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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1998
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. 000-10761
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LTX CORPORATION
(Exact name of registrant as specified in its charter)
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)
(781) 461-1000
(Registrant's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None
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, 1998 was $70,752,682.
Number of shares outstanding of each of the issuer's classes of Common
Stock as of October 1, 1998:
Common Stock, Par Value $0.05 Per Share, 35,508,736 shares.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT IN CONNECTION WITH ITS 1998
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.
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LTX CORPORATION
INDEX
Page
PART I
Item 1. Business Overview 1
Industry Background 1
Company Strategy 2
Products and Markets 3
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 9
PART II
Item 5. Market Value for the Registrant's Common Stock and Related
Security Holder Matters 10
Item 6. Selected Consolidated Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and
Management 37
Item 13. Certain Relationships and Related Transactions 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 37
Financial Statements 37
Schedules 38
Exhibits 39
Listing of Exhibits 39
Reports on Form 8-K 41
Exhibits 41
Signatures 42
LTX(R), HiPer(R), Fusion(TM) 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
system-on-a-chip, digital, analog and mixed signal (a combination of digital and
analog) integrated circuits ("ICs"). The Company's newly introduced Fusion(TM)
product is a single test platform that can be configured to test system-on-a-
chip devices, digital VLSI devices including microprocessors and
microcontrollers, and analog/mixed signal devices. The Company also sells
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 manufacturers of system-on-a-chip, digital, analog and
mixed signal ICs.
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.
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 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 that 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.
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.
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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 analog/mixed signal
and digital engineering organizations to develop a single platform systems-on-a-
chip test system, 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 Fusion test system enables complete functional
testing of the embedded mixed signal, digital and memory components of a system-
on-a-chip device, as well as performing system-level testing related to the
devices' end-use application. The Company believes that superior test
performance at the subcomponent level, without compromising functionality, is
necessary to meet the requirements of the emerging systems-on-a-chip market.
The Company began shipping Fusion HT and AC products during the fourth quarter
of fiscal 1998, and began shipping Fusion HF products during the first quarter
of fiscal 1999.
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.
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. The Company's
worldwide design, manufacturing and service functions are ISO 9001 certified.
Leverage Ando Alliance in Japan
The Japanese semiconductor industry represents the second largest market in
the world for STE. In Japan, the Company encounters significant competition
from local STE manufacturers. In fiscal 1998, the Company entered into an
agreement with Ando Electric Co., Ltd. ("Ando"), a Japanese STE manufacturer and
majority-owned subsidiary of NEC, to develop, manufacture and market Fusion for
Japanese customers. The Company believes that its alliance with Ando will
better enable it to penetrate the market for Fusion in Japan.
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PRODUCTS AND MARKETS
Market Overview
The Company currently sells products in three broad semiconductor markets:
. System-on-a-chip devices,
. Analog and mixed signal devices, and
. Digital VLSI devices.
The Company's test systems are used by semiconductor manufacturers for design
verification, characterization, qualification and failure analysis 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.
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 high-definition televisions 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.
Mixed Signal and Analog ICs
Mixed Signal 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. Analog ICs
are used to amplify, filter and shape this information. Mixed signal ICs
convert the signals from analog ICs into digital signals that can be processed
by a computer. Mixed signal devices also convert processed digital information
into a analog form to control physical phenomena or to improve sound and images.
Mixed signal and analog 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 analog/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. Microcontrollers can be as digitally complex as
microprocessors and
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also often include analog functionality. The testing of these devices requires
high performance digital test capabilities and mixed signal test instruments.
Product Overview
Fusion Product Family
During fiscal 1998, the Company introduced its Fusion product family which
offers a "one test platform, zero compromises" solution for testing the full
spectrum of system-on-a-chip, mixed signal, digital and analog integrated
circuits. The Fusion product family provides customers the highest available
test performance and cost-efficiency to speed the time to market of digital
mixed signal and system-on-a-chip ICs. The Fusion product family is available
in the following configurations:
. Fusion HF, a fully integrated test configuration for system-on-a-chip
applications, and
. Fusion HT and Fusion AC, fully integrated test configurations for advanced
and high-speed mixed signal applications.
In addition, the Fusion product family is supported by enVision++(TM), LTX's
new programming environment, which combines the flexibility of the Company's
enVision(TM) operating system with Cadence, its test language for mixed signal
ICs. enVision++ drives rapid productivity improvements by allowing test
engineers to define tests easier and faster. It also allows engineers the
option of programming with a graphical user interface while having access to a
complete, incremental test code environment for new test development or device-
specific test requirements.
Fusion HF
The Fusion High Functionality ("HF") test head contains high pin count digital
and mixed signal technology to test all aspects of a system-on-a-chip device in
a single insertion. The HF test head contains 32 mixed signal slots, 64 HiPer
II digital pin slots and 8 radio frequency ("RF") or power module slots, thus
enabling it to test both digital and analog signals. The HF test head can be
configured with up to 1,024 digital pins.
The HF can support a wide range of mixed signal test solutions such as RF,
smart power, precision high voltage analog channels, precise timebase analyzers,
powerful DSP-based synthesizer and digitizers for high-speed and high-resolution
embedded converters.
Fusion HT and Fusion AC
The Fusion HT and Fusion AC test systems are designed for high throughput
testing of complex mixed signal devices.
The Fusion HT features up to 48 digital and 48 analog pins, RF test
instruments, and smart power test technology. Typical device types tested on
the Fusion HT include RF/wireless, smart power and consumer video and audio.
The Fusion HT, powered by enVision++, is fully compatible with the Synchro HT.
The Fusion AC features up to 96 digital and 96 analog pins and high-speed DSP
instruments. Typical device types tested on the Fusion AC include high-speed
local area networks ("LAN"), disk drive, and data communications. The Fusion AC
is also powered by enVision++, and is fully compatible with the Synchro AC.
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Ando Alliance
In fiscal 1998, the Company entered into a development, manufacturing and
marketing agreement with Ando, a Japanese STE manufacturer and majority-owned
subsidiary of NEC, relating to Fusion. The Company has granted Ando exclusive
rights to manufacture and sell Fusion in Japan and has retained exclusive rights
to manufacture and sell Fusion outside of Japan, with certain exceptions in each
case.
Under the agreement, Ando will establish a new division, charged with
marketing, sales, applications, engineering and customer support for the Fusion
product line in Japan. The alliance will provide for common product hardware
and software and will unite both companies' R&D efforts to jointly develop new
options and capabilities for Fusion, including LTX's enVision++ operating
system. In addition, LTX and Ando will each represent a second supply source
for the other's customers.
Other Products
Synchro Series
Synchro test systems are designed for high throughput testing of analog
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 a per-pin architecture which
allows for concurrent control of both analog 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 analog/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 in excess of 300 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 asynchronous transfer mode ("ATM") 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.
Software Tools for Synchro
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 for the development of test
solutions concurrent with the design of the IC, reducing customers time to
market for the IC.
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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.
In fiscal 1993, the Company entered into a development, manufacturing and
marketing agreement with Ando 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.
enVision Software for Delta STE
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.
iPTest Division
The Company's iPTest division manufactures systems that are used to test power
discrete components, such as power transistors. In August 1998, the Company
announced its plans to divest its iPTest division.
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 various parts and labor warranties on test systems or options designed
and manufactured by the Company, and labor warranties 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 the 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 cyclical nature of the semiconductor industry
than sales of test equipment. The Company maintains 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 Fusion and
digital products through its alliance with Ando and its other products through
its joint venture with Sumitomo Metal Industries Ltd. ("SMI"). The Company uses
a small number of independent sales representatives and distributors in certain
other regions of the world.
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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 60%, 67% and 64% of total sales of the Company in fiscal 1998, 1997
and 1996, respectively.
CUSTOMERS
The Company's customers include many of the world's leading semiconductor
manufacturers. No single customer accounted for 10% or more of net sales in
fiscal 1998 or 1996. In fiscal 1997, sales to two customers accounted for 13%
and 12% of net sales, respectively.
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 $34.3 million, $23.4 million and $22.9 million during fiscal
1998, 1997 and 1996, respectively. Through the Company's alliance with Ando,
additional engineering and product development resources are being applied to
the development of new options for Fusion.
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 August 1998, the Company announced
the consolidation of its manufacturing facilities to Westwood, Massachusetts.
The consolidation is estimated to be completed by February 1999. During times
of peak demand, the Company anticipates that its alliance with Ando will enable
it to satisfy customers requirements through a second supply source for Fusion.
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 principal competitors in the market for system-on-a-chip test systems
are Hewlett-Packard Company, Teradyne, Inc. and Credence Systems Corporation.
The Company's major competitors in the market for digital test systems are
Schlumberger Limited, Teradyne, Inc., Hewlett-Packard Company and Credence
Systems Corporation, except in Japan where the Company's major competition also
includes Advantest Corporation. The Company's principal competitor for
analog/mixed signal test
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systems is Teradyne, Inc. 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.
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, 1998, the Company's backlog of unfilled orders for all products
and services was $62.9 million, compared with $65.1 million at July 31, 1997.
The Company expects to deliver approximately 90% of its July 31, 1998 backlog in
fiscal 1999. Included in the 1998 backlog is $10 million of deferred revenue
relating to the Company's April 1998 transaction with Ando (see Results of
Operations). 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
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
Information required under this item is included in the Proxy Statement for
the Annual Meeting of Stockholders to be held on December 8, 1998, under the
heading "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 no later
than 120 days after the end of the Company's fiscal year, July 31, 1998.
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EMPLOYEES
At July 31, 1998, the Company had a total of 1,027 permanent employees. 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 Asia Pacific. Office space
leased in Europe and Asia Pacific totals approximately 100,000 square feet.
The Company believes that its existing facilities are adequate to meet its
current and foreseeable future requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material pending legal proceedings other than routine
litigation relating to its business.
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 1998.
