<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECITON 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 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 Number 000-10761
---------
LTX CORPORATION
- --------------------------------------------------------------------------------
(exact Name of Registrant as Specified in Its Chapter)
Massachusetts 04-2594045
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
LTX Park at University Avenue, Westwood, Massachusetts 02090
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (781) 461 1000
---------------------------
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
Indicate by check X whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes __X___ No ____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Oustanding at December 1, 1998
- --------------------------------------- ------------------------------------
Common Stock, par value $0.05 per share 35,476,940
<PAGE>
LTX CORPORATION
Index
Page Number
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet 1
October 31, 1998 and July 31, 1998
Consolidated Statement of Operations 2
Three months ended October 31, 1998
And October 31, 1997
Consolidated Statement of Cash Flows 3
Three months ended October 31, 1998
And October 31, 1997
Notes to Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of Financial 7-14
Condition and Results of Operations
Item 3. Quantitive and Qualitative Disclosures About Market Risk 14
Part II. OTHER INFORMATION
Item 6--Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
LTX CORPORATION
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 19,636 $ 25,109
Accounts receivable, less allowances of $2,200 26,248 33,871
Accounts receivable - other 5,794 2,044
Inventories 39,157 38,264
Other current assets 4,188 3,633
-------------- --------------
Total current assets 95,023 102,921
Property and equipment, net 33,066 35,427
Other assets 2,678 2,671
-------------- --------------
$ 130,767 $ 141,019
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 5,296 $ 4,827
Current portion of long-term debt 4,812 5,106
Accounts payable 22,762 25,020
Deferred revenues and customer advances 14,107 15,045
Accrued restructuring charges 2,095 4,395
Other accrued expenses 16,574 14,570
-------------- --------------
Total current liabilities 65,646 68,963
Long-term debt, less current portion 8,255 8,235
Other long-term liabilities 500 563
Convertible subordinated debentures 7,308 7,308
Stockholders' equity:
Common stock, $0.05 par value
100,000,000 shares authorized; 38,024,440
shares issued; 35,476,940 shares outstanding 1,902 1,902
Additional paid-in capital 197,209 197,209
Accumulated deficit (138,292) (131,400)
Less - Treasury stock (2,547,500 shares), at cost (11,761) (11,761)
-------------- --------------
Total stockholders' equity 49,058 55,950
-------------- --------------
$ 130,767 $ 141,019
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
1
<PAGE>
LTX CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended
October 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 27,018 $ 54,206
Cost of sales 19,847 35,200
-------- --------
Gross margin 7,171 19,006
Engineering and product development
expenses 5,996 6,716
Selling, general and administrative expenses 7,869 10,909
-------- --------
Income (loss) from operations (6,694) 1,381
Interest (income) expense, net 198 (80)
-------- --------
Income (loss) before income taxes (6,892) 1,461
Provision for income taxes - 353
-------- --------
Net income (loss) $ (6,892) $ 1,108
======== =======
Net income (loss) per share:
Basic $ (0.19) $ 0.03
Diluted $ (0.19) $ 0.03
Weighted average shares:
Basic 35,477 38,265
Diluted 35,477 41,333
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE>
LTX CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended
October 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ (6,892) $ 1,108
Add (deduct) non-cash items:
Depreciation and amortization 2,859 3,001
Exchange (gain) loss 460 (33)
(Increase) decrease in:
Accounts receivable 5,121 (7,671)
Inventories (875) (8,059)
Other current assets (538) (359)
Other assets (2) (4)
Increase (decrease) in:
Accounts payable (3,108) 4,275
Accrued expenses and restructuring charges (544) 896
Deferred revenues and customer advances (938) (1,577)
-------- -------
Net cash used in operating activities (4,457) (8,423)
-------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Expenditures for property and equipment, net (506) (2,359)
-------- -------
Net cash used in investing activities (506) (2,359)
-------- -------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from stock purchase and option plans - 238
Increase (decrease) in notes payable (767) 333
Payments of long-term debt and other liabilities (362) (301)
-------- -------
Net cash provided by (used in) financing activities (1,129) 270
-------- -------
Effect of exchange rate changes on cash 619 (35)
-------- -------
Net decrease in cash and equivalents (5,473) (10,547)
Cash and equivalents at beginning of period 25,109 67,800
-------- -------
Cash and equivalents at end of period $ 19,636 $57,253
======== =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid (received) during the period for:
Interest $ 359 $ 393
Income taxes $ (846) $ 649
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company
-----------
LTX Corporation (the "Company") designs, manufactures, and markets automated
test equipment for the semiconductor industry that is used to test systems-
on-a-chip, digital, analog, and mixed signal (a combination of digital and
analog) integrated circuits (ICs) 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 accompanying financial statements have been prepared by the Company,
without audit, and reflect all adjustments which, in the opinion of
management, are necessary for a fair statement of the results of the interim
periods presented. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosures of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of income and
expenses during the reporting periods.
