ITEM 1. BUSINESS
OVERVIEW
LTX Corporation ("LTX" or the "Company") designs, manufactures and markets automatic test equipment for the semiconductor industry that is used to test digital, linear and mixed signal (a combination of digital and linear) integrated circuits ("ICs") and discrete semiconductor components. The Company currently offers three lines of test systems: digital test systems, which test digital ICs, including microprocessors and microcontrollers; linear/mixed signal test systems, which test a wide range of linear and mixed signal ICs; and discrete component test systems, which test small signal and high power semiconductor components. The Company also sells service and applications support for its test systems. The semiconductors tested by the Company's systems are widely used in the computer, communications, automotive and consumer electronics industries. The Company markets its products worldwide to both manufacturers and users of digital, linear and mixed signal ICs and discrete semiconductor components.
INDUSTRY BACKGROUND
All semiconductor manufacturers use semiconductor test equipment ("STE") in the design and manufacture of ICs. During design, STE is used for design verification, characterization, qualification and failure analysis of ICs. During manufacture, STE is used during wafer probing to select usable ICs and after packaging to classify ICs by performance characteristics and to assure conformance with quality standards. Typically, all ICs are tested two or more times during the manufacturing process. In addition, certain large electronic equipment manufacturers employ STE for incoming inspection and for further classification of ICs.
Demand for STE is driven by overall business expansion in the semiconductor industry and advances in semiconductor technology. When demand for semiconductors increases, semiconductor manufacturers will often purchase STE to meet their growing capacity requirements. Advances in semiconductor technology have allowed for increasingly complex semiconductor devices with improved performance, lower cost and greater reliability than earlier generations of devices. As a result, the use of semiconductors has proliferated across many industries, particularly in applications for the computer, communications, automotive and consumer electronics industries. In turn, semiconductor manufacturers are demanding STE that is faster, more versatile, more accurate, more productive and easier to program and maintain.
Prices of STE systems generally increase as their capabilities increase. The acquisition of STE represents a significant investment on the part of the Company's customers, who typically consider both the capital and long term operating costs of the test system in the acquisition process. Factors that can vary from one test system to another, and thereby affect the total cost of testing, include:
Speed. A test system that offers faster test times or that is able to test more than one device at a time is able to test a greater number of devices over its product life, thus increasing the system's efficiency and reducing the customer's cost of testing.
Accuracy. Superior accuracy improves the yield of the semiconductor production process because it reduces the number of good devices that are improperly rejected and permits the selection of a higher number of premium devices.
Efficiency. Greater efficiency in test program preparation, loading and debugging leads to faster time to market for newly-designed semiconductors.
Software. Test system operating software which is easier to use and more powerful reduces the amount of engineering resources needed to develop test programs and operate test systems.
Reliability. A test system that operates with minimal downtime allows the customer's production and engineering work to proceed without frequent intervention and provides more cost-effective operation.
System Architecture. Test system architecture that is modular extends the product life of a test system because the system can be adapted to meet the customer's new requirements while largely retaining compatibility with existing test programs.
Customer Support. Customer specific applications programs, worldwide service and customer training contribute to the efficient use of STE and minimize the customer's cost of testing.
COMPANY STRATEGY
LTX's objective is to be the leading supplier of STE in the markets in which it participates. The key elements of the Company's strategy are as follows:
Focus on Leading-Edge Devices
The Company's test systems are designed to meet the design and production test requirements of leading-edge digital, linear and mixed signal ICs and discrete components. Testing of these devices requires high performance test systems. The Company believes that only STE manufacturers with sophisticated technological ability are able to compete effectively in these sectors of the STE market. Moreover, the Company believes that by focusing on testing advanced devices, it is able to gain valuable insight into future market opportunities.
Develop Adaptable Test Systems
The Company designs its test systems so that they may be adapted and improved to meet its customers' future needs. This philosophy is reflected in the modular architecture of many of the Company's products, which permits both capacity additions and upgrading of performance as the Company develops new modular options and associated software. When possible, the Company also seeks to enable its customers to bridge different generations of the Company's products. For example, the Company's enVision software has been designed to operate on its new Delta Series products, as well as on its Master Series products.
Provide Application Specific Solutions
The Company is committed to providing complete test solutions to its customers by having a substantial group of engineers strategically located at customer support centers throughout the world. By actively participating in the application of its test systems, the Company is able to learn more about requirements for new devices and to improve the design of future test systems. LTX also believes that its participation in the application of its test systems enables its customers to get devices to market more rapidly and builds stronger ties with these customers.