9
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PART II
ITEM 5. MARKET VALUE FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
MARKET PRICES FOR COMMON STOCK
The Company's common stock is traded on the Nasdaq National Market System
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 System:
YEAR ENDING JULY 31, 1998 HIGH LOW
First Quarter $ 8 1/4 $ 5 1/4
Second Quarter 6 3/4 4 3/16
Third Quarter 5 1/2 4 1/4
Fourth Quarter 5 1/2 3 1/2
YEAR ENDING JULY 31, 1997 HIGH LOW
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
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, 1998, there were approximately 1,232 stockholders on record.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
(In millions, except per share data and statistics)
<TABLE>
<CAPTION>
FIVE-YEAR SUMMARY
YEAR ENDED JULY 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Customer Orders $ 194.0 193.9 233.6 236.9 197.0
Order Backlog $ 62.9 65.1 65.5 98.4 71.8
Sales $ 196.2 194.3 266.5 210.3 168.3
Cost of Sales $ 141.3 131.8 161.8 136.7 116.9
Provision for excess stock
and service stock $ 40.7 9.3 3.6 - 3.5
Engineering and Product
Development Expenses $ 34.3 23.4 22.9 19.8 19.6
Selling, General and
Administrative Expenses $ 50.8 39.0 46.8 39.0 42.3
Restructuring Charges $ 6.3 6.7 - - 14.4
Income (Loss) from Operations $ (77.1) (15.9) 31.4 14.8 (28.4)
Net Income (Loss) $ (78.3) (15.9) 30.3 10.7 (31.3)
PER SHARE DATA
Diluted Earnings (Loss)
per Share $ (2.15) (0.45) 0.82 0.36 (1.23)
Weighted Average Shares 36.4 35.5 36.8 29.8 25.5
Book Value per Share $ 1.58 3.82 4.33 2.23 1.55
FINANCIAL POSITION
Working Capital $ 34.0 115.1 137.6 62.2 48.9
Property and Equipment $ 35.4 43.0 37.9 28.4 28.9
Total Assets $ 141.0 213.5 235.3 145.9 130.6
Debt $ 25.5 32.4 36.3 37.1 48.7
Stockholders' Equity $ 56.0 140.2 155.0 65.4 40.6
Current Ratio 1.5 3.2 3.4 2.2 2.0
Asset Turnover 1.4 0.9 1.4 1.5 1.2
Debt as a % of Total
Capitalization % 31.3 18.8 19.0 36.2 54.5
OTHER INFORMATION
Additions to Property and
Equipment (Net) $ 8.8 16.1 20.0 10.2 12.7
Depreciation and Amortization $ 12.5 11.0 10.5 9.7 9.2
Employees 1,027 950 1032 944 880
Sales per Employee (000) $ 191 205 270 230 179
</TABLE>
11
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides an analysis of LTX's financial condition and
results of operations and should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this annual report
on Form 10-K. The discussion below contains certain forward-looking statements
relating to, among other things, estimates of economic and industry conditions,
sales trends, expense levels and capital expenditures. Actual results may vary
from those contained in such forward-looking statements. See "Business Risks"
below.
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
During the latter half of fiscal 1998 (primarily in the Company's fourth
quarter), the STE industry and the semiconductor and semiconductor equipment
industries experienced a significant decline in demand due to over capacity and
also due to the Asia currency revaluations and the resultant economic slowdown
in Asia and Japan. As a result of this steep decline and the Company's product
transition to Fusion, its system-on-a-chip test platform, the Company
experienced lower than expected revenues and consequently experienced losses
from operations. The Company initiated actions to restructure its operations
and recorded restructuring and other charges totaling $47.0 million during
fiscal 1998. This charge included $40.7 million for excess inventory and
service stock and $6.3 million for restructuring charges, including $3.1 million
of severance and $2.9 million related to the impairment of fixed assets. The
restructuring initiated by the Company included consolidating its San Jose
manufacturing facility with its Massachusetts facility, restructuring its sales
channels in Japan and Asia and divesting its iPTest division in the U.K. The
actions initiated will reduce the Company's workforce by approximately 30%; the
reduction of its workforce affected all functions of its business. Cash
expenditures associated with the restructuring and one-time charges are payable
over the next twelve months and are estimated to be $5.4 million.
In April 1998, the Company entered into an agreement with Ando to manufacture,
market and develop the Company's Fusion system-on-a-chip test platform for
Japanese customers, with certain exceptions. In exchange for certain
manufacturing and marketing rights for Fusion in Japan, Ando paid the Company
$10 million and delivered to the Company 1,600,000 shares of the Company's
common stock valued at $7.4 million. The Company recognized $7.4 million of
revenue relating to this transaction in fiscal 1998 and deferred $10 million of
revenue. The $10 million will be recognized ratably over the period in which the
Company transfers the manufacturing and technology rights. Ando has also agreed
to pay royalties to LTX on future sales of Fusion in Japan and reduced the
interest rate from 8.0% to 5.5% on the outstanding balance of debt owed to Ando,
effective March 30, 1998. At July 31, 1998, the outstanding balance on the Ando
debt was $12,000,000.
Net sales were $196.2 million in fiscal 1998 compared to $194.3 million in
fiscal 1997. The increase of $1.9 million includes $7.4 million of revenue
relating to the Company's alliance with Ando. Excluding the $7.4 million,
revenues for fiscal 1998 decreased by $5.5 million. The decrease in revenue
occurred during the latter half of fiscal 1998 as the STE and semiconductor
industries experienced significant decline in activity. The Company anticipates
that revenues will continue to be adversely affected by decreased demand for
semiconductors during fiscal 1999. Geographically, sales to customers outside
of North America were 60% and 67% of total net sales in fiscal 1998 and 1997,
respectively.
Excluding provisions for excess inventory and service stock and the $7.4
million of revenue relating to the Company's alliance with Ando, the Company's
gross profit margin was 25.2% and 32.1% of net sales for fiscal 1998 and 1997,
respectively. The decrease in the gross margin is a result of the change in the
Company's product mix coupled with lower sales prices due to the slowdown in the
industry and costs associated with the Company's transition to its Fusion
product line. The decrease also results from a lower level of sales relative to
fixed manufacturing costs. Including the provision for excess inventory and
service stock of $40.7 million in 1998 and $9.3 million in 1997, and the Ando
revenue, the gross profit margins were 7.3% and 27.4% of net sales for fiscal
1998 and 1997, respectively. The Company anticipates that its gross margin as a
percentage of sales will improve as revenues from its Fusion product line
increases and as the Company realizes the full impact of the consolidation of
its manufacturing facilities. The provision for excess inventory and service
stock is a result of inventory
12
<PAGE>
quantities on-hand exceeding current demand due to the significant decline in
the STE and semiconductor industries coupled with the Company's product
transition to Fusion.
Engineering and product development expenses were $34.3 million or 17.5% of
net sales in fiscal 1998 and $23.4 million or 12.0% of net sales in fiscal 1997.
During fiscal 1998, the Company invested resources in the development of its
single platform test system, Fusion, for testing system-on-a-chip devices.
Engineering and product development expenses are expected to decline as key
Fusion development projects are completed during fiscal 1999.
Selling, general and administrative expenses were $50.8 million and $39.0
million in fiscal 1998 and 1997, respectively. The increase of $11.7 million in
fiscal 1998 relates primarily to the expansion of the Company's sales
organization, increased advertising and promotion costs and the consolidation of
its operations. The majority of these costs are associated with the product
introduction of Fusion and the downturn in the STE and semiconductor industries.
The Company anticipates selling, general and administrative expenses will
decrease during fiscal 1999 as the Company realizes the savings of its
restructuring efforts.
Interest expense was $1.9 million in fiscal 1998 as compared to $2.4 million
in fiscal 1997. The lower interest expense is due to the reduction in long-term
debt and the applicable interest rates. Interest income was $1.9 million and
$2.9 million in fiscal 1998 and 1997, respectively. The decrease in interest
income is primarily due to lower cash balances during fiscal 1998.
The Company's tax provision in fiscal 1998 was $1.1 million as compared to
$0.4 million in fiscal 1997. The 1998 provision relates to the write-off of a
deferred tax asset previously recorded by the Company, net of certain tax
adjustments.
Industry conditions were severely depressed during the latter half of fiscal
1998, particularly in the Asian and Japan markets due to economic conditions in
those regions. Management believes that weak semiconductor equipment industry
conditions will continue for the near term. Until there is substantial
improvement in industry conditions, the Company's results of operations may
continue to be adversely affected. The Company's results of operations would be
further adversely affected if it were to experience lower than anticipated order
levels, cancellations of orders in backlog, extended customer delivery
requirements, lower than anticipated revenues or lower than anticipated margins
due to unfavorable product mix.
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.
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
13
<PAGE>
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 know as "system-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.
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, and 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.
Liquidity and Capital Resources
At July 31, 1998, the Company had $25.1 million in cash and equivalents and
working capital of $34.0 million in comparison to $67.8 million of cash and
equivalents and $115.1 million of working capital at July 31, 1997. The
majority of the decrease in cash and equivalents during fiscal 1998 relates to a
$21.5 million increase in inventory (before the inventory provision of $40.7
million), $8.8 million of additions to property and equipment and $5.8 million
of debt repayments, net of $10 million of cash received under the Ando alliance.
During fiscal 1998, the Company's subordinated note payable was reduced by
$4.0 million as result of regularly scheduled principal payments. The Company's
Japanese subsidiary had borrowings of $4.8 million at July 31, 1998 as compared
to $6.5 million at July 31, 1997.
In October 1998, the Company obtained a $10.0 million domestic credit facility
from a bank. The facility is secured by all assets of the Company and bears
interest at the bank's prime rate plus 1%. Borrowing available
14
<PAGE>
under the facility is based on a formula of eligible accounts receivable. During
fiscal 1998, the Company had a $20 million domestic credit facility which had no
outstanding borrowings and expired in July 1998. In addition, the Company had a
$5 million equipment lease line with the same banks which had an outstanding
balance of $2,278,000 at July 31, 1998. The bank has agreed to extend the
equipment lease line to October 31,1998.
The Company's working capital has continued to decrease subsequent to year-
end. The Company has taken and continues to take significant steps to reduce
spending and capital expenditures and sell its non-strategic assets. The
Company anticipates that these steps, combined with its working capital and its
recently obtained credit facility will be adequate to fund the Company's
currently proposed operating activities for the next twelve months. However, a
significant shortfall from plan as a result of further deterioration in the STE
industry or delayed acceptance of the Company's new Fusion products would
unfavorably impact the Company's cash flow. In that event, the Company would
need to seek additional debt or equity financing. There can be no assurance
that the Company could obtain the necessary financing.
Year 2000
A discussion of the impact of the Year 2000 to the Company appears in Item 7
of this Form 10-K under the heading "Business Risks".
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 1998 COMPARED TO FISCAL 1997," AS TO ANTICIPATED
REVENUES, MARGINS AND LEVELS OF ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES AND
THE COMPANY'S BELIEF, UNDER "LIQUIDITY AND CAPITAL RESOURCES," AS TO THE
ADEQUACY OF ITS CASH RESOURCES 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 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.
Asia Economic Conditions
In light of the economic downturn in certain Asian countries, there can be no
assurance that the Company will be able to obtain additional orders or that it
will not experience cancellations of existing orders from customers in or
dependent upon such countries, any of which would have an adverse effect on the
Company's business and results of operations.
15
<PAGE>
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.
Importance of New Product Introduction
The STE market is subject to rapid technological change and new product
introductions, as well as advancing industry standards. The development of
increasingly complex semiconductors and the utilization of semiconductors in a
broader spectrum of products 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 IC markets will depend upon
its ability to successfully enhance existing test systems, develop new
generations of test systems, such as its new Fusion platform, and to introduce
these new products 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
would 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 productions, that such
introduction will coincide with the development by semiconductor manufacturers
of their next generation semiconductors or that such products will satisfy
customer needs or achieve market acceptance. The failure to do so could
materially adversely affect the Company's business and results of operations.
Market Risk
Financial instruments that potentially subject the Company to concentrations
of credit-risk consist principally of investments in cash equivalents, short-
term investments and trade receivables. The Company places its investment with
high-quality financial institutions, limits the amount of credit exposure to any
one institution and has established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidity. The
Company's trade receivables result primarily from sales to semiconductors
manufacturers located in North America, Japan, the Pacific Rim and Europe.
