along with higher travel expenses and
sales commissions on the higher level of sales.
Net interest income was $0.3 million in fiscal 1996 as compared to net
interest expense of $3.8 million in fiscal 1995. Interest expense of $2.5
million in fiscal 1996 was $1.7 million lower than fiscal 1995 primarily as a
result of the conversion of the Company's 131/2 % Convertible Subordinated
Debentures into 2,241,000 shares of the Company's common stock in July 1995. In
fiscal 1996, the Company generated $2.8 million in interest income, $2.4 million
more than in fiscal 1995, primarily as a result of the investment of the $55.8
million in proceeds received in October 1995 from a public offering of the
Company's common stock.
The Company's tax provision in fiscal 1996 was $1.4 million, or 4.4% of
pre-tax income. The Company fully used its U.S. federal net operating loss
carryforward, and a portion of its U.S. federal tax credit carryforward during
fiscal 1996. As a result, the tax provision represents a minimal level of U.S.
federal, state and foreign income taxes. In fiscal 1995, the tax provision of
$0.4 million represented only certain state and foreign tax liabilities.
The Company's Japanese subsidiary's results of operations were
approximately break-even in fiscal 1996 and 1995. As a result, the minority
partner's share of the Company's Japanese subsidiary's results was
insignificant.
The Company had net income of $30.3 million, or $0.82 per share, in fiscal
1996 as compared to $10.7 million, or $0.36 per share, in fiscal 1995. The 183%
increase in net income year-to-year was largely a result of the combination of
higher sales levels, an improvement in the gross profit margin as a percentage
of net sales, the reduction in operating expenses as a percentage of net sales
and added interest income.
3
<PAGE> 4
Liquidity and Capital Resources
Cash and short-term investments were $67.8 million at July 31, 1997 as
compared to $76.0 million at July 31, 1996. The decrease in cash and short-term
investments of $8.2 million was a result of $10.2 million of net cash provided
by operating activities, $16.1 million of net cash used for property and
equipment additions and $2.0 million of net cash used in financing activities.
The Company had positive net cash flow of $10.2 million from operating
activities in fiscal 1997. The reduction in accounts receivable of $4.8 million
reflects the lower level of sales in fiscal 1997 as compared to fiscal 1996.
Inventories declined $11.5 million in fiscal 1997, largely as a result of the
inventory provision in the first quarter of fiscal 1997 of $9.3 million.
Accounts payable declined $4.5 million as a result of the reduction in inventory
purchases required to support the lower level of sales in fiscal 1997. Accrued
expenses and restructuring costs increased $3.0 million during fiscal 1997 as a
result of the provision for product line restructuring in the first quarter of
$6.7 million. At July 31, 1997, the Company had $2.2 million remaining in its
restructuring provision to cover the future costs resulting from its change in
product strategy.
Property and equipment additions of $16.1 million during fiscal 1997 were
mostly for product development and customer support activities. In addition, the
Company purchased, and is in the process of installing, a new management
information system. Non-cash depreciation charges were $11.0 million in fiscal
1997. The Company expects that expenditures for property and equipment will be
lower in fiscal 1998 than the level of expenditures in fiscal 1997.
The Company's Japanese subsidiary had bank borrowings of $6.5 million at
July 31, 1997 as compared to $8.3 million at July 31, 1996. During fiscal 1997,
the Company's long-term subordinated note was reduced by $4.0 million as a
result of regularly scheduled payments.
In June 1997, the Company obtained a $25.0 million domestic credit
facility. The facility includes a $20.0 million working capital line and a $5.0
million equipment lease line. At July 31, 1997, there were no borrowings
outstanding under the working capital line and $1.8 million in operating
equipment leases had been originated under the equipment lease line.
The Company purchased 0.7 million shares of its common stock, for $3.4
million, in the first half of fiscal 1997 under its previously announced stock
repurchase program.
In July 1997, Ando Electric Co., Ltd. purchased 1.0 million shares of
common stock, for $2.3 million, pursuant to the exercise of the remaining shares
under a warrant previously issued by the Company.
Management believes that the Company has sufficient cash resources to meet
its fiscal 1998 cash requirements. These resources include cash balances of
$67.8 million at July 31, 1997, together with the borrowing availability under
its domestic working capital and equipment lease line and future cash flows from
operations.
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-Fiscal 1997 Compared to Fiscal 1996," as to anticipated
increases in engineering and product development expenses and the Company's
belief, under "Liquidity And Capital Resources," as to the adequacy of its cash
resources and the level of expenditures for property and equipment. 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:
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
4
<PAGE> 5
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.