Leverage Worldwide Presence
The semiconductor business is a worldwide industry, with well-established manufacturers in the United States, Europe and the Far East. The Company has nine offices in the United States, and in Europe maintains sales and support offices in the United Kingdom, France, Italy and Germany. In recent years, an increasing portion of semiconductor test and assembly operations have been conducted in the Pacific Rim by manufacturers based in the United States and Europe, as well as by local manufacturers. LTX has established sales and support offices in Korea, Taiwan and Singapore to focus on the specific needs of the markets within the Pacific Rim. In addition, through a majority-owned subsidiary, the Company provides sales and support services at three locations in Japan. The Company believes that this network of sales and support centers improves its ability to sell and support its products to the world's major semiconductor manufacturers.
Execute Strategic Alliances 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 1990, the Company strengthened its resources and presence in Japan by forming a joint venture with Sumitomo Metal Industries, Ltd. ("SMI") through which the Company currently sells and services its products in Japan. In addition, in fiscal 1993, the Company entered into a development, manufacturing and marketing agreement
with Ando Electric Co., Ltd. ("Ando"), a Japanese STE manufacturer and majority-owned subsidiary of NEC, relating to the Delta 50, a digital test system that the Company introduced in fiscal 1994. The Company believes that its alliance with Ando will better enable it to penetrate the Japanese digital production STE market. Moreover, since the Delta 50 is compatible with other Delta Series machines, the Company believes that sales of Delta 50 test systems to key Japanese semiconductor manufacturers will increase the Company's opportunities to sell other Delta Series test systems to these same manufacturers. In fiscal 1995, the Company entered into a development, manufacturing and marketing agreement with Asia Electronics, Inc. ("Asia Electronics"), a Japanese STE manufacturer which is 50% owned by Toshiba Corporation ("Toshiba"), relating to a new discrete component test system for testing integrated power modules. The Company believes that its alliance with Asia Electronics will increase LTX's penetration of the market for discrete component test systems in Japan.
Emphasize Quality and Reliability
The Company's People Driven Quality (PDQ) 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 Trillium Products Division in San Jose, California achieved ISO 9001 certification in 1996. The Company is committed to implementing ISO 9001 standards at all of its locations in 1997.
PRODUCTS AND MARKETS
Product Overview
The Company offers products in three broad product categories:
- Systems that are used to test linear and mixed signal devices, which include the Synchro Series and Ninety;
- Systems that are used to test digital devices, which include the Delta Series and Master Series, and enVision test development software; and
- Discrete component test systems, marketed as the iPTest product line.
The Company's test systems are used by semiconductor manufacturers for design verification, characterization, qualification and failure analysis of ICs. In addition, certain large electronic equipment manufacturers use the Company's test systems for incoming inspection and for further classification of ICs. All of the Company's test systems are comprised of multiple computer-controlled instruments which send signals to a device under test and measure the responses of that device to classify the device by performance characteristics and to ensure conformance with quality standards. The Company's test system instrumentation is controlled by operating system software which is developed by the Company. The Company also develops and sells test programs for specific devices and offers software packages for use by semiconductor manufacturers for test simulation in engineering design and test program generation, data collection and statistical analysis in manufacturing.
Linear and Mixed Signal ICs
Linear ICs are used in almost every electronic application. Physical occurrences, such as sound, images, temperature, pressure, speed, acceleration, position and rotation, consist of continuously varying information. Linear ICs are used to amplify, filter and shape this information. Mixed signal ICs convert the signals from linear ICs into digital signals that can be processed by a computer. Mixed signal devices also convert processed digital information into a linear form to control physical phenomena or to improve sound and images.
Linear and mixed signal ICs are widely used in automobiles, appliances, personal computers, telephone systems, personal communication products, such as cellular telephones and pagers, and home entertainment
products. The complexity and density of these ICs have increased rapidly over the past several years, as the demand for portable, battery-operated products has required IC manufacturers to integrate more functions on each chip and reduce size and power consumption. These technological advances have resulted in increased demand for higher performance linear/mixed signal test systems.
Digital ICs
Digital ICs include microprocessors, microcontrollers, programmable DSPs (digital signal processing), microperipherals and logic/ASIC (application specific IC) devices. These ICs are used for computing, controlling and calculating functions, and are at the heart of most electronic products. The most well known of these devices is the microprocessor, which is the enabler of personal computer technology. Microcontrollers, however, are much more broadly used in automobiles, appliances, home entertainment products and many other electronic products which utilize electronic control functions. Microprocessors can cost hundreds or even thousands of dollars, while microcontrollers typically cost tens of dollars. However, testing of microcontrollers can be as complex as microprocessors and requires high performance test systems.