Receivables are from major corporations or are supported by letters of credit.
The Company maintains reserves for potential credit losses and such losses have
been immaterial.
The fair value of the Company's notes payable and long-term liabilities is
estimated based on quoted market prices for the same or similar issues or on
current rates offered to the Company for debt of the same remaining maturities.
For all other balance sheet financial instruments, the carrying amount
approximates fair value.
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Year 2000
Many computer systems will experience problems handling dates beyond the Year
1999 because the systems are coded to accept only two-digit entries in the date
code field. The Company is assessing the readiness of its products sold to
customers for handling Year 2000 issues, as well as its own internal business
systems and the products and internal business systems of its suppliers. In
connection with the foregoing, the Company has established a Year 2000 Program
to address both LTX product compliance and internal business systems and
suppliers compliance. The Program is sponsored by a member of senior management
who is charged with apprising senior management and the Board of Directors of
the status of the Company's compliance efforts.
Certain hardware and software products currently installed at sites will
require upgrade or other remediation to become Year 2000 compliant. The Company
is identifying and contacting affected customers to advise them of non-compliant
products. The Company has established three ongoing product-based teams to
ensure product compliance. The teams are managed in accordance with the
Company's engineering product development process. The Company anticipates that
it will incur costs of approximately $300,000 to make its products Year 2000
compliant. A majority of such Year 2000 compliance expenses is represented by
existing engineering personnel assigned to the project. The Company does not
believe that there will be a material adverse impact as a result of making its
products Year 2000 compliant since the Company's products are not "date
dependent".
The Company also has established a team to assess Year 2000 readiness of its
internal business systems (including its facilities) and the products and
internal business systems of its suppliers. The team has identified all mission
critical systems and plans have been formulated to ensure Year 2000 compliance.
It is anticipated that the Company will incur costs of approximately $300,000 in
making its internal business systems Year 2000 compliant. There can be no
assurance, however, that the Company will not experience unanticipated material
costs caused by undetected errors or defects in such systems.
The impact to the Company of Year 2000 will also be dependent on the manner in
which Year 2000 issues are addressed by third parties that either provide or
receive services or data to or from the Company or whose operations are critical
to the Company. To reduce this risk, the team has been identifying mission
critical third parties to determine their Year 2000 compliance. The Company is
also developing contingency plans if these third parties fail to address
adequately Year 2000 issues. These plans primarily involve identifying
alternative vendors and suppliers. There can be no assurance that these plans
will fully address these problems and whether such alternative sources are in
fact available.
Although the Company does not believe that there will be any material adverse
impact to its operations and products as a result of the Year 2000, there can be
no assurance that the Company will not experience unanticipated costs and
consequences caused by Year 2000 which could have a material adverse effect on
the Company's business, financial condition and results of operations.
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.
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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.
Proprietary Rights
The Company's future success depends in part upon its proprietary technology.
Although the Company attempts to protect its proprietary technology through a
combination of contract provisions, trade secrets, copyrights and patents, it
believes that its future success depends more upon its engineering,
manufacturing, marketing and service skills. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or the independent development by
others of similar technology. Although there are no pending actions against the
Company regarding any patents, no assurance can be given that infringement
claims by third parties will not have a material adverse effect on the Company's
business and results of operations.
Acquisitions
The Company from time to time may acquire technologies, product lines or
businesses that are complementary to those of the Company. Although the Company
believes that integration of acquired technologies, product lines and businesses
will result in long-term growth and profitability, there can be no assurance
that the Company will be able to successfully negotiate, finance or integrate
such acquired technologies, product lines or business. Furthermore, the
integration of an acquired company or business may cause a diversion of
management time and resources. There can be no assurance that a given
acquisition, if consummated, would not materially adversely affect the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion of the Company's exposure to and management of market risk apears
in Item 7 of this Form 10-K under the heading "Business Risks".
18
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998 1997 1996
<S> <C> <C> <C>
Net sales $ 196,227 $ 194,343 $ 266,476
Cost of sales $ 141,274 131,870 161,794
Inventory provisions $ 40,718 9,250 3,600
----------------------------------------------------------------------------------------------------------
Gross Profit $ 14,235 53,223 101,082
Engineering and product development expenses $ 34,320 23,350 22,927
Selling, general and administrative expenses $ 50,772 39,049 46,787
Restructuring charges $ 6,272 6,750 -
----------------------------------------------------------------------------------------------------------
Income (loss) from operations $ (77,129) (15,926) 31,368
Other income (expense):
Interest expense $ (1,898) (2,443) (2,529)
Interest income $ 1,877 2,876 2,826
----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ (77,150) (15,493) 31,665
Provision for income taxes $ 1,130 416 1,395
----------------------------------------------------------------------------------------------------------
Net income (loss) $ (78,280) $ (15,909) $ 30,270
----------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ (2.15) $ (0.45) $ 0.89
Diluted $ (2.15) $ (0.45) $ 0.82
Weighted average shares:
Basic 36,401 35,476 34,011
Diluted 36,401 35,476 36,755
----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
19
<PAGE>
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
AT JULY 31, 1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 25,109 $ 67,800
Accounts receivable, net of allowances
of $2,200 and $1,100 33,871 37,616
Accounts receivable - other 2,044 3,229
Inventories 38,264 54,947
Other current assets 3,633 4,016
- -------------------------------------------------------------------------------------------
Total current assets 102,921 167,608
- -------------------------------------------------------------------------------------------
Property and equipment, net 35,427 42,958
Other assets 2,671 2,980
- -------------------------------------------------------------------------------------------
$ 141,019 $ 213,546
- -------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 4,827 $ 6,471
Current portion of long-term debt 5,106 5,043
Accounts payable 25,020 26,808
Deferred revenues and customer advances 15,045 5,156
Accrued restructuring charges 4,395 513
Other accrued expenses 14,570 8,499
- -------------------------------------------------------------------------------------------
Total current liabilities 68,963 52,490
- -------------------------------------------------------------------------------------------
Long-term debt, less current portion 8,235 13,550
Other long-term liabilities 563 -
Convertible subordinated debentures 7,308 7,308
Stockholders' equity:
Common stock, $0.05 par value:
100,000,000 shares authorized; 38,024,440 and
37,624,668 shares issued; 35,476,940 and
36,677,168 shares outstanding 1,902 1,881
Additional paid-in capital 197,209 195,798
Accumulated deficit (131,400) (53,120)
Less - treasury stock (2,547,500 and
947,500 shares), at cost (11,761) (4,361)
- -------------------------------------------------------------------------------------------
Total stockholders' equity 55,950 140,198
- -------------------------------------------------------------------------------------------
$ 141,019 $ 213,546
- -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
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, 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
- -----------------------------------------------------------------------------------------------------------------------------
Exercise of stock options 108,515 6 301 - - 307
Issuance of shares under employees'
stock purchase plan 291,257 15 1,110 - - 1,125
Purchase of treasury stock (1,600,000) - 0 - (7,400) (7,400)
Net loss - - 0 (78,280) - (78,280)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1998 35,476,940 $ 1,902 $ 197,209 $ (131,400) $ (11,761) $ 55,950
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands except share data)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998 1997 1996
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (78,280) $ (15,909) $ 30,270
Add (deduct) non-cash items:
Depreciation and amortization 12,510 11,038 10,533
Inventory provisions 40,718 9,250 -
Translation (gain) loss (47) (100) (562)
(Increase) decrease in:
Accounts receivable 2,842 4,762 (14,319)
Inventories (21,529) 2,299 (19,395)
Other current assets 383 1,191 (310)
Other assets 313 530 415
Increase (decrease) in:
Accounts payable 1,753 (4,533) 6,946
Accrued expenses and restructuring charges 1,124 2,985 (5,177)
Deferred revenues and customer advances 9,889 (1,273) (728)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (30,324) 10,240 7,673
- -------------------------------------------------------------------------------------------------------------------
Purchases of held-to-maturity securities, net - - (9,941)
Maturities of held-to-maturity securities, net - 9,941 -
Expenditures for property and equipment (8,795) (16,116) (20,006)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,795) (6,175) (29,947)
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from stock plans:
Employees' stock purchase plan 1,124 1,334 1,294
Exercise of stock options 308 780 538
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 (520) (993) 1,250
Proceeds from lease financing 1,451 2,975 -
Payments of long-term debt (5,253) (5,090) (486)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,890) (2,040) 59,698
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (682) (294) (538)
- -------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (42,691) 1,731 36,886
Cash and equivalents at beginning of year 67,800 66,069 29,183
- -------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 25,109 $ 67,800 $ 66,069
- -------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 2,062 $ 2,451 $ 2,529
Income taxes $ 716 $ 725 $ 1,953
Supplemental Disclosure of Non-Cash Financing Activities:
1,600,000 shares of LTX Common Stock received by LTX
as consideration for certain marketing, sales and
manufacturing rights and held in treasury $ 7,400 $ - $ -
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
Notes to Consolidated Financial Statements
1. THE COMPANY
- ----------------
LTX Corporation (the Company) designs, manufactures, and markets automated
test equipment for the semiconductor industry that is used to test digital,
analog, and mixed signal (a combination of digital and analog) 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.
The Company incurred a significant loss and used $42.7 million of cash in
fiscal year 1998. The Company has taken and continues to take significant steps
to reduce spending and capital expenditures. The Company anticipates that these
steps, combined with its working capital and its recently obtained credit
facility will be adequate to fund the Company's currently proposed operating
activities for the next twelve months. However, a significant shortfall from
plan, as a result of further deterioration in the STE industry or delayed
acceptance of the Company's new Fusion products would unfavorably impact the
Company's cash flow. In that event, the Company would need to seek additional
debt or equity financing. There can be no assurances that the Company could
obtain the necessary financing.
The Company initiated actions to restructure its operations and recorded
restructuring and other charges totaling $47.0 million during fiscal 1998. This
charge included $40.7 million for excess inventory and service stock and $6.3
million for restructuring charges including $3.1 million of severance and $2.9
million related to the impairment of fixed assets. Cash expenditures associated
with the restructuring and one-time charges, are payable over the next twelve
months and are estimated to be $5.4 million.
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.
23
<PAGE>
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. Revenue from engineering
contracts are recognized over the contract period on a percentage of completion
basis.
During April 1998 Ando Electric Co., Ltd. (Ando) paid the Company $17,400,000
in cash and LTX Common Stock for the rights to manufacturer, market and develop
LTX's Fusion product for Japanese customers. The Company recognized $7,400,000
of revenue during fiscal 1998 for the sale of its marketing and development
rights. The Company deferred $10 million of revenue related to the
manufacturing rights and transfer of technology knowledge. The $10 million will
be recognized ratably over the period in which the Company transfers the
manufacturing and technology rights. In addition, the Company will receive
future royalty payments which will be recognized as revenue in the period
earned.
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 that they can be used to reduce the tax provision. The Company has not
provided for federal income taxes on the cumulative undistributed earnings of
its foreign subsidiaries, which were not significant, in the past since it
reinvested those earnings. At July 31, 1998, most of the Company's foreign
subsidiaries had accumulated deficits.