Importance of New Product Introductions
The semiconductor test equipment (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 has driven
the need for more advanced test systems to test such devices at an acceptable
cost. The Company's ability to remain competitive in the mixed signal and
system-on-a-chip integrated circuit (IC) and discrete component 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 on a timely and cost-effective basis. 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 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
could reduce gross margins on new product sales and otherwise materially affect
the Company's business and results of operations. The Company's 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 products, 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.
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 downturn
continues for a prolonged period 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.
5
<PAGE> 6
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.
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 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.
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 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.
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.
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 businesses. 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.
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.
6
<PAGE> 7
LTX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales.................................................. $194,343 $266,476 $210,319
Cost of sales.............................................. 131,870 161,794 136,748
Inventory provision........................................ 9,250 3,600 --
-------- -------- --------
Gross profit.......................................... 53,223 101,082 73,571
Engineering and product development expenses............... 23,350 22,927 19,778
Selling, general and administrative expenses............... 39,049 46,787 38,953
Restructuring charges...................................... 6,750 -- --
-------- -------- --------
Income (loss) from operations......................... (15,926) 31,368 14,840
Other income (expense):
Interest expense...................................... (2,443) (2,529) (4,254)
Interest income....................................... 2,876 2,826 480
-------- -------- --------
Income (loss) before income taxes................ (15,493) 31,665 11,066
Provision for income taxes................................. 416 1,395 372
-------- -------- --------
Net income (loss)................................ $(15,909) $ 30,270 $ 10,694
======== ======== ========
Net income (loss) per share:
Primary............................................... $ (0.45) $ 0.82 $ 0.37
Fully diluted......................................... $ (0.45) $ 0.82 $ 0.36
Weighted average shares:
Primary............................................... 35,482 36,716 28,805
Fully diluted......................................... 35,482 36,755 29,787
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT JULY 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents.............................................. $ 67,800 $ 66,069
Short-term investments............................................ -- 9,941
Accounts receivable, less allowances of $1,100 and $900........... 40,845 46,201
Inventories....................................................... 54,947 66,496
Other current assets................................................... 4,016 5,239
-------- --------
Total current assets......................................... 167,608 193,946
-------- --------
Property and equipment, net....................................... 42,958 37,880
Other assets...................................................... 2,980 3,493
-------- --------
$213,546 $235,319
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable..................................................... $ 6,471 $ 8,252
Current portion of long-term liabilities.......................... 5,043 4,143
Accounts payable.................................................. 23,887 28,451
Accrued compensation.............................................. 2,921 4,667
Unearned service revenues and customer advances................... 5,156 6,429
Other accrued expenses............................................ 9,012 4,385
-------- --------
Total current liabilities.................................... 52,490 56,327
-------- --------
Long-term liabilities, less current portion............................ 13,550 16,645
Convertible subordinated debentures.................................... 7,308 7,308
Stockholders' equity:
Common stock, $0.05 par value:
100,000,000 shares authorized; 37,624,668 and 35,995,796 shares
issued......................................................... 1,881 1,800
Additional paid-in capital........................................ 195,798 191,455
Accumulated deficit............................................... (53,120) (37,211)
Less - treasury stock (947,500 and 200,000 shares), at cost....... (4,361) (1,005)
-------- --------
Total stockholders' equity................................... 140,198 155,039
-------- --------
$213,546 $235,319
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE> 9
LTX CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL TOTAL
OUTSTANDING PAID-IN ACCUMULATED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
----------- ------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 31, 1994......... 26,223,942 $1,311 $117,457 $(78,175) $ -- $ 40,593
Conversion of 13 1/2% Convertible
Subordinated Debentures due
2011........................... 2,240,581 112 11,943 12,055
Exercise of stock options........ 504,595 25 965 990
Issuance of shares under
employees' stock purchase
plan........................... 299,708 15 1,060 1,075
Net income....................... 10,694 10,694
---------- ------ -------- -------- ------- --------
BALANCE AT JULY 31, 1995......... 29,268,826 1,463 131,425 (67,481) -- 65,407
Exercise of stock options........ 228,842 12 954 966
Exercise of stock warrant........ 1,000,000 50 2,260 2,310
Issuance of shares under
employees' stock purchase
plan........................... 248,128 12 1,282 1,294
Sale of common stock............. 5,250,000 263 55,534 55,797
Purchase of treasury stock....... (200,000) (1,005) (1,005)
Net income....................... 30,270 30,270
---------- ------ -------- -------- ------- --------
