<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K-A
AMENDMENT NO. 1
(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
-----------------------------
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. [ ]
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.
<PAGE>
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.
LTX CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I
Item 1. Business Overview
Industry Background
Company Strategy
Products and Markets
Service
Sales and Distribution
Customers
Engineering and Product Development
Manufacturing and Supply
Competition
Backlog
Proprietary Rights
Executive Officers of the Company
Employees
Environmental Affairs
PART II
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
PART IV
Signatures
</TABLE>
<PAGE>
LTX(R), HiPer(R), Fusion(TM) and enVision(TM) are all trademarks of LTX
Corporation.
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.
1
<PAGE>
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.
2
<PAGE>
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
3
<PAGE>
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.
4
<PAGE>
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.
5
<PAGE>
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 onVision 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
rightsin 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. The percentage of net sales
contributed by iPTest compared to the Company's total net sales was 2.9%, or
$5.6 million, for the fiscal year ended July 31, 1998 and 3.1%, or $6.1 million,
for the fiscal year ended July 31, 1997. 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. Service revenue totaled $32.2 million, or 16.4% of net sales, in fiscal
1998, $27.4 million, or 14.1% of net sales, in fiscal 1997 and $27.2 million, or
10.2% of net sales, in fiscal 1996.
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.
6
<PAGE>
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. The Company is
dependent on two integrated circuit manufacturers, Vitesse Semiconductor
Corporation and Maxtech Components Corporation, who are sole source suppliers of
custom components for the Company's products. LTX has no written supply
agreements with these sole suppliers and purchases its custom components through
individual purchase orders. 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
7
<PAGE>
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.
8
<PAGE>
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.
9
<PAGE>
PART II
10
<PAGE>
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
OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
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
Customer Orders $ 194.0 193.9 233.6 236.9 197.0
Order Backlog $ 62.9 65.1 65.5 98.4 71.8
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
<PAGE>
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
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.
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.
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 increase and 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
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. 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.
In fiscal 1998, the Asian financial crisis (which began in January 1998)
created a major impact on the global economy, precipitating a further drop in
demand than the Company and the industry had been previously experiencing. As a
result, the Company's sales dropped to $33 million in the fourth quarter of
fiscal 1998, compared to $54 million in the third quarter of fiscal 1998.
Simultaneously, the Company's development and introduction of the Fusion product
line was occurring. The sudden drop in demand for the Company's products,
combined with the introduction of the Fusion product line, resulted in
significant excess and obsolete inventory. Management determined to restructure
the Company's operations during the fourth quarter of fiscal 1998, in line with
its strategy of focusing on the Fusion product line. As a result of the combined
rapid and sudden decline in global demand for STE and the transition to the
Fusion product line, the Company recorded a $40.7 million inventory charge in
the fourth quarter of fiscal 1998. Inventory purchases in the second and third
quarters of fiscal 1998 in anticipation of a higher level of demand for its
existing products consisted of a large amount of custom and semi-custom
inventory that would become obsolete or difficult to sell due to the declining
business conditions within the industry in the third and fourth quarter of that
same fiscal year.
The $40.7 million inventory charge taken in fiscal 1998 consisted of a
write-down of the Delta Series product line for $25.3 million, the Synchro and
77/90 product lines for $11.8 million, and $3.6 million for service parts deemed
excess or obsolete.
The $6.3 million restructuring charge recorded in the fourth quarter of
fiscal 1998 included: $3.2 million in employee separation costs, $2.9 million in
asset impairment write-offs and $.2 million in lease terminations and other
contractual obligations. The workforce reduction impacted 259 employees, of
which 211 were in Production and Engineering, 33 in Sales and Marketing and 15
in Administration. Asset impairment write-offs of $2.9 million related to the
write off of capitalized Master and Delta Series testers and test equipment at
its San Jose and Korean facilities. The Company no longer manufactures the
Master series line and this equipment was written down to zero value and
depreciation expense permanently ceased. The assets will most likely be disposed
of or sold if possible in fiscal 1999. The remaining balance of $3.3 million at
July 31, 1998 includes $3.2 million related to employee separation costs, which
were all paid by February 1999.