NET INCOME (LOSS) PER SHARE
In July 1998, the Company adopted Statement of Financial Accounting Standards,
"Earnings Per Share," (SFAS 128). All previously reported earnings per share
information presented has been restated to reflect the impact of adopting SFAS
128.
Under SFAS 128, basic net income (loss) per common share is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted income
(loss) per common share reflects the maximum dilution that would have resulted
from the assumed exercise and share repurchase related to dilutive stock options
and is computed by dividing net income (loss) by the weighted average number of
common shares and all dilutive securities outstanding.
A reconciliation between basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income (loss) $(78,280) $(15,909) $30,270
Basic EPS
Basic common shares 36,401 35,476 34,011
Basic EPS $ (2.15) $ (0.45) $ 0.89
Diluted EPS
Basic common shares 36,401 35,476 34,011
Plus: Impact of stock options and warrants - - 2,744
-------- -------- -------
Diluted common shares 36,401 35,476 36,755
Diluted EPS $ (2.15) $ (0.45) $ 0.82
</TABLE>
24
<PAGE>
Options to purchase 3,966,793 shares of common stock in 1998 and 3,260,283
shares in 1997 were outstanding during the years there ended, but were not
included in the year to date calculation of diluted net income (loss) per common
share because the options' exercise price was greater than the average market
price of the common shares during those periods.
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. In accordance with the Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", investments in debt securities are classified as trading,
available-for-sale or held-to-maturity. Investments are classified as held-to-
maturity when the Company has the positive intent and ability to hold those
securities to maturity. Held-to-maturity securities are stated at amortized
cost with premiums and discounts amortized to interest income over the life of
the investment.
The Company has no short-term investments as of July 31, 1998. 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," 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, 1998 and 1997, the
carrying value of $4,827,000 and $6,471,000, respectively, for notes payable and
$13,904,000 and $18,593,000, respectively, for long-term liabilities, including
current portion, approximates fair value. At July 31, 1998, and 1997, 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 $4,092,000
and $6,200,000, respectively. For all other balance sheet financial
instruments, the carrying amount approximates fair value.
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, 1998 1997
<S> <C> <C>
Raw materials $ 14,400,000 $ 14,482,000
Work-in-process 19,419,000 24,409,000
Finished goods 4,445,000 16,056,000
----------------------------------------------------
$ 38,264,000 $ 54,947,000
</TABLE> ----------------------------------------------------
25
<PAGE>
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, 1998 1997 Depreciable
Life in Years
<S> <C> <C> <C>
Machinery and equipment $ 100,519,000 $ 95,755,000 3-5
Office furniture and equipment 9,219,000 9,040,000 3-7
Leasehold improvements 8,783,000 8,133,000 10 or term
of lease
- ---------------------------------------------------------------------------------------
118,521,000 112,928,000
Less: accumulated depreciation
and amortization (83,094,000) (69,970,000)
- ---------------------------------------------------------------------------------------
$ 35,427,000 $ 42,958,000
- ---------------------------------------------------------------------------------------
</TABLE>
RECLASSIFICATIONS
Prior year financial statements have been reclassified to conform to the 1998
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
statement is effective for fiscal 1999 and requires comprehensive income to be
reported with the same prominence as other financial statements. Comprehensive
income would include any unrealized gains or losses on available-for-sale
securities, foreign currency translation adjustments and minimum pension
liability adjustments.
In June 1997, the Financial Accounting Standards Board also issued Statement
of Financial Accounting Standards No. 131. Disclosures About Segments of an
Enterprise and Related Information (SFAS 131). The statement is effective for
fiscal 1999. SFAS 131 changes the definition and reporting of segments and
requires disclosure by operating segment of information such as profit and loss,
assets and capital expenditures, major customers and types of products from
which revenues are derived.
3. NOTES PAYABLE
- ------------------
The Company's Japanese subsidiary had borrowings outstanding of $4,827,000 at
July 31, 1998, under demand bank lines of credit. Borrowings of $4,482,000, at
the local prime rate plus 1/4%, are guaranteed by the Company's minority
partner in Japan, and borrowings of $345,000, at the local prime plus 3/4%,
under a $1,382,000 demand bank line, are guaranteed by the Company. At July 31,
1997, the Company's Japanese subsidiary had borrowings outstanding of $6,471,000
under demand bank lines of credit.
On October 26, 1998, the Company obtained a $10 million domestic credit
facility from a bank. The facility is secured by all assets of the Company and
bears interest at the bank's prime rate plus 1%. The borrowing base of the
facility is based on a formula of eligible accounts receivable. The agreement
requires the Company to maintain a certain minimum net worth. During fiscal
1998, the Company had a $20 million domestic credit facility and a $5 million
equipment lease line. The $20 million credit facility has no outstanding
borrowings and expired in July 1998. The outstanding equipment lease balance was
$2,278,000 at July 31, 1998. The bank has agreed to extend the equipment lease
line to October 31, 1998.
26
<PAGE>
4. LONG-TERM LIABILITIES
- --------------------------
Long-term liabilities consist of the following:
<TABLE>
<CAPTION>
JULY 31
1998 1997
---------------------------
<S> <C> <C>
Subordinated note payable $12,000,000 $16,000,000
Lease purchase obligations at various
Interest rates, net of deferred interest 1,341,000 2,593,000
- ------------------------------------------------------------------------
13,341,000 18,593,000
Less: current portion (5,106,000) (5,043,000)
- ------------------------------------------------------------------------
$ 8,235,000 $13,550,000
- ------------------------------------------------------------------------
</TABLE>
The subordinated note payable bears interest at 5.5% at July 31, 1998 and 8.0%
at July 31, 1997, which is payable semi-annually and has semi-annual principal
payments of $2,000,000, which began in January 1997. The note is unsecured 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 remains outstanding at July 31, 1998 and 1997. 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 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.
6. INCOME TAXES
- -----------------
The components of the provision for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998 1997 1996
<S> <C> <C> <C>
Currently payable:
Federal $ (818,000) $ 1,000,000 $ 600,000
State (526,000) 200,000 195,000
Foreign 274,000 216,000 600,000
Total current $(1,070,000) $ 1,416,000 $1,395,000
Deferred:
Federal $ 2,200,000 $(1,000,000) $ -
State - - -
Foreign - - -
Total deferred $ 2,200,000 $(1,000,000) $ -
Total tax provision $ 1,130,000 $ 416,000 $1,395,000
</TABLE>
27
<PAGE>
Reconciliations of the U.S. federal statutory rate to the Company's effective
tax rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998 1997 1996
<S> <C> <C> <C>
U.S. Federal statutory rate (35.0)% (35.0)% 35.0%
State income taxes, net of
Federal income tax effect (.7) 0.8 0.4
Foreign income taxes .4 - (1.4)
Change in valuation allowance 31.5 17.9 (3.0)
Foreign operating losses not benefited 4.5 17.4 -
Tax credits - (2.1) (4.2)
Benefit of net operating loss carryforward - - (18.6)
Other, net .8 3.7 (3.8)
----------------------------------------------------------------------
Effective tax rate 1.5% 2.7% 4.4%
----------------------------------------------------------------------
</TABLE>
The temporary differences and carryfowards that created the deferred tax
assets and liabilities as of July 31, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
AT JULY 31, 1998 1997
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 13,616,000 $ -
Tax credits 2,388,000 1,959,000
Inventory valuation reserves 10,329,000 3,680,000
Restructuring charges 2,356,000 4,604,000
Spares amortization 3,228,000 3,936,000
Unearned service revenues 3,500,000 1,168,000
Other 2,974,000 1,776,000
----------------------------------------------------------------------
Total deferred tax assets 38,391,000 17,123,000
Valuation allowance (37,997,000) (13,367,000)
----------------------------------------------------------------------
Net deferred tax assets 394,000 3,756,000
Deferred tax liabilities:
Depreciation (394,000) (632,000)
Other - (924,000)
----------------------------------------------------------------------
Total deferred tax liabilities (394,000) (1,556,000)
----------------------------------------------------------------------
Net deferred taxes recorded $ - $ 2,200,000
----------------------------------------------------------------------
</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. Under this program, the Company purchased 747,500
shares during fiscal 1997 which are held in treasury at a cost of $3,356,000.
The stock repurchase program expired in June 1997.
28
<PAGE>
In April 1998, the Company entered into an agreement with the subordinated
note holder to market and develop the Company's Fusion product line. As part of
this agreement, the subordinated note holder delivered to the Company 1,600,000
shares of the Company's common stock. The Company recorded this stock in
treasury at its then fair market value of $7,400,000.
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.
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 of 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 1997, 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 3,700,000 shares to 5,225,000 shares. At
July 31, 1998, 1,067,626 shares were subject to future grant under the 1990 Plan
and 38,000 shares were subject to future grant under the U.K. Plan.
COMPENSATION EXPENSE
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), requires employee stock-based compensation to be either recorded or
disclosed at its fair value. As permitted by SFAS 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
1998 and 1997 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 SFAS 123, the effect on the Company's net income (loss) and net income
(loss) per share would have been as follows:
29
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998 1997
<S> <C> <C>
NET LOSS:
As reported $(78,280) $(15,909)
Pro forma $(81,154) $(17,535)
NET LOSS PER SHARE:
Basic
As reported $ (2.15) $ (0.45)
Pro forma $ (2.23) $ (0.49)
Diluted
As reported $ (2.15) $ (0.45)
Pro forma $ (2.23) $ (0.49)
</TABLE>
Since the method prescribed by SFAS 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.
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, 1998 1997
<S> <C> <C>
Volatility 79% 83%
Dividend yield 0% 0%
Risk-free interest rate 4.44% 5.875%
Expected life of options 7.95 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.
30
<PAGE>
Stock Option Activity
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998 1997 1996
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year 3,260,283 $ 3.94 2,025,227 $ 3.35 2,034,069 $ 2.77
Granted 1,178,250 $ 4.57 1,753,750 $ 4.82 225,500 $ 8.58
Exercised (108,515) $ 2.83 (333,955) $ 2.51 (228,842) $ 2.24
Forfeited (143,225) $ 4.96 (184,739) $ 7.15 (5,500) $ 1.86
Options outstanding,
end of year 4,186,793 $ 4.26 3,260,283 $ 3.94 2,025,227 $ 3.35
Options exercisable 1,612,478 $ 3.46 1,707,496 $ 2.88 1,469,082 $ 2.52
Options available
for grant 1,105,626 636,846 2,205,857
Weighted average fair
value of options
granted during year $ 3.55 $ 3.38 $ 8.42
</TABLE>
31
<PAGE>
As of July 31, 1998, the status of the Company's outstanding and exercisable
options is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------------------
Range of Exercise Number Weighted Average Weighted Average Number Exercisable Weighted Average
Price Outstanding Remaining Exercise Exercise
Contractual Life Price Price
<S> <C> <C> <C> <C> <C>
$ 0.00 - $ 1.26 159,500 6.4 $ 0.96 137,135 $ 0.95
$ 1.26 - $ 2.53 637,108 3.1 $ 1.99 637,108 $ 1.99
$ 2.53 - $ 3.79 306,035 2.9 $ 3.52 306,035 $ 3.52
$ 3.79 - $ 5.05 2,193,100 8.9 $ 4.46 192,700 $ 4.60
$ 5.05 - $ 6.31 726,300 8.2 $ 5.51 274,800 $ 5.63
$ 6.31 - $ 7.58 37,750 7.4 $ 7.13 11,000 $ 6.85
$ 7.58 - $ 8.84 48,000 8.8 $ 8.09 4,400 $ 8.25
$ 8.84 - $ 10.10 4,000 7.9 $ 8.94 2,200 $ 8.94
$ 10.10 - $ 12.63 75,000 6.9 $11.50 47,100 $11.50
--------- --------- --------- --------- ---------
4,186,793 7.3 $ 4.26 1,612,478 $ 3.46
</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 purchase
of common stock of the Company up to $25,000 of fair market value of the stock
per calendar year. The plan limited the number of shares which can be issued for
any semi-annual plan period to 150,000 shares. In 1997, the shareholders of the
Company increased the number of shares which can be issued over the term of the
plan to 1,500,000 shares. At July 31, 1998, 85,218 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 $1,056,000 in fiscal 1998 and $1,035,000 in fiscal 1997.