BALANCE AT JULY 31, 1996......... 35,795,796 1,800 191,455 (37,211) (1,005) 155,039
Exercise of stock options........ 333,955 16 764 780
Exercise of stock warrant........ 1,000,000 50 2,260 2,310
Issuance of shares under
employees' stock purchase
plan........................... 294,917 15 1,319 1,334
Purchase of treasury stock....... (747,500) (3,356) (3,356)
Net loss......................... (15,909) (15,909)
---------- ------ -------- -------- ------- --------
BALANCE AT JULY 31, 1997......... 36,677,168 $1,881 $195,798 $(53,120) $(4,361) $140,198
========== ====== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
9
<PAGE> 10
LTX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)............................................. $(15,909) $ 30,270 $ 10,694
Add (deduct) non-cash items:
Depreciation and amortization............................ 11,038 10,533 9,701
Original issue discount amortization..................... -- -- 263
Translation (gain) loss.................................. (100) (562) 178
(Increase) decrease in:
Accounts receivable...................................... 4,762 (14,319) 990
Inventories.............................................. 11,549 (19,395) (4,429)
Other current assets..................................... 1,191 (310) (980)
Other assets............................................. 530 415 382
Increase (decrease) in:
Accounts payable......................................... (4,533) 6,946 6,033
Accrued expenses, compensation and restructuring
charges............................................... 2,985 (5,177) (6,626)
Unearned service revenues and customer advances.......... (1,273) (728) 3,290
-------- -------- --------
Net cash provided by operating activities.................. 10,240 7,673 19,496
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of held-to-maturity securities, net.............. -- (9,941) --
Maturities of held-to-maturity securities, net............. 9,941 -- --
Expenditures for property and equipment.................... (16,116) (20,006) (10,222)
-------- -------- --------
Net cash used in investing activities...................... (6,175) (29,947) (10,222)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds from stock plans:
Employees' stock purchase plan............................. 1,334 1,294 1,075
Exercise of stock options.................................. 780 538 990
Sale of common stock -- 55,797 --
Exercise of stock warrant..................................... 2,310 2,310 --
Purchase of treasury stock.................................... (3,356) (1,005) --
Increase (decrease) in notes payable.......................... (993) 1,250 1,187
Proceeds from lease financing................................. 2,975 -- --
Payments of long-term debt.................................... (5,090) (486) (627)
Costs of debenture conversion................................. -- -- (367)
-------- -------- --------
Net cash provided by (used in) financing activities........ (2,040) 59,698 2,258
-------- -------- --------
Effect of exchange rate changes on cash......................... (294) (538) 425
Net increase in cash and equivalents....................... 1,731 36,886 11,957
Cash and equivalents at beginning of year....................... 66,069 29,183 17,226
-------- -------- --------
Cash and equivalents at end of year............................. $ 67,800 $ 66,069 $ 29,183
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest................................................... $ 2,451 $ 2,529 $ 4,872
Income taxes............................................... 725 1,953 364
Supplemental Disclosure of Non-Cash Financing Activities:
Conversion of convertible subordinated debentures to common
stock (see Note 5)......................................... -- -- $ 12,415
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
10
<PAGE> 11
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
LTX Corporation (the Company) designs, manufactures, and markets automatic
test equipment for the semiconductor industry that is used to test digital,
linear, and mixed signal (a combination of digital and linear) integrated
circuits (ICs) and discrete semiconductor components. The Company is
headquartered in Westwood, Massachusetts, has development and manufacturing
facilities in Westwood, Massachusetts, and San Jose, California, and worldwide
sales and service facilities to support its customer base.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned domestic subsidiaries and wholly owned and majority-owned
foreign subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts 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. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions.
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, which have not been significant in the past
three fiscal years, are included in the results of operations.
Revenue Recognition
Revenue 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.
Engineering and Product Development Costs
The Company expenses all engineering, research and development costs as
incurred. Expenses subject to capitalization in accordance with the Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software To Be Sold, Leased or Otherwise Marketed," relating to certain software
development costs, were insignificant.
Income Taxes
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 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
11
<PAGE> 12
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the past since it reinvested those earnings. At July 31, 1997, most of the
Company's foreign subsidiaries had accumulated deficits.
Net Income (Loss) per Share
Primary and fully diluted net income per share are based on the weighted
average number of shares of common stock and common stock equivalents (shares
issuable under stock option plans and warrants) outstanding. None of the
Company's convertible subordinated debentures are common stock equivalents. Net
loss per share is based on the weighted average number of shares of common stock
outstanding only, as the inclusion of common stock equivalents would be
anti-dilutive.
Financial Instruments
Cash and Short-Term Investments
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 and commercial paper. Effective August 1, 1995, the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (FAS 115). In accordance with FAS
115, 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 short-term investments as of July 31, 1997. 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.