Certain information and footnote disclosures normally included in the annual
financial statements which are prepared in accordance with generally
accepted accounting principles have been condensed or omitted. Accordingly,
although the Company believes that the disclosures are adequate to make the
information presented not misleading the financial statements should be read
in conjunction with the footnotes contained in the Company's Annual Report
on 10-K.
4
<PAGE>
Revenue Recognition
Revenues from product sales and related warranty costs are recognized at the
time of shipment. Service revenues are recognized over the applicable
contractual periods or as services are performed. Revenues from engineering
contracts are recognized over the contract period on a percentage of
completion basis.
Net Income (Loss) Per Share
In July 1998, the Company adopted Statement of Financial Accounting
Standards, "Earnings Per Share," (SFAS 128). All previously reported
earnings per share information presented has been restated to reflect the
impact of adopting SFAS 128.
Under SFAS 128, basic net income (loss) per common share is computed by
dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted net
income (loss) per common share reflects the maximum dilution that would have
resulted from the assumed exercise and share repurchase related to dilutive
stock options and is computed by dividing net income (loss) by the weighted
average number of common shares and all dilutive securities outstanding.
A reconciliation between basic and diluted earnings per share is as follows:
Three Months Ended
October 31,
1998 1997
(In thousands except per/share amounts)
Net income (loss) $ (6,892) $ 1,108
Basic EPS
Basic common shares 35,477 38,265
Basic EPS $ (0.19) $ 0.03
Diluted EPS
Basic common shares 35,477 38,265
Plus: Impact of stock options and warrants - 3,068
--------- --------
Diluted common shares 35,477 41,333
Diluted EPS $ (0.19) $ 0.03
Options to purchase 4,159,893 shares of common stock in 1998 and 3,204,974
shares in 1997 were outstanding during the periods then ended. There were
3,067,574 options to purchase shares outstanding at October 31, 1997 that
were priced at less than the average market price of common shares that were
added to the basic common shares outstanding in the calculation of diluted
EPS.
The impact of stock option and warrants was not used in the calculation of
the October 31, 1998 diluted EPS as the Company was in a net loss position.
5
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and include material, labor and manufacturing overhead. Inventories
consisted of the following at:
October 31, July 31,
1998 1998
---------------- -------------
(In thousands)
Raw materials $15,131 $14,400
Work-in-progress 19,597 19,419
Finished goods 4,429 4,445
---------- ----------
$39,157 $38,264
========== ==========
3. Comprehensive Income
----------------------
In August 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". The statement requires comprehensive income to be reported with the
same prominence as other financial statements. Comprehensive income would
include any unrealized gains or losses on available-for-sale securities,
foreign currency translation adjustments and minimum pension liability
adjustments. The effect of SFAS 130 is immaterial to the Company's financial
results.
4. Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
Disclosures About Segments of an Enterprise and Related Information. The
statement is effective for fiscal 1999. SFAS 131 changes the definition and
reporting of segments and requires disclosure by operating segment of
information such as profit and loss, assets and capital expenditures, major
customers and types of products from which revenues are derived.
5. Interest Expense and Income
---------------------------
Interest expense and income were as follows:
Three Months
Ended
October 31,
1998 1997
---------------------
(In thousands)
Expense $ 397 $ 582
Income (199) (662)
------ ------
Interest (income) expense, net $ 198 ($80)
===== ======
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the principal items
included in the Consolidated Statement of Operations as percentages of net
sales.