32
<PAGE>
9. GEOGRAPHIC AREA INFORMATION
- -------------------------------
The Company's operations by geographic segment for the three years ended July
31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1998 1997 1996
<S> <C> <C> <C>
Sales to unaffiliated customers:
North America $ 77,905,000 $ 64,183,000 $ 95,086,000
Europe $ 21,725,000 $ 29,003,000 $ 40,193,000
Japan $ 30,388,000 $ 15,147,000 $ 17,461,000
Rest of world (principally Pacific $ 66,209,000 $ 86,010,000 $113,736,000
Rim)
- -----------------------------------------------------------------------------------------------------------
Total sales to unaffiliated customers $196,227,000 $194,343,000 $266,476,000
- -----------------------------------------------------------------------------------------------------------
Transfers between geographic areas:
United States $ 18,615,000 $ 34,826,000 $ 40,973,000
Europe $ 6,727,000 $ 7,772,000 $ 10,156,000
Japan $ 110,000 $ 100,000 $ 315,000
- -----------------------------------------------------------------------------------------------------------
Total transfers between geographic areas $ 25,452,000 $ 42,698,000 $ 51,444,000
- -----------------------------------------------------------------------------------------------------------
Income (loss) from operations:
United States $(67,688,000) $ (8,845,000) $ 30,310,000
Europe $ (6,839,000) $ (4,598,000) $ 191,000
Japan $ (1,272,000) $ (1,151,000) $ 582,000
Eliminations $ (1,330,000) $ (1,332,000) $ 285,000
- -----------------------------------------------------------------------------------------------------------
Total income (loss) from operations $(77,129,000) $(15,926,000) $ 31,368,000
- -----------------------------------------------------------------------------------------------------------
Identifiable assets:
United States $153,426,000 $224,737,000 $228,187,000
Europe $ 10,391,000 $ 13,006,000 $ 20,529,000
Japan $ 4,163,000 $ 14,199,000 $ 14,129,000
Eliminations $(26,961,000) $(38,396,000) $(27,526,000)
- -----------------------------------------------------------------------------------------------------------
Total identifiable assets $141,019,000 $213,546,000 $235,319,000
- -----------------------------------------------------------------------------------------------------------
</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.
33
<PAGE>
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 noncancelable leases at July 31, 1998,
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, TOTAL TOTAL
OPERATING CAPITAL
REAL ESTATE EQUIPMENT LEASES LEASES
<S> <C> <C> <C> <C>
1999 $ 2,625,000 $1,997,000 $ 4,622,000 $1,183,000
2000 2,031,000 1,800,000 3,831,000 157,000
2001 1,960,000 1,374,000 3,334,000 105,000
2002 1,960,000 409,000 2,369,000 -
2003 1,955,000 409,000 2,364,000 -
2004 and thereafter 7,892,000 1,465,000 9,357,000 -
- ---------------------------------------------------------------------------------------------------------------------
Total minimum
lease payments $18,423,000 $7,454,000 $25,877,000 $1,445,000
- ---------------------------------------------------------------------------------------------------------------------
Less: amount
representing interest $ (104,000)
- ---------------------------------------------------------------------------------------------------------------------
Present value of total
capital leases $1,341,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Total rental expense for fiscal 1998, 1997 and 1996 was $6,713,000, $7,257,000
and $7,993,000 respectively.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDING JULY 31, 1998 First SECOND THIRD FOURTH(1)
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
Net sales $54,206 $55,132 $54,130 $ 32,759
Gross profit 19,006 19,978 14,364 (39,113)
Net income (loss) 1,108 765 (6,334) (73,819)
Net income (loss) per share:
Basic and diluted 0.03 0.02 (0.17) (2.09)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDING JULY 31, 1997 First(2) SECOND THIRD FOURTH
QUARTER 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:
Basic and diluted (0.53) 0.01 0.02 0.05
</TABLE>
(1) The Company recorded an inventory provision of $40.7 million and a
restructuring charge of $6.3 million in its fourth quarter results of
operations.
(2) The Company recorded an inventory provision of $9.3 million and a product
line restructuring charge of $6.7 million in its first quarter results of
operations.
34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of LTX Corporation:
We have audited the accompanying balance sheet of LTX Corporation and
subsidiaries as of July 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended July 31, 1998. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
August 31, 1998 (except with respect to the matter
discussed in Note 3, as to which the date is October 26, 1998)
35
<PAGE>
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, File No. 33-65247, File No. 33-
48363 and File No. 33-48341).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 26, 1998
36
<PAGE>
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 AND
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under these Items is included in the Proxy Statement
for the Annual Meeting of Stockholders to be held on December 8, 1998, 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, 1998.
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, 1998, are included in Item 8, herein.
Report of Independent Public Accountants
Consolidated Balance Sheet - July 31, 1998 and 1997
Consolidated Statement of Operations for the years ended July 31, 1998,
1997 and 1996
Consolidated Statement of Stockholders' Equity for the years ended July
31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended July 31, 1998,
1997 and 1996
Notes to the Consolidated Financial Statements
37
<PAGE>
(A) 2. SCHEDULES
SCHEDULE II
LTX CORPORATION
---------------
VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED JULY 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Balance
beginning Charged to Amounts at end
Description of period expense written off of period
---------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts
July 31, 1998 $ 1,100 $ 2,230 $ (1,130) $ 2,200
July 31, 1997 $ 900 $ 206 $ (6) $ 1,100
July 31, 1996 $ 700 $ 425 $ (225) $ 900
Accrued restructuring
charges
July 31, 1998 $ 513 $ 6,272 $ (2,390) $ 4,395
July 31, 1997 $ 1,198 $ 6,750 $ (7,435) $ 513
July 31, 1996 $ 6,087 $ - $ (4,889) $ 1,198
</TABLE>
38
<PAGE>
(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-I 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. I 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; the Company's Annual Reports on Form 10-K for one of the
years ended July 31, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988,
1987, 1986, 1985, 1984 and 1983; or the Company's Quarterly Reports on 10-Q for
one of the quarters ended October 31, 1997, January 31, 1998 and April 30, 1998
and are hereby incorporated by reference. The location of each document so
incorporated by reference is noted parenthetically.
(A) LISTING OF EXHIBITS
(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(B) to the Quarterly Report on
Form 10-Q for the quarter ended October 31, 1997).
(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 I of the Registrant's Current Report
on Form 8-K, filed May 11, 1989), as amended by Amendment No. I
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 Quarterly Report
on Form 10-Q for the quarter ended January 31, 1998).
(10) (D)+ - 1993 Employees' Stock Purchase Plan. (Exhibit 10(D) to the
Quarterly Report on Form 10-Q for the quarter ended January 31,
1998).
(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)
39
<PAGE>
(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., LT'X Corporation and LTX Co., Ltd. (Exhibit
10(N) to the 1990 Registration Statement No.1)
(10) (0) - 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)
(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 October 26, 1998 between LTX
Corporation 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. I 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) to the 1997
Annual Report on Form 10-K).
(10) (Y) - Form of Change of Control Agreement entered into with certain
executive officers as of March 2, 1998 (Exhibit 10 (Y) to the
Quarterly Report on Form 10-Q for the quarter ended
January 31, 1998)
(10) (AA)* - Fusion Agreement dated as of April 24, 1998 between LTX
Corporation and Ando Electric Co., Ltd. (Exhibit 10 (AA) to the
Quarterly Report on Form 10-Q for the quarter ended
April 30, 1998)
(22) - Subsidiaries of Registrant
40
<PAGE>
(27) - Financial Data Schedules (Exhibit 27 hereto)
_____________
+ 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 1998.
ITEM 14(C). EXHIBITS
Exhibit 22 - Subsidiaries of Registrant
<TABLE>
<CAPTION>
Company
<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................................ 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.
41
<PAGE>
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
By /s/ ROGER W. BLETHEN
---------------------------------------
Roger W. Blethen
Chief Executive Officer, President
and Director
October 28, 1998
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.
/s/ SAMUEL RUBINOVITZ Chairman of the Board October 28, 1998
- -------------------------
(Samuel Rubinovitz)
/s/ ROGER W. BLETHEN Chief Executive Officer, October 28, 1998
- ------------------------- President and Director
(Roger W. Blethen) (Principal Executive Officer)
/s/ CAROL B. LANGER Chief Financial Officer October 28, 1998
- ------------------------- (Principal Financial and
(Carol B. Langer) Accounting Officer)
/s/ ROBERT J. BOEHLKE Director October 28, 1998
- --------------------------
(Robert J. Boehlke)
/s/ JACQUES BOUYER Director October 28, 1998
- --------------------------
(Jacques Bouyer)
/s/ STEPHEN M. JENNINGS Director October 28, 1998
- --------------------------
(Stephen M. Jennings)
/s/ ROGER J. MAGGS Director October 28, 1998
- --------------------------
(Roger J. Maggs)
/s/ ROBERT E. MOORE Director October 28, 1998
- -------------------------
(Robert E. Moore)
42
<PAGE>
SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: LTX CORPORATION
ADDRESS: UNIVERSITY AVENUE
WESTWOOD, MASSACHUSETTS 02090
DATE: OCTOBER 26, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named
above (jointly and severally, the "Borrower"), whose chief executive office is
located at the above address ("Borrower's Address"). The Schedule to this
Agreement (the "Schedule") shall for all purposes be deemed to be a part of this
Agreement, and the same is an integral part of this Agreement. (Definitions of
certain terms used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount of
Obligations that may be outstanding from time to time, Borrower shall pay
Silicon minimum monthly interest during the term of this Agreement in the amount
set forth on the Schedule (the "Minimum Monthly Interest").
1.3 OVERADVANCES. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 FEES. Borrower shall pay Silicon the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Silicon and are
not refundable.