The Company's inventory provision of $9.3 million in the first quarter of
fiscal 1997 was a direct result of management's new strategy for its Digital
product line. During the first quarter of fiscal 1997, the Company restructured
its Digital Products Division management team and initiated a new marketing and
product development strategy that produced an anticipated reduction in the
realizable value of existing inventories relating to non-strategic products.
The bulk of this inventory charge of $9.3 million related to product
obsolescence in the Company's Delta 50 and Delta 100 Test Systems, which were
replaced with the Delta STE line.
In fiscal 1997, the Company redirected its product strategy to focus
primarily on functionally complex devices known as "systems-on-a chip". As a
result, the Company restructured its Digital Products Division and began
emphasizing sales of its Delta/STE mixed technology test systems. In fiscal
1997, the Company recorded a restructuring charge of $6.8 million consisting of
$4.0 million for cancelled non-strategic development projects and technology
upgrades to the customers, $1.8 million in severance costs relating to workforce
reductions, $.6 million of asset impairments and $.3 million in equipment lease
cancellations. The workforce reduction totaled 180 employees, of which 166 were
in production and engineering, 10 in administration and 4 in sales.
The remaining accrued balance as of July 31, 1998 of $2.0 million relates
to the estimated cost to replace certain board modules.
12
<PAGE>
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.
13
<PAGE>
Fiscal 1997 Compared to Fiscal 1996
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. 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 and was the result of over capacity of test
equipment in the semiconductor industry. 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.
Including the provision for excess inventory of $9.3 million in 1997 and $3.6
million in 1996, the gross margins were 27.3% and 37.9% of net sales for fiscal
1997 and 1996, respectively. 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. As a result of a combination of increasing sales
and a reduction in manufacturing costs, the Company's gross profit margin
improved each quarter during fiscal 1997.
The Company's inventory provision of $9.3 million in the first quarter of
fiscal 1997 was a result of management's new strategy for its Digital product
line. During the first quarter of fiscal 1997, the Company restructured its
Digital Products Division management team and initiated a new marketing and
product development strategy that produced an anticipated reduction in the
realizable value of existing inventories relating to non-strategic products.
The bulk of this inventory charge of $9.3 million related to product
obsolescence in the Company's Delta 50 and Delta 100 Test Systems, which were
replaced with the Delta STE line.
In fiscal 1997, the Company redirected its product strategy to focus
primarily on functionally complex devices known as "systems-on-a chip". As a
result, the Company restructured its Digital Products Division and began
emphasizing sales of its Delta/STE mixed technology test systems. In fiscal
1997, the Company recorded a restructuring charge of $6.8 million consisting of
$4.0 million for cancelled non-strategic development projects and technology
upgrades to the customers, $1.8 million in severance costs relating to workforce
reductions, $.6 million of asset impairments and $.3 million in equipment lease
cancellations. The workforce reduction totaled 180 employees, of which 166 were
in production and engineering, 10 in administration and 4 in sales.
The remaining accrued balance as of July 31, 1998 of $2.0 million relates
to the estimated cost to replace certain board modules.
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.
Including the provision for excess inventory of $9.3 million and product line
restructuring charges of $6.7 million in the first quarter of fiscal 1997, the
Company had a net loss of $15.9 million, or $0.45 per share. On a quarterly
basis, the Company improved its financial performance each subsequent quarter in
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 effective rate of interest on the
equipment lease line was 8.3% 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. Capital
expenditures amounting to $8.8 million in fiscal 1998 were down significantly
from $16.1 million in fiscal 1997 and $20.0 million in fiscal 1996. In fiscal
1998, the Company limited capital expenditures to those projects essential to
the development of the Fusion product line and critical replacement assets
needed to sustain ongoing business. Fiscal 1998 and fiscal 1997 capital
expenditures relating to the Fusion product line were $4.8 million and $2.4
million respectively. The budget for capital expenditures over the next 12
months is $9.4 million and is primarily for equipment used in the manufacture
and development of the Fusion product line. 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.