LINEAR/MIXED SIGNAL PRODUCTS
LTX offers two product lines for testing linear/mixed signal ICs, the Synchro Series and Ninety.
Synchro Series
Synchro test systems are designed for high throughput testing of linear devices and for testing mixed signal devices that require high digital pattern rates and high digital pin counts along with analog signal generation and measurement requirements. The Synchro features DSP (digital signal processing) - -- per-pin architecture which allows for concurrent control of both linear and digital resources at each pin of the IC under test. This design permits the generation of test signals and measurements on many device pins at the same time, producing faster test times on high pin count ICs. The Synchro systems are modular in design which enables customers to add new options to their systems in the future. This allows customers to increase the capability of their Synchro system to meet their new test requirements. Since its introduction, the Company has significantly upgraded the performance and capabilities of the Synchro through the introduction of new hardware and software.
The Synchro Series includes the Synchro II, Synchro Plus and Synchro ProductionPAC test systems:
Synchro II. The configuration of the Synchro II test system is flexible. This permits LTX customers to choose from a wide array of options to meet the test requirements of a broad range of linear/mixed signal devices.
Synchro Plus. The Synchro Plus test system is configured with SuperSpeed Data Pins which can test mixed signal devices at data rates of up to 400 MHz. The Synchro Plus system addresses the test requirements of new, high speed devices used in applications such as disk drives for personal computers and advanced ATM(Asynchronous Transfer Mode) interface boards used to support the development of the information superhighway.
Synchro ProductionPAC. The Synchro ProductionPAC test systems are lower cost, smaller footprint, specifically focused configurations that address the production requirements of high volume, low cost mixed signal devices. The RFPAC system is configured to test devices used in the rapidly expanding wireless communications market. The PowerPAC addresses "smart" power devices that are being increasingly used in automobiles and consumer electronics. The TelePAC addresses commodity ICs used in telecommunications. The ConverterPAC is focused on devices used in multimedia applications.
All Synchro Series test systems are fully compatible in hardware, software and specification. Current prices range from approximately $400,000 for a Synchro ProductionPAC system to approximately $2,000,000 for a high pin count Synchro Plus system.
Ninety
The Ninety system is an improved version of the LTX77, the Company's first linear/mixed signal test system introduced in 1977. Although the Synchro has largely superseded the Ninety, the Company continues to manufacture the Ninety, primarily for customers who are already using the Ninety or LTX77 systems and desire to expand capacity. Many of the Ninety or LTX77 systems the Company has previously sold are currently still in use. In the past, the Company has upgraded the performance and capabilities of the Ninety system through the introduction of new hardware and software. As with the Synchro, a wide array of options are available. The current prices for a Ninety system range from approximately $200,000 to approximately $700,000, depending on the system configuration.
Software Tools
The Company offers two software options to facilitate the development of test solutions off-line, called Device Tool and Synchro Models Toolbox. These software tools work in conjunction with IC design and simulation software allowing test solutions to be designed and debugged with a model of the IC. Device Tool and the Synchro Models Toolbox allow the development of test solutions concurrent with the design of the IC, reducing customers time to market for the IC. The Company also offers data collection and analysis software called dataVision. This software is easily adapted by the customer to collect data from test systems and other manufacturing equipment and provides solutions for improving the efficiency of the manufacturing process through yield improvements and yield management. Device Tool typically sells for approximately $25,000 per user, Synchro Models Toolbox typically sells for approximately $35,000 per user, and dataVision typically sells for approximately $25,000 per user.
DIGITAL PRODUCTS
LTX offers two product lines for testing digital ICs, the Delta Series and Master Series, which are marketed under the Trillium name. The Delta Series and Master Series product lines are based on a resource-per-pin architecture which allows for a complete set of the test system's key features (timing generators, waveform formatting and pattern memory) for each pin channel of the test system. The Company believes that this architecture provides for faster, simpler characterization and engineering debugging of new ICs, better system timing accuracy, and simplified interfacing with computer-aided design systems. The Company's enVision test development software is sold with both the Delta Series and Master Series product lines.
Delta Series
The Delta Series includes the Delta 50 and Delta/STE test systems. The Delta 50 is designed to meet the production test requirements of newer high volume, lower cost devices such as microcontrollers. The Delta 50 has a compact design and is capable of testing 512 pins at data rates of up to 50 MHz or 256 pins at data rates of up to 100 MHz. The Delta/STE, introduced in fiscal 1996, incorporates Synchro mixed signal technology with Delta Series 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 50 and Delta/STE operate with the Company's enVision graphical software environment providing customers with compatibility among these systems. The current prices for the Delta Series test systems range from approximately $500,000 for a low pin count Delta 50 to approximately $3,000,000 for a high pin count Delta/STE.