1.5 LETTERS OF CREDIT. At the request of Borrower, Silicon may, in its
sole discretion, issue or arrange for the issuance of letters of credit for the
account of Borrower, in each case in form and substance satisfactory to Silicon
in its sole discretion (collectively, "Letters of Credit"). The aggregate face
amount of all outstanding Letters of Credit from time to time shall not exceed
the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be
reserved against Loans which would otherwise be available hereunder. Borrower
shall pay all bank charges (including charges of Silicon) for the issuance of
Letters of Credit, together with such additional fee as Silicon's letter of
credit department shall charge in connection with the issuance of the Letters of
Credit. Any payment by Silicon under or in connection with a Letter of Credit
shall constitute a Loan hereunder on the date such payment is made. Each Letter
of Credit shall have an expiry date no later than thirty days prior to the
Maturity Date. Borrower hereby agrees to indemnify, save, and hold Silicon
harmless from any loss, cost, expense, or liability, including payments made by
Silicon, expenses, and reasonable attorneys' fees incurred by Silicon arising
out of or in connection with any Letters of Credit. Borrower agrees to be bound
by the regulations and interpretations of the issuer of any Letters of Credit
guarantied by Silicon and opened for Borrower's account or by Silicon's
interpretations of any Letter of Credit issued by Silicon for Borrower's
account, and Borrower understands and agrees that Silicon shall not be liable
for any error, negligence, or mistake, whether of omission or commission, in
following Borrower's instructions or those contained in the Letters of Credit or
any modifications, amendments, or supplements thereto. Borrower understands that
Letters of Credit may require Silicon to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify and hold Silicon harmless with respect
to any
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loss, cost, expense, or liability incurred by Silicon under any Letter of Credit
as a result of Silicon's indemnification of any such issuing bank. The
provisions of this Loan Agreement, as it pertains to Letters of Credit, and any
other present or future documents or agreements between Borrower and Silicon
relating to Letters of Credit are cumulative.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to Silicon a security interest
in all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): All Inventory,
Equipment, Receivables, and General Intangibles, including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Silicon's pos session (including claims and credit
balances), and all proceeds (including proceeds of any insurance policies,
proceeds of proceeds and claims against third parties), all products and all
books and records related to any of the foregoing (all of the foregoing,
together with all other property in which Silicon may now or in the future be
granted a lien or security interest, is referred to herein, collectively, as the
"Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Silicon at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others. None of the Collateral now is or will be affixed to any real property
in such a manner, or with such intent, as to become a fixture. Borrower is not
and will not become a lessee under any real property lease pursuant to which the
lessor may obtain any rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any Collateral
is located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or otherwise),
Borrower shall, whenever requested by Silicon, use its best efforts to cause
such third party to execute and deliver to Silicon, in form acceptable to
Silicon, such waivers and subordinations as Silicon shall specify, so as to
ensure that Silicon's rights in the Collateral are, and will continue to be,
superior to the rights of any such third party. Borrower will keep in full force
and effect, and will comply with all the terms of, any lease of real property
where any of the Collateral now or in the future may be located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Silicon in writing of any
material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last date
covered by any such statement provided to Silicon and the date hereof, there has
been no material adverse change in the financial condition or business of
Borrower. Borrower is now and will continue to be solvent.
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3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be,
and all signatories and endorsers have the capacity to contract. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Silicon transaction reports and loan requests, schedules and
assignments of all Receivables, and schedules of collections, all on Silicon's
standard forms; provided, however, that Borrower's failure to execute and
deliver the same shall not affect or limit Silicon's security interest and other
rights in all of Borrower's Receivables, nor shall Silicon's failure to advance
or lend against a specific Receivable affect or limit Silicon's security
interest and other rights therein. Loan requests received after 12:00 Noon will
not be considered by Silicon until the next Business Day. Together with each
such schedule and assignment, or later if requested by Silicon, Borrower shall
furnish Silicon with copies (or, at Silicon's request, originals) of all
contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Silicon an aged accounts receivable trial balance
in such form and at such intervals as Silicon shall request. In addition,
Borrower shall deliver to Silicon the originals of all instruments, chattel
paper, security agreements, guarantees and other documents and property
evidencing or securing any Receivables, immediately upon receipt thereof and in
the same form as received, with all necessary endorsements, all of which shall
be with recourse. Borrower shall also provide Silicon with copies of all credit
memos within two days after the date issued.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to the
Obligations in such order as Silicon shall determine. Silicon may, in its
discretion, require that all proceeds of Collateral be deposited by Borrower
into a lockbox account, or such other "blocked account" as Silicon may
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specify, pursuant to a blocked account agreement in such form as Silicon may
specify. Silicon or its designee may, at any time, notify Account Debtors that
the Receivables have been assigned to Silicon.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
4.6 DISPUTES. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with Account Debtors for amounts and upon terms which Silicon considers
advisable in its reasonable credit judgment and, in all cases, Silicon shall
credit Borrower's Loan account with only the net amounts received by Silicon in
payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence of any Event of Default, Borrower shall (i) hold the
returned Inventory in trust for Silicon, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as Silicon's property, and (iv) immediately notify Silicon of the
return of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on Silicon's request deliver such
returned Inventory to Silicon.
4.8 VERIFICATION. Silicon may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters relating
to the Receivables, by means of mail, telephone or otherwise, either in the name
of Borrower or Silicon or such other name as Silicon may choose.
4.9 NO LIABILITY. Silicon shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which gives rise to
a Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Silicon from liability for
its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Silicon shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Silicon may, but
is not obligated to, obtain the same at Borrower's expense. Borrower shall
promptly deliver to Silicon copies of all reports made to insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and on
one Business Day's notice, Silicon, or its agents, shall have the right to
inspect the Collateral, and the right to audit and copy Borrower's books and
records. Silicon shall take reasonable steps to keep confidential all
information obtained in any such inspection or audit, but Silicon shall have the
right to disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The foregoing
inspections and audits shall be at Borrower's expense and the charge therefor
shall be $500 per person per day (or such higher amount as shall represent
Silicon's then current standard charge for the
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same), plus reasonable out of pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first obtaining Silicon's written consent, which may be conditioned upon
such accounting firm, service bureau or other third party agreeing to give
Silicon the same rights with respect to access to books and records and related
rights as Silicon has under this Loan Agreement. Borrower waives the benefit of
any accountant-client privilege or other evidentiary privilege precluding or
limiting the disclosure, divulgence or delivery of any of its books and records
(except that Borrower does not waive any attorney-client privilege).
5.5 NEGATIVE COVENANTS. Except as may be permitted in the Schedule,
Borrower shall not, without Silicon's prior written consent, do any of the
following: (i) merge or consolidate with another corporation or entity; (ii)
acquire any assets, except in the ordinary course of business; (iii) enter into
any other transaction outside the ordinary course of business; (iv) sell or
transfer any Collateral, except for the sale of finished Inventory in the
ordinary course of Borrower's business, and except for the sale of obsolete or
unneeded Equipment in the ordinary course of business; (v) store any Inventory
or other Collateral with any ware houseman or other third party; (vi) sell any
Inventory on a sale-or-return, guaranteed sale, consignment, or other contingent
basis; (vii) make any loans of any money or other assets; (viii) incur any
debts, outside the ordinary course of business, which would have a material,
adverse effect on Borrower or on the prospect of repayment of the Obligations;
(ix) guarantee or otherwise become liable with respect to the obligations of
another party or entity; (x) pay or declare any dividends on Borrower's stock
(except for dividends payable solely in stock of Borrower); (xi) redeem, retire,
purchase or otherwise acquire, directly or indirectly, any of Borrower's stock;
(xii) make any change in Borrower's capital structure which would have a
material adverse effect on Borrower or on the prospect of repayment of the
Obligations; or (xiii) pay total compensation, including salaries, fees,
bonuses, commissions, and all other payments, whether directly or indirectly, in
money or otherwise, to Borrower's executives, officers and directors (or any
relative thereof) in an amount in excess of the amount set forth on the
Schedule; or (xiv) dissolve or elect to dissolve. Transactions permitted by the
foregoing provisions of this Section are only permitted if no Default or Event
of Default would occur as a result of such transaction.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Silicon, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
5.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to two percent (2.0%) of the Maximum Credit Limit. The termination fee
shall be due and payable on the effective date of termination and thereafter
shall bear interest at a rate equal to the highest rate applicable to any of the
Obligations.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right or
remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Silicon by Borrower or any
of Borrower's officers, employees or agents, now or in
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the future, shall be untrue or misleading in a material respect; or (b) Borrower
shall fail to pay when due any Loan or any interest thereon or any other
monetary Obligation; or (c) the total Loans and other Obligations outstanding at
any time shall exceed the Credit Limit; or (d) Borrower shall fail to comply
with any of the financial covenants set forth in the Schedule or shall fail to
perform any other non-monetary Obligation which by its nature cannot be cured;
or (e) Borrower shall fail to perform any other non-monetary Obligation, which
failure is not cured within 5 Business Days after the date due; or (f) Any levy,
assessment, attachment, seizure, lien or encumbrance (other than a Permitted
Lien) is made on all or any part of the Collateral which is not cured within 10
days after the occurrence of the same; or (g) any default or event of default
occurs under any obligation secured by a Permitted Lien, which is not cured
within any applicable cure period or waived in writing by the holder of the
Permitted Lien; or (h) Borrower breaches any material contract or obligation,
which has or may reasonably be expected to have a material adverse effect on
Borrower's business or financial condition; or (i) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect; or (j) the commencement of any
proceeding against Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect, which is not cured by the dismissal thereof within 30 days
after the date commenced; or (k) revocation or termination of, or limitation or
denial of liability upon, any guaranty of the Obligations or any attempt to do
any of the foregoing, or commencement of proceedings by any guarantor of any of
the Obligations under any bankruptcy or insolvency law; or (l) revocation or
termination of, or limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset of any kind
pledged by any third party to secure any or all of the Obligations, or any
attempt to do any of the foregoing, or commencement of proceedings by or against
any such third party under any bankruptcy or insolvency law; or (m) Borrower
makes any payment on account of any indebtedness or obligation which has been
subordinated to the Obligations other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such indebtedness
or obligations terminates or in any way limits his subordination agreement; or
(n) there shall be * a change in the record or beneficial ownership of an
aggregate of more than 20% of the outstanding shares of stock of Borrower, in
one or more transactions, compared to the ownership of outstanding shares of
stock of Borrower in effect on the date hereof, without the prior written
consent of Silicon; or (o) Borrower shall generally not pay its debts as they
become due, or Borrower shall conceal, remove or transfer any part of its
property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a
material adverse change in Borrower's business or financial condition; or (q)
Silicon, acting in good faith and in a commercially reasonable manner, deems
itself insecure because of the occurrence of an event prior to the effective
date hereof of which Silicon had no knowledge on the effective date or because
of the occurrence of an event on or subsequent to the effective date. Silicon
may cease making any Loans hereunder during any of the above cure periods, and
thereafter if an Event of Default has occurred.