Fair Value
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," which was adopted by the Company effective
August 1, 1995, requires that disclosure be made of estimates of the fair value
of financial instruments. 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. At July 31, 1997 and 1996, the carrying value of
$6,471,000 and $8,252,000, respectively, for notes payable and $18,593,000 and
$20,788,000, respectively, for long-term liabilities, including current portion,
approximates fair value. At July 31, 1997 and 1996, the Company's 7 1/4%
Convertible Subordinated Debentures due 2011 had a carrying value of $7,308,000
and the estimated fair value was approximately $6,200,000 and $5,800,000,
respectively. For all other balance sheet financial instruments, the carrying
amount approximates fair value.
Concentration of Credit 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 investments 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
semiconductor 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.
12
<PAGE> 13
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method, and include materials, labor and
manufacturing overhead. Inventories consist of the following:
<TABLE>
<CAPTION>
AT JULY 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Raw materials.................................. $14,482,000 $17,752,000
Work-in-process................................ 24,409,000 34,261,000
Finished goods................................. 16,056,000 14,483,000
----------- -----------
$54,947,000 $66,496,000
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
AT JULY 31, DEPRECIABLE
----------------------------- LIFE IN
1997 1996 YEARS
------------- ------------ --------------------
<S> <C> <C> <C>
Machinery and equipment...................... $ 95,755,000 $84,854,000 3-5
Office furniture and equipment............... 9,040,000 5,779,000 3-7
Leasehold improvements....................... 8,133,000 7,736,000 10 or term of lease
------------ -----------
112,928,000 98,369,000
Less: accumulated depreciation and
amortization (69,970,000) (60,489,000)
------------ -----------
$ 42,958,000 $37,880,000
============ ===========
</TABLE>
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), which
is effective for periods ending after December 15, 1997. FAS 128 requires the
presentation of basic earnings per share (EPS) and diluted EPS. Basic EPS
replaces the primary EPS calculation required under APB Opinion No. 15. Basic
EPS excludes dilution and is calculated using the weighted average of common
shares outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. The pro forma effect of this
accounting change on the July 31, 1997 and July 31, 1996 previously reported EPS
data is as follows:
<TABLE>
<CAPTION>
PER SHARE AMOUNTS
YEAR ENDED JULY 31,
-------------------
1997 1996
------ ------
<S> <C> <C>
Primary EPS as reported................................ $(0.45) $ 0.82
Effect of FAS 128...................................... -- 0.07
------ ------
Basic EPS.............................................. $(0.45) $ 0.89
------ ------
Fully diluted EPS as reported.......................... $(0.45) $ 0.82
Effect of FAS 128...................................... -- --
------ ------
Diluted EPS............................................ $(0.45) $ 0.82
====== ======
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). The statement is effective for fiscal 1999 and requires comprehensive
income to be reported with the same prominence as other financial
13
<PAGE> 14
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements. Comprehensive income would include any unrealized gains or losses on
available-for-sale securities, foreign currency translation adjustments and
minimum pension liability adjustments.
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" (FAS 131). The statement is effective
for fiscal 1999. FAS 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.
3. NOTES PAYABLE
The Company's Japanese subsidiary had borrowings outstanding of $6,471,000
at July 31, 1997 under demand bank lines of credit. Borrowings of $5,462,000, at
the local prime rate plus 1/4%, are guaranteed by the Company's minority partner
in Japan, and borrowings of $1,009,000, at the local prime plus 3/4%, under a
$1,681,000 demand bank line, are guaranteed by the Company. At July 31, 1996,
the Company's Japanese subsidiary had borrowings outstanding of $8,252,000 under
demand bank lines of credit.
In June 1997, the Company expanded its line of credit with its domestic
banks. The new agreement is comprised of a $20,000,000 unsecured working capital
line and a $5,000,000 equipment lease line. The working capital line matures in
July 1998 and borrowings are at the agent bank's prime rate. Borrowings under
the equipment lease line are available through July 1998 and are secured by the
leased equipment, with repayments scheduled over a maximum three-year period.
Borrowings availability under the working capital line are on a formula basis.
The working capital line has financial covenants that largely relate to results
of operations and minimum levels of liquidity. At July 31, 1997, there were no
borrowings outstanding under the working capital line, and $1,767,000 in
operating leases had been originated under the equipment lease line.