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage
------------------------ Increase/(Decrease)
Three Months -------------------
Ended Three Months
October 31, 1998
------------------------ Over
1998 1997 1997
---------- ----------- --------
<S> <C> <C> <C>
Net sales 100.0 % 100.0 % (50.2)%
Cost of sales 73.5 64.9 (43.6)
---------- ----------- --------
Gross margin 26.5 35.1 (62.3)
Engineering and product
development expenses 22.2 12.4 (10.7)
Selling, general and
administrative expenses 29.1 20.1 (27.9)
---------- ----------- --------
Income (loss) from operations (24.8) 2.6 N/M
Interest (income) expense, net 0.7 (0.1) N/M
---------- ----------- --------
Income (loss) before income
taxes (25.5) 2.7 N/M
Provision for income taxes 0.7 -
---------- ----------- --------
Net income (loss) (25.5)% 2.0 % N/M %
========== =========== =========
</TABLE>
N/M - Not Meaningful
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains certain forward-looking statements relating to,
among other things, estimates of economic and industry conditions, sales trends,
expense levels and capital expenditures. Actual results may vary from those
contained in such forward-looking statements. See "Business Risks" below.
RESULTS OF OPERATIONS
During the latter half of fiscal 1998 (primarily in the Company's fourth
quarter) and the three months ended October 31, 1998, the semiconductor test
equipment ("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. The restructuring initiated by the Company includes 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.
Three Months Ended October 31, 1998 Compared
to the Three Months Ended October 31, 1997
Net sales for the three months ended October 31, 1998 were $27.0 million
(including $2.5 million of deferred revenue from the Company's Fusion alliance
with Ando Electric Co., Ltd.) as compared to $54.2 million in the same quarter
of the prior year, a decrease of 50.2%. The decrease in revenue is a result of
the STE and semiconductor industries experiencing a significant decline in
activity. The Company anticipates that revenues will continue to be adversely
affected by decreased demand for semiconductors during the remainder of fiscal
1999. Geographically, sales to customers outside of North America were 54% and
67% of total net sales in the three months ended October 31, 1998 and 1997,
respectively.
The gross profit margin was 26.5% of net sales in the three months ended October
31, 1998, compared to 35.1% of net sales in the same quarter of the prior year.
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. The Company anticipates that its gross margin as a
percentage of sales will improve as revenues from its Fusion product line
increase and as the Company realizes the full impact of the consolidation of its
manufacturing facilities.
Engineering and product development expenses were $6.0 million or 22.2% of net
sales, in the three months ended October 31, 1998, as compared to $6.7 million,
or 12.4% of net sales, in the same quarter of the prior year. During the first
quarter of fiscal 1999, the Company began to realize savings in relation to the
higher levels of spending during fiscal 1998 when the Company was at an earlier
stage of development of Fusion product. Engineering and product
8
<PAGE>
development expenses are expected to continue to decline as key Fusion
development projects are completed during fiscal 1999.
Selling, general and administrative expenses were $7.9 million or 29.1% of net
sales, in the three months ended October 31, 1998, as compared to $10.9 million,
or 20.1% of net sales, in the same quarter of the prior year. The decrease in
selling, general and administrative expenses in absolute dollars largely relates
to the Company's restructuring efforts taken during the fourth quarter of fiscal
1998. The Company anticipates selling, general and administrative expenses will
continue to decrease during fiscal 1999 as the Company realizes the savings of
its restructuring efforts.
Net interest expense was $0.2 million in the three months ended October 31,
1998, as compared to net interest income of $0.1 million in the same quarter in
the prior year and occurred because of the reduction in the Company's average
cash balances.
The Company had no tax provision for the three months ended October 31, 1998, as
compared to $0.4 million in the same quarter in the prior year. The change in
the provision relates to the net loss from operations and the net operating loss
carryforward.
Net loss was $6.9 million, or ($0.19) per share, in the three months ended
October 31, 1998. The Company had a net income of $1.1 million, or $0.03 per
share, in the same quarter of the prior year.
Industry conditions were severely depressed during the latter half of fiscal
1998 and the first three months of fiscal 1999, particularly in the Asian and
Japanese 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.
Liquidity and Capital Resources
At October 31, 1998, the Company had $19.6 million in cash and equivalents and
working capital of $29.4 million, as compared to $25.1 million of cash and
equivalents and $34.0 million of working capital at July 31, 1998. The decrease
in cash balance of $5.5 was a result of net cash used in operating activities of
$4.5 million, net cash used for additions to property and equipment of $0.5
million, net cash used in financing activities of $1.1 million and a $0.6
million net cash increase due to the affect of exchange rates on cash.
The Company's Japanese subsidiary had borrowings of $5.3 million at October 31,
1998 as compared to $4.8 million at July 31, 1998. The increase is a result of
exchange rate fluctuation.