* AN ACQUISITION BY A PERSON
7.2 REMEDIES. Upon the occurrence of any Event of Default, and at any
time thereafter, Silicon, at its option, and without notice or demand of any
kind (all of which are hereby expressly waived by Borrower), may do any one or
more of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Silicon without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to
Silicon at places designated by Silicon which are reasonably convenient to
Silicon and Borrower, and to remove the Collateral to such locations as Silicon
may deem advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Silicon shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Silicon obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Silicon shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and
the Collateral need not be located at the place of disposition. Silicon may
directly or through any affiliated company purchase or lease any Collateral at
any such public disposition, and if permissible under applicable law, at any
private disposition. Any sale or other disposition of Collateral shall not
relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes Silicon to endorse or sign Borrower's name on all collections,
receipts, instruments and other documents, to take possession of and open mail
addressed to Borrower and remove therefrom payments made with respect to
-6-
<PAGE>
any item of the Collateral or proceeds thereof, and, in Silicon's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value; (h) Offset against any sums
in any of Borrower's general, special or other Deposit Accounts with Silicon;
and (i) Demand and receive possession of any of Borrower's federal and state
income tax returns and the books and records utilized in the preparation thereof
or referring thereto. All reasonable attorneys' fees, expenses, costs,
liabilities and obligations incurred by Silicon with respect to the foregoing
shall be added to and become part of the Obligations, shall be due on demand,
and shall bear interest at a rate equal to the highest interest rate applicable
to any of the Obligations. Without limiting any of Silicon's rights and
remedies, from and after the occurrence of any Event of Default, the interest
rate applicable to the Obligations shall be increased by an additional four
percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general, non-
specific terms; (iii) The sale is conducted at a place designated by Silicon,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash
or by cashier's check or wire transfer is required; (vi) With respect to any
sale of any of the Collateral, Silicon may (but is not obligated to) direct any
prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Silicon shall be free to employ other methods
of noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default,
without limiting Silicon's other rights and remedies, Borrower grants to Silicon
an irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents) at
any time, at its option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the following, in
Borrower's name or otherwise, but Silicon agrees to exercise the following
powers in a commercially reasonable manner: (a) Execute on behalf of Borrower
any documents that Silicon may, in its sole discretion, deem advisable in order
to perfect and maintain Silicon's security interest in the Collateral, or in
order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all other
present and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute
on behalf of Borrower, any invoices relating to any Receivable, any draft
against any Account Debtor and any notice to any Account Debtor, any proof of
claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or
other lien, or assignment or satisfaction of mechanic's, materialman's or other
lien; (d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Silicon's
possession; (e) Endorse all checks and other forms of remittances received by
Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Silicon the same rights of access and other rights with respect
thereto as Silicon has under this Agreement; and (k) Take any action or pay any
sum required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be payable on demand, and shall bear interest at a rate equal
to the highest interest rate applicable to any of the Obligations. In no event
shall Silicon's rights under the foregoing power of attorney or any of Silicon's
other rights under this Agreement be deemed to indicate that Silicon is in
control of the business, management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Silicon first to the reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by
Silicon in the exercise of its rights under this Agreement, second to the
interest due upon any of the Obligations, and third to the principal of the
Obligations, in such order as Silicon shall determine in its sole discretion.
Any surplus shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its
sole discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Silicon shall have all the other rights and remedies accorded
a secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any rights
or remedies shall not operate as a waiver thereof, but all rights and remedies
shall continue in full force and effect until all of the Obligations have been
fully paid and performed.
-7-
<PAGE>
SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT
---------------------------------------------------------------------------
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
--------------
"Affiliate" means, with respect to any Person, a relative, partner,
---------
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Silicon is open for business.
------------
"Code" means the Uniform Commercial Code as adopted and in effect in the State
----
of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
----------
"Default" means any event which with notice or passage of time or both, would
-------
constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
---------------
"Eligible Inventory" [NOT APPLICABLE].
------------------
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on such
considerations as Silicon may from time to time deem appropriate. Without
limiting the fact that the determination of which Receivables are eligible for
borrowing is a matter of Silicon's discretion, the following (the "Minimum
-------
Eligibility Requirements") are the minimum requirements for a Receivable to be
- ------------------------
an Eligible Receivable: (i) the Receivable must not be outstanding for more
than 90 days from its invoice date, (ii) the Receivable must not represent
progress billings, or be due under a fulfillment or requirements contract with
the Account Debtor, (iii) the Receivable must not be subject to any
contingencies (including Receivables arising from sales on consignment,
guaranteed sale or other terms pursuant to which payment by the Account Debtor
may be conditional), (iv) the Receivable must not be owing from an Account
Debtor with whom the Borrower has any dispute (whether or not relating to the
particular Receivable), (v) the Receivable must not be owing from an Affiliate
of Borrower, (vi) the Receivable must not be owing from an Account Debtor which
is subject to any insolvency or bankruptcy proceeding, or whose financial
condition is not acceptable to Silicon, or which, fails or goes out of a
material portion of its business, (vii) the Receivable must not be owing from
the United States or any department, agency or instrumentality thereof (unless
there has been compliance, to Silicon's satisfaction, with the United States
Assignment of Claims Act), (viii) the Receivable must not be owing from an
Account Debtor located outside the United States or Canada (unless pre-approved
by Silicon in its discretion in writing, or backed by a letter of credit
satisfactory to Silicon, or FCIA insured satisfactory to Silicon), (ix) the
Receivable must not be owing from an Account Debtor to whom Borrower is or may
be liable for goods purchased from such Account Debtor or otherwise. Receivables
owing from one Account Debtor will not be deemed Eligible Receivables to the
extent they exceed 25% of the total eligible Receivables outstanding. In
addition, if more than * 50% of the Receivables owing from an Account Debtor are
outstanding more than 90 days from their invoice date (without regard to
unapplied credits) or are otherwise not eligible Receivables, then all
Receivables owing from that Account Debtor will be deemed ineligible for
borrowing. Silicon may, from time to time, in its discretion, revise the Minimum
Eligibility Requirements, upon written notice to the Borrower.
* 25%
"Equipment" means all of Borrower's present and hereafter acquired machinery,
---------
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
"General Intangibles" means all general intangibles of Borrower, whether now
-------------------
owned or hereafter created or acquired by Borrower, including, without
limitation, all choices in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in
all litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
-8-
<PAGE>
"Obligations" means all present and future Loans, advances, debts,
-----------
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and
Silicon.
"Permitted Liens" means the following: (i) purchase money security interests
---------------
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens consented to in writing by Silicon, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.
"Reserves" means, as of any date of determination, such amounts as Silicon may
--------
from time to time establish and revise in good faith reducing the amount of
Loans and Letters of Credit which would otherwise be available to Borrower under
the lending formula(s) provided in the Schedule: (a) to reflect events,
conditions, contingencies or risks which, as determined by Silicon in good
faith, do or may affect either (i) the Collateral or any other property which is
security for the Obligations or its value, (ii) the assets, business or
prospects of Borrower or any Guarantor or (iii) the security interests and other
rights of Silicon in the Collateral (including the enforceability, perfection
and priority thereof), or (b) to reflect Silicon's good faith belief that any
collateral report or financial information furnished by or on behalf of Borrower
or any Guarantor to Silicon is or may have been incomplete, inaccurate or
misleading in any material respect, or (c) in respect of any state of facts
which Silicon determines in good faith constitutes an Event of Default or may,
with notice or passage of time or both, constitute an Event of Default.
Other Terms. All accounting terms used in this Agreement, unless otherwise
-----------
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 12:00 Noon on any day shall be deemed
received on the next Business Day. Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNTS. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon.
-9-
<PAGE>
9.4 MONTHLY ACCOUNTINGS. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless Borrower
notifies Silicon in writing to the contrary within thirty days after each
account is rendered, describing the nature of any alleged errors or admissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. * All notices shall be deemed to have been given upon delivery
in the case of notices personally delivered, or at the expiration of one
Business Day following delivery to the private delivery service, or two Business
Days following the deposit thereof in the United States mail, with postage
prepaid.
* NOTICES TO THE BORROWER SHALL BE DIRECTED TO THE ATTENTION OF THE CHIEF
FINANCIAL OFFICER OR THE GENERAL COUNSEL.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements, documents
and instruments as may be executed in connection herewith are the final, entire
and complete agreement between Borrower and Silicon and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
-----------------
understandings, representations or agreements between the parties which are not
- -------------------------------------------------------------------------------
set forth in this Agreement or in other written agreements signed by the parties
- --------------------------------------------------------------------------------
in connection herewith.
- -----------------------
9.8 WAIVERS. The failure of Silicon at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Silicon shall not waive or
diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of any
action taken by Silicon, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Silicon, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon, but nothing herein shall relieve Silicon from
liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be waived
or amended, except in a writing executed by Borrower and a duly authorized
officer of Silicon.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES AND COSTS. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
-----------------------------------
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
- --------------------------------------------------------------------
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
- --------------------------------------------------------------------------------
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
- ------------------------------------------------------------------------------
only Silicon and not Borrower in connection with this Agreement. If either
- ----------------------------------------------------------------
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment. All attorneys' fees
and costs to which Silicon may be entitled pursuant to this Paragraph shall
immediately become part of Borrower's Obligations, shall be due on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Silicon; provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Silicon, and
-10-
<PAGE>
any prohibited assignment shall be void. No consent by Silicon to any assignment
shall release Borrower from its liability for the Obligations.
9.14 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower against
Silicon, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Silicon, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof, is based, and the service of a
summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Silicon in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
9.18 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
LTX CORPORATION
BY_______________________________
PRESIDENT OR VICE PRESIDENT
BY_______________________________
CLERK OR ASS'T CLERK
SILICON:
SILICON VALLEY BANK
BY_______________________________
TITLE____________________________
-11-
<PAGE>
___________________________________________________________________________
SILICON VALLEY BANK
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: LTX CORPORATION
ADDRESS: UNIVERSITY AVENUE
WESTWOOD, MASSACHUSETTS 02090
DATE: OCTOBER 26, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrower of even date.
================================================================================
1. CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of: (i)
$10,000,000 at any one time outstanding (the
"Maximum Credit Limit"); or (ii) 80% of the amount
of Borrower's Eligible Receivables (as defined in
Section 8 above).
LETTER OF CREDIT SUBLIMIT
(Section 1.5): $2,500,000
================================================================================
2. INTEREST.
INTEREST RATE (Section 1.2):
A rate equal to the "Prime Rate" in effect from
time to time, plus 1.0% per annum. Interest shall
be calculated on the basis of a 360-day year for
the actual number of days elapsed. "Prime Rate"
means the rate announced from time to time by
Silicon as its "prime rate;" it is a base rate
upon which other rates charged by Silicon are
based, and it is not necessarily the best rate
available at Silicon. The interest rate applicable
to the Obligations shall change on each date there
is a change in the Prime Rate.
MINIMUM MONTHLY
INTEREST (Section 1.2): None.
================================================================================
3. FEES (Section 1.4):
Loan Fee: $100,000, which fee has been paid prior to the
execution hereof.
-1-
<PAGE>
Collateral Monitoring
Fee: $1,250 per calendar month, payable in arrears,
beginning with the first calendar month in which
Loans are made.