16
<PAGE>
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 we believe we have taken adequate measures to prepare for the Year
2000, there can be no assurances that our products do not contain undetected
Year 2000 problems. In addition, although we have sent out evaluation forms
regarding Year 2000 readiness to our critical suppliers, vendors and facilities
owners, there can be no assurances that these entities will adequately address
Year 2000 issues. Reasonable descriptions of most likely worse case scenarios
could include power outages at the Company's facilities, in particular, its
Westwood, Massachusetts facility and product component shortages as a result of
Year 2000 problems at our critical suppliers and vendors. If any of these were
to occur, business and operations could be adversely impacted.
The Company is developing a comprehensive contingency plan to address
problems that may arise if the Company is unable to achieve Year 2000 readiness
of its critical operations. The Company has targeted October 31, 1999 for
completion of its contingency plans.
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.
17
<PAGE>
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.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)
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
----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
AT JULY 31, 1998 1997
ASSETS
<S> <C> <C>
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 5,786 2,491
Other accrued expenses 13,179 6,521
- -------------------------------------------------------------------------------------------
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 $3.9 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. Service revenue totaled $32.2
million, or 16.4% of net sales, in fiscal 1998, $27.4 million, or 14.1% of net
sales, in fiscal 1997 and $27.2 million, or 10.2% of net sales, in fiscal 1996.
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. The Japanese prime rate of interest was 2.5%
percent at July 31, 1998.
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 effective rate of interest on the equipment
lease facility was 8.3% 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%
----------------------------------------------------------------------
The temporary differences and carryfowards that created the deferred tax
assets and liabilities as of July 31, 1998, and 1997 are as follows:
</TABLE>
<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
----------------------------------------------------------------------
The valuation allowance relates to uncertainty surrounding the
realization of the deferred tax assets.
</TABLE>
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>
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.
YEAR ENDED JULY 31, 1998 1997
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
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>
<TABLE>
<CAPTION>
Stock Option Activity
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.
34
<PAGE>
11. RESTRUCTURING AND INVENTORY CHARGES
------------------------------------
Fiscal 1998 Restructuring
In fiscal 1998, the Asian financial crisis (which began in January
1998) created a major impact on the global economy, precipitating a further drop
in demand than the Company and the industry had been previously experiencing. As
a result, the Company's sales dropped to $33 million in the fourth quarter of
fiscal 1998, compared to $54 million in the third quarter of fiscal 1998.
Simultaneously, the Company's development and introduction of the Fusion product
line was occurring. The sudden drop in demand for the Company's products,
combined with the introduction of the Fusion product line, resulted in
significant excess and obsolete inventory. Management determined to restructure
the Company's operations during the fourth quarter of fiscal 1998, in line with
its strategy of focusing on the Fusion product line. As a result of the combined
rapid and sudden decline in global demand for Semiconductor Test Equipment and
the transition to the Fusion product line, the Company recorded a $40.7 million
inventory charge in the fourth quarter of fiscal 1998. Inventory purchases in
the second and third quarters of fiscal 1998 in anticipation of a higher level
of demand for its existing products consisted of a large amount of custom and
semi-custom inventory that would become obsolete or difficult to sell due to the
declining business conditions within the industry in the third and fourth
quarter of that same fiscal year.
The $40.7 million inventory charge taken in fiscal 1998 consisted of a
write-down of the Delta Series product line for $25.3 million, the Synchro and
77/90 product lines for $11.8 million, and $3.6 million for service parts deemed
excess or obsolete.