In October 1998, the Company obtained a $10.0 million domestic credit facility
from a bank. The facility is secured by all assets of the Company and bears
interest at the bank's prime rate plus 1%. Borrowing availability under the
facility is based on a formula of eligible accounts receivable. 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 October 31, 1998. The Company repaid the lease line in
full during November 1998 upon its termination.
9
<PAGE>
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 under the
heading "Business Risks" below.
BUSINESS RISKS
The Company in this report makes, and may from time to time elsewhere make,
disclosures which contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such disclosures in this
report include, without limitation, statements regarding the development,
introduction, acceptance, and market for Fusion, the Company's belief, under
"Results of Operations--Three Months Ended October 31, 1998 As Compared to the
Three Months Ended October 31, 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. 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.
10
<PAGE>
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 in a timely and cost-effective manner. The Company also has
to manufacture its products in volume at a competitive price and on a timely
basis to enable customers to integrate them into their operations as they begin
to produce their next generation of semiconductors. The Company's failure to
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.
Asia Economic Conditions
In light of the continuing 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.
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.
11
<PAGE>
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.
Year 2000
Many computer systems will experience problems handling dates beyond the Year
1999 because the systems are coded to accept only two-digit entries in the date
code field. The Company is assessing the readiness of its products sold to
customers for handling Year 2000 issues, as well as its own internal business
systems and the products and internal business systems of its suppliers. In
connection with the foregoing, the Company has established a Year 2000 Program
to address both LTX product compliance and internal business systems and
suppliers compliance. The Program is sponsored by a member of senior management
who is charged with apprising senior management and the Board of Directors of
the status of the Company's compliance efforts.
Certain hardware and software products currently installed at sites will require
upgrade or other remediation to become Year 2000 compliant. The Company is
identifying and contacting affected customers to advise them of non-compliant
products. The Company has established three ongoing product-based teams to
ensure product compliance. The teams are managed in accordance with the
Company's engineering product development process. The Company anticipates that
it will incur costs of approximately $400,000 to make its products Year 2000
compliant. A majority of such Year 2000 compliance expenses is represented by
existing engineering personnel assigned to the project. The Company does not
believe that there will be a material adverse impact as a result of making its
products Year 2000 compliant since the Company's products are not "date
dependent".
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 readiness.
12
<PAGE>
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.
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.
Highly Competitive Industry
The STE industry is highly competitive in all areas of the world. Most of the
Company's major competitors have substantially greater financial resources and
some have more extensive engineering, manufacturing, marketing and customer
support capabilities than the Company. The Company expects its competitors to
continue to improve the performance of their current products and to introduce
new products with improved price and performance characteristics. The Company
principally competes on the basis of performance, cost of test, reliability,
customer service, applications support, price and ability to deliver its
products on a timely basis. New product introductions by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products and could prevent the successful introduction of the
Company's new products. In addition, increased competitive pressure could lead
to intensified price-based competition, resulting in lower prices and adversely
affecting the Company's business and results of operations. The Company believes
that to remain competitive it will require significant financial resources for
investment in new product development and for the maintenance of customer
support centers worldwide. There can be no assurance that the Company will be
able to compete successfully in the future.
Customer Concentration
The loss of a major customer or reduction in, or rescheduling or cancellation
of, orders by major customers, including reductions, cancellations or
rescheduling due to market or competitive conditions in the semiconductor
industry, has had in the past and could have in the future an adverse effect on
the Company's business and results of operations. In addition, the Company's
ability to increase its sales will depend in part upon its ability to obtain
orders from new customers. The loss of one or more of its top ten customers
could have a material adverse effect on the Company's business and results of
operations.
13
<PAGE>
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 3. Quantitive and Qualitative Disclosures About Market Risk
A discussion of the Company's exposure to and mangement of market risk appears
under the heading "Business Risks".
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) (i) Exhibit 27 - Financial Data Schedule
(b) There were no reports on Form 8-K filed during the three months
ended October 31, 1998.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LTX Corporation
Date: December 15, 1998 By: /s/ Roger W. Blethen
-------------------------------- -----------------------------------
Roger W. Blethen
Chief Executive Officer and President
Date: December 15, 1998 By: /s/ David G. Tacelli
-------------------------------- -----------------------------------
David G. Tacelli
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
15
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