Unused Line Fee: In the event, in any calendar month (or portion
thereof at the beginning and end of the term
hereof), the average daily principal balance of
the Loans outstanding during the month is less
than the amount of the Maximum Credit Limit,
Borrower shall pay Silicon an unused line fee in
an amount equal to 0.25% per annum on the
difference between the amount of the Maximum
Credit Limit and the average daily principal
balance of the Loans outstanding during such
month, which unused line fee shall be computed and
paid monthly, in arrears, on the first day of the
following month.
Facility Access Fees: The Borrower shall pay Silicon facility access
fees as follows: (i) $25,000, payable concurrently
with the first disbursement of Loan proceeds; (ii)
$50,000, payable with the first disbursement of
Loan proceeds which causes the aggregate
outstanding Obligations to exceed $2,500,000; and
(iii) $100,000, payable with the first
disbursement of Loan proceeds which causes the
aggregate outstanding Obligations to exceed
$5,000,000.
================================================================================
4. MATURITY DATE
(Section 6.1): One year from the date of this Agreement, subject
to automatic renewal as provided in Section 6.1
above, and early termination as provided in
Section 6.2 above.
================================================================================
5. FINANCIAL COVENANTS
(Section 5.1): Borrower shall comply with the following covenant.
Compliance shall be determined as of the end of
each quarter, except as otherwise specifically
provided below:
MINIMUM TANGIBLE
NET WORTH: Borrower shall maintain a Tangible Net Worth of
not less than $52,600,000 plus 75% of the sum of
(i) the Borrower's net income earned subsequent to
the date of the Loan Agreement, plus (ii) the
proceeds of any issuance(s) of equity or
subordinated debt by the Borrower subsequent to
the date of the Loan Agreement.
DEFINITIONS. For purposes of the foregoing financial covenants,
the following terms shall have the following
meanings: "Current assets", "current liabilities"
and "liabilities" shall have the meanings ascribed
to them by generally accepted accounting
principles.
"Tangible Net Worth" shall mean the excess of
total assets over total liabilities, determined in
accordance with generally accepted accounting
principles, with the following adjustments:
(A) there shall be excluded from assets: (i)
notes, accounts receivable and other
obligations owing to the Borrower from its
officers or other Affiliates, and (ii) all
assets which would be classified as
intangible assets under generally accepted
accounting
-2-
<PAGE>
principles, including without limitation
goodwill, licenses, patents, trademarks,
trade names, copyrights, capitalized software
and organizational costs, licenses and
franchises;
(B) there shall be excluded from liabilities:
all indebtedness (except subordinated debt
owing to Ando Electric, Ltd. ("Ando")) which
is subordinated to the Obligations under a
subordination agreement in form specified by
Silicon or by language in the instrument
evidencing the indebtedness which is
acceptable to Silicon in its discretion.
================================================================================
6. REPORTING.
(Section 5.3):
Borrower shall provide Silicon with the following:
1. Monthly Receivable agings, aged by invoice date,
within fifteen days after the end of each month.
2. Monthly accounts payable agings, aged by invoice
date, and outstanding or held check registers, if
any, within fifteen days after the end of each
month.
3. Monthly reconciliations of Receivable agings (aged
by invoice date), transaction reports, and general
ledger, within ten days after the end of each
month.
4. Monthly unaudited financial statements, as soon as
available, and in any event within thirty days
after the end of each month.
5. Monthly reports which detail the following, each
within thirty days after the end of each month: (i)
order backlog; (ii) shipments to date; and (iii)
any modifications to the annual operating budget
with respect to revenue forecast for the then-
current quarter.
6. Monthly Compliance Certificates, within thirty days
after the end of each month, in such form as
Silicon shall reasonably specify, signed by the
Chief Financial Officer of Borrower, certifying
that as of the end of such month Borrower was in
full compliance with all of the terms and
conditions of this Agreement, and setting forth
calculations showing compliance with the financial
covenants set forth in this Agreement and such
other information as Silicon shall reasonably
request, including, without limitation, a statement
that at the end of such month there were no held
checks.
7. Quarterly unaudited financial statements, as soon
as available, and in any event within forty-five
days after the end of each fiscal quarter of
Borrower.
8. Annual operating budgets (including income
statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal year
of Borrower within thirty days prior to the end of
each fiscal year of Borrower.
-3-
<PAGE>
9. Annual financial statements, as soon as available,
and in any event within 120 days following the end
of Borrower's fiscal year, certified by independent
certified public accountants acceptable to Silicon.
================================================================================
7. COMPENSATION
(Section 5.5): Without Silicon's prior written consent, Borrower
shall not pay total compensation, including
salaries, withdrawals, fees, bonuses, commissions,
drawing accounts and other payments, whether
directly or indirectly, in money or otherwise,
during any fiscal year to all of Borrower's
executives, officers and directors (or any relative
thereof) as a group in excess of 115% of the total
amount thereof in the prior fiscal year.
================================================================================
8. BORROWER INFORMATION:
PRIOR NAMES OF
BORROWER
(Section 3.2): None.
PRIOR TRADE
NAMES OF BORROWER
(Section 3.2): None.
EXISTING TRADE
NAMES OF BORROWER
(Section 3.2): None.
OTHER LOCATIONS AND
ADDRESSES (Section 3.3): See Exhibit A hereto.
MATERIAL ADVERSE
LITIGATION (Section 3.10): None
================================================================================
9. OTHER COVENANTS
(Section 5.1): Borrower shall at all times comply with all of the
following additional covenants:
(1) BANKING RELATIONSHIP. Borrower shall at all
times maintain its primary banking relationship
with Silicon.
(2) SUBORDINATION. Prior to the earlier of (a) the
making of the first Loan, or (b) thirty days
following the execution of this Agreement,
Borrower shall cause Ando to execute and
deliver a Subordination Agreement in such form
as Silicon shall specify, subordinating to the
Obligations all indebtedness of the Borrower to
Ando, and Borrower shall cause said
Subordination Agreement to continue in full
force and effect at all times during the term
of this Agreement.
(3) PATENTS, TRADEMARKS AND COPYRIGHTS.
Concurrently with the execution of this
Agreement, Borrower shall execute and deliver
to Silicon, on Silicon's standard form(s), any
security agreement(s) and other documentation
which Silicon deems necessary for filing in the
United States Patent and Trademark Office, the
United
-4-
<PAGE>
States Copyright Office, and any other
governmental office, with respect to Borrower's
copyrights, patents, trademarks and related
collateral. Prior to the earlier of (a) the
making of the first Loan, or (b) ninety days
following the execution of this Agreement,
Borrower shall (i) cause all of its computer
software, the licensing of which results in
Receivables, including but not limited to the
software known as "enVision" and "enVision++",
to be registered with the United States
Copyright Office, and (ii) execute such
additional security agreement(s) and other
documentation which Silicon deems necessary for
filing with respect to such additional
registered copyright(s).
(4) SUBSIDIARIES. The following are subsidiaries of
Borrower, but the same are, and will remain
throughout the term of this Agreement,
inactive, with assets having an aggregate value
of less than $5,000 each:
LTX Test Systems Corporation, a Delaware
corporation;
LTX International, Inc., Domestic
International Sales Corporation (DISC),
a Delaware corporation.
The following are subsidiaries of Borrower, but
the same are, and will remain throughout the
term of this Agreement, inactive:
LTX Benelux B.V., a Netherlands
corporation
LTX International, B.V., a Netherlands
corporation
LTX (Foreign Sales Corporation) B.V., a
Netherlands corporation
LTX Israel Limited, an Israeli
corporation
The following are subsidiaries of Borrower, but
the same have, and will continue to have
throughout the term of this Agreement, assets
with an aggregate value of less than $5,000:
LTX (Deutschland) GmbH, a West German
corporation
LTX France S.A., a French corporation
LTX (Italia) S.r.l., an Italian
corporation
LTX (Malaysia) SDN.BHD, a Malaysian
corporation
(5) GUARANTIES. Prior to the earlier of (a) the
making of the first Loan, or (b) ninety days
following the execution of this Agreement,
Borrower shall cause the following subsidiaries
and/or affiliates of Borrower to execute and
deliver to Silicon, on Silicon's standard form,
guaranties containing terms and conditions as
Silicon may require, together with such other
documentation as Silicon may require in
connection therewith:
LTX Co., Ltd., a Japanese corporation
LTX (Europe) Limited, a United Kingdom
corporation
LTX Asia International, Inc., a Delaware
corporation
(6) FINANCIAL STATEMENTS. Prior to the earlier of
(a) the making of the first Loan, or (b) thirty
days following the execution of this Agreement,
Borrower shall cause to be delivered to Silicon
financial statements for Borrower's fiscal year
ended July 31,
-5-
<PAGE>
1998, certified by independent certified public
accountants acceptable to Silicon.
(7) LANDLORD WAIVERS. Prior to the earlier of (a)
the making of the first Loan, or (b) one
hundred twenty days following the execution of
this Agreement, Borrower shall cause the record
owners (other than Borrower) of all real
property upon which Borrower maintains
inventory to execute and deliver to Silicon, on
Silicon's standard form, a landlord waiver
containing terms and conditions as Silicon may
require.
Borrower: Silicon:
LTX CORPORATION SILICON VALLEY BANK
By_______________________________ By____________________________________
President or Vice President Title ________________________________
By_______________________________
Clerk or Ass't Clerk
-6-
<PAGE>
SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
EXHIBIT A
ADDITIONAL LOCATIONS
--------------------
University Avenue
Westwood, MA 02090
- Norfolk County
3930 North First Street
San Jose, CA 95134
- Santa Clara County
180 Rose Orchard Way
San Jose, CA 95134
9381 South 51/st/ Street, Suite C-104
Phoenix, AZ 05044
- Maricopa County
1250 Capital of Texas Highway, South
Building 2, Suite 120
Austin, TX 78746
- Travis County
710 East Park Boulevard, Suite 206
Plano, TX
- Collin County
5762 Bolsa Avenue, Suite 102
Huntington Beach, CA 92649
- Orange County
60 West Broad Street
Bethlehem, PA 18018
- Northampton County
-7-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> JUL-31-1998
<CASH> 25,109
<SECURITIES> 0
<RECEIVABLES> 36,071
<ALLOWANCES> 2,200
<INVENTORY> 38,264
<CURRENT-ASSETS> 102,921
<PP&E> 118,521
<DEPRECIATION> 83,094
<TOTAL-ASSETS> 141,019
<CURRENT-LIABILITIES> 68,963
<BONDS> 15,606
0
0
<COMMON> 1,902
<OTHER-SE> 54,048
<TOTAL-LIABILITY-AND-EQUITY> 141,019
<SALES> 164,045
<TOTAL-REVENUES> 196,227
<CGS> 126,522
<TOTAL-COSTS> 141,274
<OTHER-EXPENSES> 46,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,898
<INCOME-PRETAX> (77,150)
<INCOME-TAX> 1,130
<INCOME-CONTINUING> (78,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78,280)
<EPS-PRIMARY> $(2.15)
<EPS-DILUTED> $(2.15)
</TABLE>