4. LONG-TERM LIABILITIES
Long-term liabilities consist of the following:
<TABLE>
<CAPTION>
AT JULY 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Subordinated note payable with interest at
8%.......................................... $16,000,000 $20,000,000
Lease purchase obligations at various interest
rates, net of deferred interest............. 2,593,000 788,000
----------- -----------
18,593,000 20,788,000
Less: current portion......................... (5,043,000) (4,143,000)
----------- -----------
$13,550,000 $16,645,000
=========== ===========
</TABLE>
The subordinated note payable bears interest at 8%, which is payable
semi-annually and has semi-annual principal payments of $2,000,000, which began
in January 1997. The note is secured by the Company's inventories and capital
equipment and is subordinated in right of payment to senior indebtedness of the
Company. In connection with this note, the Company issued a warrant to purchase
up to 2,000,000 shares of common stock during the term of the note (see Note 7).
5. CONVERTIBLE SUBORDINATED DEBENTURES
On April 25, 1986, the Company issued and sold at par $35,000,000 of 7 1/4%
Convertible Subordinated Debentures due 2011. A total of $7,308,000 of the
original issue of $35,000,000 remained outstanding at July 31, 1997 and 1996.
The debentures are subordinated in right of payment to senior indebtedness and
are convertible by the holders into common stock at $18.00 per share at any time
prior to redemption or maturity. The debentures are redeemable at the Company's
option at any time, in whole or in part, at 100% of the
14
<PAGE> 15
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
principal amount. No sinking fund payments are required before the maturity date
of the debentures in 2011. Interest is payable semi-annually on April 15 and
October 15.
In July 1995, the Company's 131/2% Convertible Subordinated Debentures due
2011 were converted into 2,240,581 shares of common stock. The outstanding
principal amount of $15,693,000 of Debentures was converted at the conversion
price of $7.00 per share. On the conversion date, the Debentures had a book
value of $13,149,000, which included the remaining unamortized original issue
discount of $2,544,000.
6. INCOME TAXES
At July 31, 1997, the Company had, for tax purposes, $1,959,000 of federal
tax credits available for carryforward, which expire in fiscal years 2000
through 2004. The components of the provision for income taxes consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1997 1996 1995
----------- ---------- --------
<S> <C> <C> <C>
Currently payable:
Federal........................................... $ 1,000,000 $ 600,000 $ --
State............................................. 200,000 195,000 50,000
Foreign........................................... 216,000 600,000 322,000
----------- ---------- --------
Total current.......................................... $ 1,416,000 $1,395,000 $372,000
=========== ========== ========
Deferred:
Federal........................................... $(1,000,000) $ -- $ --
State............................................. -- -- --
Foreign........................................... -- -- --
----------- ---------- --------
Total deferred......................................... $(1,000,000) $ -- $ --
----------- ---------- --------
Total tax provision.................................... $ 416,000 $1,395,000 $372,000
=========== ========== ========
</TABLE>
Reconciliations of the U.S. federal statutory rate to the Company's
effective tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
U.S. federal statutory rate......................... (35.0)% 35.0% 35.0%
State income taxes, net of federal income tax
effect............................................ 0.8 0.4 0.3
Foreign income taxes................................ -- (1.4) (2.0)
Change in valuation allowance....................... 17.9 (3.0) (29.9)
Foreign operating losses not benefited.............. 17.4 -- --
Tax credits......................................... (2.1) (4.2) --
Benefit of net operating loss carryforward.......... -- (18.6) --
Other, net.......................................... 3.7 (3.8) --
----- ----- -----
Effective tax rate.................................. 2.7% 4.4% 3.4%
===== ===== =====
</TABLE>
15
<PAGE> 16
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The temporary differences and carryforwards that created the deferred tax
assets and liabilities as of July 31, 1997 and July 31, 1996 are as follows:
<TABLE>
<CAPTION>
AT JULY 31,
----------------------------
1997 1996
------------ -----------
<S> <C> <C>
Deferred tax assets:
Tax credits...................................... $ 1,959,000 $ 2,244,000
Inventory valuation reserves..................... 3,680,000 3,634,000
Restructuring charges............................ 4,604,000 419,000
Spares amortization.............................. 3,936,000 3,419,000
Unearned service revenues........................ 1,168,000 2,005,000
Other............................................ 1,776,000 936,000
------------ -----------
Total deferred tax assets................... 17,123,000 12,657,000
Valuation allowance.............................. (13,367,000) (9,181,000)
------------ -----------
Net deferred tax assets..................... $ 3,756,000 $ 3,476,000
============ ===========
Deferred tax liabilities:
Depreciation..................................... $ (632,000) $ (690,000)
Other............................................ (924,000) (286,000)
------------ -----------
Total deferred tax liabilities.............. $ (1,556,000) $ (976,000)
============ ===========
Net deferred taxes recorded................. $ 2,200,000 $ 2,500,000
============ ===========
</TABLE>
The valuation allowance relates to uncertainty surrounding the realization
of the deferred tax assets.