In fiscal 1993, the Company entered into a development, manufacturing and marketing agreement with Ando, a Japanese STE manufacturer and majority-owned subsidiary of NEC, relating to the Delta 50. The Company has developed the Delta 50 in conjunction with Ando and has granted Ando exclusive rights to manufacture the Delta 50 in Japan. The Company has retained exclusive rights to manufacture the Delta 50 outside of Japan. Ando has the exclusive right to sell the Delta 50 in Japan and the Company has exclusive marketing rights for the rest of the world, with certain exceptions in each case.
Master Series
The Master Series product line includes the Deltamaster and Micromaster test systems, which are enhanced versions of the Company's original digital test system. The Deltamaster is a high-performance system with the capability of testing up to 256 pins at data rates of up to 80 MHz. The Micromaster is a lower-priced system that can test up to 256 pins at data rates of up to 40 MHz. The Micromaster is device interface and software compatible with the Deltamaster. Although the Delta Series product line is expected to eventually replace the Master Series, the Company will continue to sell the Master Series test systems, primarily to customers who are already using these systems and desire to expand capacity. The current prices for the Master Series range from approximately $400,000 for a low pin count Micromaster to approximately $2,000,000 for a high pin count Deltamaster.
enVision
enVision, the Company's object-oriented programming software is designed for use on all of its digital test systems. In earlier generation software languages, programming commands made direct reference to the hardware of the test system, which required the user to have a detailed knowledge of the system's hardware. In contrast, this detailed knowledge is not required when using enVision, thereby allowing the programmer to focus attention on refining the test program for the specific IC under test. Thus, the Company has designed enVision to be more device oriented than tester oriented. enVision permits a user to test multiple devices at the same time, significantly improving the throughput of the Company's digital test systems. enVision is an integral feature of the Delta Series product line and can be purchased by customers of the Master Series product line. The current price for enVision is approximately $15,000 per user.
DISCRETE PRODUCTS
The Company's iPTest systems are used to test discrete components, such as power transistors, as well as arrays of these components. The Company expects that arrays of discrete components, such as multi-device modules, will replace transistors in electric motor control and will permit a wider use of semiconductors in extremely high power applications, such as air conditioners, domestic appliances, electric locomotives and automobiles. These arrays of discrete components are mostly constructed from IGBT (insulated gate bipolar transistor) technology and include devices such as intelligent power modules and power MOSFETS. In fiscal 1996, the Company introduced the iPTest PowerTrak system to address intelligent power modules (IPM) as well as the iPTest high speed parallel test MosTrak system to address discrete power MOSFETS and IGBT transistors.
In fiscal 1995, the Company entered into a development, manufacturing and marketing agreement with Asia Electronics, a Japanese STE manufacturer which is 50% owned by Toshiba, relating to a new discrete component test system for testing integrated power modules. The Company believes that its ability to penetrate the Japanese market with its iPTest systems has been enhanced as a result of this agreement together with its new product introductions in fiscal 1996.
Prices of iPTest systems currently range from approximately $200,000 to approximately $500,000, depending on the system configuration and testing specifications.
SERVICE
The Company considers service to be an important aspect of its business. The Company's worldwide service organization is capable of performing installations and all necessary maintenance of test systems sold by the Company, including routine servicing of components manufactured by third parties. The Company provides a one-year parts and three-month labor warranty on test systems or options designed and manufactured by the Company, and a three-month labor warranty on components that have been purchased from other manufacturers and incorporated into the Company's test systems. The Company also provides training on the maintenance and operation of test systems sold to its customers.
The Company offers a wide range of service contracts which gives its customers flexibility to select the maintenance program best suited to their needs. Customers may purchase service contracts which extend
maintenance beyond the initial warranty provided by the Company with the sale of its test systems. Many customers enter into annual or multiple-year service contracts over the life of the equipment. The pricing of contracts is based upon the level of service provided to the customer and the time period of the service contract. As the installed base of LTX test systems has grown, service revenues have been increasing on an annual basis. The Company believes that service revenues should be less affected by the cyclicality of the semiconductor industry than sales of test equipment. The Company maintains 22 service centers around the world.