The $6.3 million restructuring charge recorded in the fourth quarter of
fiscal 1998 included: $3.2 million in employee separation costs, $2.9 million in
asset impairment write-offs and $.2 million in lease terminations and other
contractual obligations. The workforce reduction impacted 259 employees, of
which 211 were in Production & Engineering, 33 in Sales & Marketing and 15 in
Administration. Asset impairment write-offs of $2.9 million related to the write
off of capitalized Master and Delta Series testers and test equipment at its San
Jose and Korean facilities. The Company no longer manufactures the Master series
line and this equipment was written down to zero value and depreciation expense
permanently ceased. The assets are expected to be disposed of or sold in fiscal
1999. The Company anticipates that there will be no remaining accrued liability
balance to be paid that relates to the fiscal 1998 restructuring plan at the end
of fiscal 1999.
Fiscal 1997 Restructuring
The Company's inventory provision of $9.3 million in the first quarter
of fiscal 1997 was a direct result of management's new strategy for its Digital
product line. During the first quarter of fiscal 1997, the Company restructured
its Digital Products Division management team and initiated a new marketing and
product development strategy that produced an anticipated reduction in the
realizable value of existing inventories relating to non-strategic products.
The bulk of this inventory charge of $9.3 million related to product
obsolescence in the Company's Delta 50 and Delta 100 Test Systems, which were
replaced with the Delta STE line.
In fiscal 1997, the Company redirected its product strategy to focus
primarily on functionally complex devices known as "systems-on-a chip". As a
result, the Company restructured its Digital Products Division and began
emphasizing sales of its Delta/STE mixed technology test systems. In fiscal
1997, the Company recorded a restructuring charge of $6.8 million consisting of
$4.0 million for cancelled non-strategic development projects and technology
upgrades to the customers, $1.8 million in severance costs relating to workforce
reductions, $.6 million of asset impairments and $.3 million in equipment lease
cancellations. The workforce reduction totaled 180 employees, of which 166 were
in production and engineering, 10 in administration and 4 in sales and
marketing.
The remaining accrued balance as of July 31, 1998 of $2.0 million
relates to the estimated cost to replace certain board modules.
<TABLE>
<CAPTION>
Restructuring Cost
($000's)
Charges: (See Note)
From the From the From the
Pre Fiscal 1996 Plan Fiscal 1997 Plan Fiscal 1998 Plan
-------------------- ---------------- ----------------
<S> <C> <C> <C>
Employee separation cost........................... $ 1,900 1,750 3,145
Cancelled engineering projects..................... -- 1,250 --
New system board modules........................... -- 2,850 --
Fixed asset write-downs ........................... -- 600 2,908
Termination of leases and other
contractual obligations ......................... 12,500 300 219
------ ----- -----
Total........................................ 14,400 6,750 6,272
====== ===== =====
Incurred through July 31, 1998..................... $13,887 4,772 2,977
Ending accrual at July 31, 1998.................... $ 513 1,978 3,295
</TABLE>
Note: Charges represent cash items except the fixed asset write-downs which is a
non-cash item.
Headcount Reduction
<TABLE>
<CAPTION>
From the From the
Fiscal 1997 Plan Fiscal 1998 Plan
---------------- ----------------
<S> <C> <C>
Sales and Marketing....................................... 4 33
Administration............................................ 10 15
Production and Engineering................................ 166 211
Total Reduction........................................... 180 259
</TABLE>
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)
<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.
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. 333-
48363, File No. 333-48341 and File No. 333-71455).
ARTHUR ANDERSEN LLP
Boston, Massachusetts
September 15, 1999
36
<PAGE>
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 $ 2,491 $ 6,272 $ (2,977) $ 5,786
July 31, 1997 $ 1,198 $ 6,750 $ (5,457) $ 2,491
July 31, 1996 $ 6,087 $ - $ (4,889) $ 1,198
</TABLE>
37
<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
September 14, 1999
38