7. STOCKHOLDERS' EQUITY
Stock Repurchase Program
In June 1996, the Board of Directors authorized a stock repurchase program
under which the Company could acquire up to 3,500,000 shares of its common stock
over a 12-month period. In fiscal 1997, the Company purchased 747,500 shares, to
be held in treasury, at a cost of $3,356,000 under this program. In fiscal 1996,
the Company purchased 200,000 shares at a cost of $1,005,000.
Warrants
In July 1994, in connection with the issuance of a subordinated note, the
Company issued a warrant to purchase up to 2,000,000 shares of common stock at
the then fair market value of $2.31 per share during the term of the note (see
Note 4). In June 1996, 1,000,000 shares of common stock were exercised under
this warrant. In July 1997, the remaining 1,000,000 shares under this warrant
were exercised.
Rights Agreement
The Board of Directors of the Company adopted a Rights Agreement, dated as
of May 11, 1989, between the Company and The First National Bank of Boston, as
rights agent, and in connection therewith, distributed one common share purchase
right for each outstanding share of common stock. The rights will become
exercisable only if a person or group acquires 20% or more of the Company's
common stock or announces a tender offer that would result in ownership of 30%
or more of the common stock. Initially, each right will entitle a stockholder to
buy one share of common stock of the Company at a purchase price of $30.00 per
share, subject to significant adjustment depending on the occurrence thereafter
of certain events. Before any person or group has acquired 20% or more of the
common stock of the Company, the rights are redeemable by the Board of Directors
at $0.01 per right. The rights will expire on May 11, 1999 unless redeemed by
the Company prior to that date.
16
<PAGE> 17
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS
Stock Option Plans
The Company has two stock option plans: the 1990 Stock Option Plan (1990
Plan) and the 1995 LTX (Europe) Ltd. Approved Stock Option Plan (U.K. Plan).
The 1990 Plan and the U.K. Plan provide for the granting of options to
employees to purchase shares of common stock at not less than 100% of the fair
market value on the date of grant. The 1990 Plan also provides for the granting
of options to an employee, director or consultant of the Company or its
subsidiaries to purchase shares of common stock at prices to be determined by
the Board of Directors. Compensation expense relating to shares granted under
this plan at less than fair market value has been charged to operations over the
applicable vesting period. Options under both plans are exercisable over vesting
periods, which are typically three years beginning one year from the date of
grant. In December 1995, the stockholders of the Company approved an increase to
the number of shares of common stock that may be granted under the 1990 Plan,
through October 2000, from 2,700,000 shares to 3,700,000 shares. At July 31,
1997, 588,846 shares were subject to future grant under the 1990 Plan and 48,000
shares were subject to future grant under the U.K. Plan.
Compensation Expense
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), which is effective for the Company's fiscal year ended
July 31, 1997. FAS 123 requires employee stock-based compensation to be either
recorded or disclosed at its fair value. As permitted by FAS 123, the Company
has elected to continue to account for employee stock-based compensation under
Accounting Principles Board Opinion No. 25. Had compensation costs for awards in
fiscal 1997 and 1996 under the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the method
set forth under FAS 123, the effect on the Company's net income (loss) and net
income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Net income (loss):
As reported................................... $(15,909) $ 30,270
Pro forma..................................... $(17,535) $ 29,985
Net income (loss) per share:
Primary
As reported................................... $ (0.45) $ 0.82
Pro forma..................................... $ (0.49) $ 0.82
Fully Diluted
As reported................................... $ (0.45) $ 0.82
Pro forma..................................... $ (0.49) $ 0.82
</TABLE>
Since the method prescribed by FAS 123 has not been applied to options
granted prior to August 1, 1995, the resulting pro forma compensation expense
may not be representative of the amount to be expected in future years. Pro
forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
17
<PAGE> 18
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Volatility........................................ 83% 83%
Risk-free interest rate........................... 5.875% 5.875%
Expected life of options.......................... 5.02 years 5.02 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option-pricing models require the input
of highly subjective assumptions. Because the Company's employee stock options
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Stock Option Activity
The following table summarizes stock option activity for the three years
ended July 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------------------------------------------------
1997 1996 1995
------------------- ------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE RANGE OF
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF OPTION PRICES
SHARES PRICE SHARES PRICE SHARES PER SHARE
--------- -------- --------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year................................ 2,025,227 $ 3.35 2,034,069 $ 2.77 2,183,339 $ 0.05-$6.88
Granted.......................... 1,753,750 $ 4.82 225,500 $ 8.58 391,000 $ 1.00-$5.56
Exercised........................ (333,955) $ 2.51 (228,842) $ 2.24 (504,595) $ 0.05-$3.75
Forfeited........................ (184,739) $ 7.15 (5,500) $11.86 (35,675) $ 1.88-$4.13
Options outstanding, end of year...... 3,260,283 $ 3.94 2,025,227 $ 3.35 2,034,069 $ 0.05-$6.88
Options exercisable................... 1,707,496 $ 2.88 1,469,082 $ 2.52 1,135,014 $ 0.05-$6.88
Options available for grant........... 636,846 2,205,857 1,425,857
Weighted average fair value of options
granted during year................. $ 3.38 $ 8.42
</TABLE>
As of July 31, 1997, the status of the Company's outstanding and
exercisable options is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.00-$ 1.27 161,886 6.8 $ 0.96 113,955 $ 0.94
$1.28-$ 2.53 886,843 2.9 $ 2.02 974,685 $ 2.02
$2.54-$ 3.79 344,321 3.4 $ 3.56 381,600 $ 3.56
$3.80-$ 5.05 1,395,809 9.4 $ 4.74 24,500 $ 3.94
$5.06-$ 7.58 369,334 7.9 $ 5.71 179,466 $ 5.71
$7.59-$11.36 18,290 6.6 $ 8.57 7,090 $ 8.16
$11.37-$12.63 83,800 8.0 $11.50 26,200 $11.50
</TABLE>
Employees' Stock Purchase Plan
In December 1993, the stockholders of the Company approved the adoption of
the 1993 Employees' Stock Purchase Plan, which replaced the 1983 Employees'
Stock Purchase Plan, which expired in December 1993. Under this plan, eligible
employees may contribute up to 15% of their annual compensation for the
18
<PAGE> 19
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase of common stock of the Company up to $25,000 of fair market value of
the stock per calendar year. The plan limits the number of shares which can be
issued for any semi-annual plan period to 150,000 shares and, over the term of
the plan, the Company may issue up to 1,200,000 shares. At July 31, 1997, 76,475
shares were available for future issuance under this plan.
Other Compensation Plans
In fiscal 1996, the Company established a Profit Sharing Bonus Plan,
wherein a percentage of pretax profits are distributed semi-annually to all
employees. In addition, the Company has a 401(k) Growth and Investment Program.
Eligible employees may make voluntary contributions to this plan through a
salary reduction contract up to the statutory limit or 15% of their annual
compensation. In fiscal 1996, the Company began matching employees' voluntary
contributions to the plan, up to certain prescribed limits. These Company
contributions vest at a rate of 20% per year. The total charge to expense under
these plans was $1,035,000 in fiscal 1997 and $2,006,000 in fiscal 1996.
9. GEOGRAPHIC AREA INFORMATION
The Company's operations by geographic segment for the three years ended
July 31, 1997 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales to unaffiliated customers:
North America............................... $ 64,183,000 $ 95,086,000 $ 70,797,000
Europe...................................... 29,003,000 40,193,000 33,268,000
Japan....................................... 15,147,000 17,461,000 21,352,000
Rest of world (principally Pacific Rim)..... 86,010,000 113,736,000 84,902,000
------------ ------------ ------------
Total sales to unaffiliated
customers............................ $194,343,000 $266,476,000 $210,319,000
============ ============ ============
Transfers between geographic areas:
United States............................... $ 34,826,000 $ 40,973,000 $ 81,666,000
Europe...................................... 7,772,000 10,156,000 10,966,000
Japan....................................... 100,000 315,000 519,000
------------ ------------ ------------
Total transfers between geographic
areas................................ $ 42,698,000 $ 51,444,000 $ 93,151,000
============ ============ ============
Income (loss) from operations:
United States............................... $ (8,845,000) $ 30,310,000 $ 9,228,000
Europe...................................... (4,598,000) 191,000 2,853,000
Japan....................................... (1,151,000) 582,000 569,000
Eliminations................................ (1,332,000) 285,000 2,190,000
------------ ------------ ------------
Total income (loss) from operations.... $(15,926,000) $ 31,368,000 $ 14,840,000
============ ============ ============
Identifiable assets:
United States............................... $224,737,000 $228,187,000 $136,563,000
Europe...................................... 13,006,000 20,529,000 17,866,000
Japan....................................... 14,199,000 14,129,000 13,296,000
Eliminations................................ (38,396,000) (27,526,000) (21,808,000)
------------ ------------ ------------
Total identifiable assets.............. $213,546,000 $235,319,000 $145,917,000
============ ============ ============
</TABLE>
Transfer prices on products sold to foreign subsidiaries are intended to
produce profit margins that correspond to the subsidiary's sale and support
efforts.
19
<PAGE> 20
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS
The Company has operating lease commitments for certain facilities and
equipment and capital lease commitments for certain equipment. Minimum lease
payments net of sublease proceeds under non-cancelable leases at July 31, 1997
are as follows:
<TABLE>
<CAPTION>
TOTAL TOTAL
REAL OPERATING CAPITAL
ESTATE EQUIPMENT LEASES LEASES
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ending July 31,
1998..................................... $ 4,312,000 $2,632,000 $ 6,944,000 $1,437,000
1999..................................... 3,611,000 1,940,000 5,551,000 1,124,000
2000..................................... 2,136,000 1,207,000 3,343,000 186,000
2001..................................... 2,058,000 594,000 2,652,000 124,000
2002..................................... 2,037,000 437,000 2,474,000 --
2003 and thereafter...................... 10,745,000 1,465,000 12,210,000 --
Total minimum lease payments.................. $24,899,000 $8,275,000 $33,174,000 $2,871,000
=========== ========== ===========
Less: amount representing interest............ (278,000)
----------
Present value of total capital leases......... $2,593,000
==========
</TABLE>
Total rental expense for fiscal 1997, 1996 and 1995 was $7,257,000,
$7,993,000 and $9,611,000, respectively.
20
<PAGE> 21
LTX CORPORATION
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDING JULY 31, 1997
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(1) QUARTER QUARTER QUARTER
---------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 44,666 $46,783 $49,497 $53,397
Gross profit....................................... 4,069 14,534 16,190 18,430
Net income (loss).................................. (18,802) 381 717 1,795
Net income (loss) per share:
Primary and fully diluted..................... (0.53) 0.01 0.02 0.05
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING JULY 31, 1996
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER(1) QUARTER QUARTER QUARTER
---------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 62,158 $65,054 $71,979 $67,285
Gross profit....................................... 23,430 26,047 29,127 22,478
Net income......................................... 6,546 8,745 10,591 4,388
Net income per share:
Primary and fully diluted..................... 0.19 0.23 0.28 0.12
</TABLE>
- ---------------
(1) The Company took an inventory provision of $9.3 million and a product line
restructuring charge of $6.7 million in its first quarter results of
operations.
21
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of LTX Corporation:
We have audited the accompanying consolidated balance sheet of LTX
Corporation and subsidiaries as of July 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LTX Corporation and
subsidiaries as of July 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1997, in conformity with generally accepted accounting principles.
/S/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 3, 1997
22
<PAGE> 23
MARKET PRICES FOR COMMON STOCK
The Company's common stock is traded on the NASDAQ National Market under
the symbol "LTXX." The following table sets forth for the periods indicated the
actual high and low sales prices per share of common stock, as reported on the
NASDAQ National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C> <C>
YEAR ENDING JULY 31, 1997
First Quarter............................................ $ 5 3/4 $3 15/16
Second Quarter........................................... 7 3/8 3 15/16
Third Quarter............................................ 7 4 1/8
Fourth Quarter........................................... 7 3/4 4 7/8
YEAR ENDING JULY 31, 1996
First Quarter............................................ $14 1/8 $9 1/2
Second Quarter........................................... 13 1/4 6 5/8
Third Quarter............................................ 10 3/4 7 3/8
Fourth Quarter........................................... 11 3/8 4
</TABLE>
The Company has never declared or paid cash dividends on the shares of
common stock and does not anticipate paying any cash dividends on the shares of
common stock in the foreseeable future. The Company currently intends to retain
future earnings to fund the development and growth of its business.
As of October 1, 1997, there were approximately 1,212 stockholders of
record.
23
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 67,800
<SECURITIES> 0
<RECEIVABLES> 41,945
<ALLOWANCES> 1,100
<INVENTORY> 54,947
<CURRENT-ASSETS> 167,608
<PP&E> 112,928
<DEPRECIATION> 69,970
<TOTAL-ASSETS> 213,546
<CURRENT-LIABILITIES> 52,490
<BONDS> 20,858
0
0
<COMMON> 1,881
<OTHER-SE> 138,317
<TOTAL-LIABILITY-AND-EQUITY> 213,546
<SALES> 166,909
<TOTAL-REVENUES> 194,343
<CGS> 118,018
<TOTAL-COSTS> 131,870
<OTHER-EXPENSES> 16,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,443
<INCOME-PRETAX> (15,493)
<INCOME-TAX> 416
<INCOME-CONTINUING> (15,909)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,909)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