SALES AND DISTRIBUTION
The Company sells its products primarily through its worldwide sales organization. In Japan, the Company sells, services and supports its products through its joint venture with SMI, except that Ando has the right to manufacture and sell the Delta 50 to certain customers in Japan. The Company will share with its SMI joint venture specified portions of the royalties to be paid by Ando on any sales by it of the Delta 50. Asia Electronics also has the right to sell the Company's iPTest systems to certain customers in Japan. The Company uses a small number of independent sales representatives in certain other regions of the world.
Sales to customers outside the United States are subject to risks, including the imposition of governmental controls, the need to comply with a wide variety of foreign and United States export laws, political and economic instability, trade restrictions, changes in tariffs and taxes, longer payment cycles typically associated with international sales, and the greater difficulty of administering business overseas as well as general economic conditions. Sales by the Company to customers outside the United States are primarily denominated in United States dollars. Sales by the Company to customers outside North America were 64%, 66% and 61% of total sales of the Company in fiscal 1996, 1995 and 1994, respectively. For more information about the Company's foreign operations and export sales see Note 9 -- Geographic Area Information of Notes to the Company's Consolidated Financial Statements.
CUSTOMERS
The Company's customers include many of the world's leading semiconductor manufacturers. The Company's major customers in fiscal 1996 included:
Hitachi National Semiconductor Intel Philips Lucky Goldstar Rockwell Lucent Technologies SGS Thomson Motorola Siemens
Sales to these major customers accounted for approximately 60% of net sales in fiscal 1996. Sales to Philips accounted for approximately 17% of net sales in fiscal 1995. No single customer accounted for 10% or more of net sales in fiscal 1996 or fiscal 1994.
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 in the digital, linear and mixed signal IC and discrete component markets 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 $22.9 million, $19.8 million and $19.6 million during fiscal 1996, 1995 and 1994, respectively.
The Company's engineering strategy is to develop its test systems in an evolutionary manner so that they may be progressively upgraded. This approach preserves its customers' substantial investments in test programs, and, in general, maintains market acceptance for the Company's test systems. In order to
implement this strategy, the Company works closely with its customers to define new product features and to identify emerging applications for its products.
MANUFACTURING AND SUPPLY
LTX's principal manufacturing operations consist of component parts assembly, final assembly and testing at its manufacturing facilities in Westwood, Massachusetts and San Jose, California. Over the past year, the Company has significantly increased its outsourcing of certain subassemblies to contract manufacturers. The Company uses standard components and prefabricated parts manufactured to the Company's specifications. Most of the components for the Company's products are available from a number of different suppliers; however, certain components are purchased from a single supplier. Although LTX believes that all single-source components currently are available in adequate amounts, there can be no assurance that shortages will not develop in the future. Any disruption or termination of supply of certain single-source components could have an adverse effect on the Company's business and results of operations.
COMPETITION
The STE industry is highly competitive, with many other domestic and foreign companies participating in the markets for each of the Company's products. The Company's major competitors in the market for digital test systems are Schlumberger Limited, Teradyne, Inc. and Credence Systems Corporation, except in Japan where the Company's major competitor is Advantest Corporation (an affiliate of Fujitsu Limited). The Company's principal competitor for linear/mixed signal test systems is Teradyne, Inc., except in Japan where the Company's major competitor is Yokogawa Electric Works. The Company's principal competitor for discrete component test systems is Tesec, Ltd. Most of the Company's major competitors are also suppliers of other types of automatic test equipment and have significantly greater financial and other resources than the Company.
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. 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, 1996, the Company's backlog of unfilled orders for all products and services was $65.5 million, compared with $98.4 million at July 31, 1995. The Company expects to deliver approximately 86% of its July 31, 1996 backlog in fiscal 1997. While backlog is calculated on the basis of firm orders, no assurance can be given that customers will purchase the equipment subject to such orders. As a result, the Company's backlog at a particular date is not necessarily indicative of actual sales for any succeeding period.
PROPRIETARY RIGHTS
The development of the Company's products is largely based on proprietary information. The Company relies upon a combination of contract provisions, copyright, trademark and trade secret laws to protect its proprietary rights in products. It also has a policy of seeking patents on technology considered of particular strategic importance. Although the Company believes that the copyrights, trademarks and patents it owns are of value, the Company believes that they will not determine the Company's success, which depends principally upon its engineering, manufacturing, marketing and service skills. However, the Company intends to protect its rights when, in its view, these rights are infringed upon.
The Company licenses some software programs from third party developers and incorporates them in the Company's products. Generally, such agreements grant to the Company non-exclusive licenses with respect to the subject program and terminate only upon a material breach by the Company. The Company believes that such licenses are generally available on commercial terms from a number of licensors.
The use of patents to protect hardware and software has increased in the STE industry. The Company has at times been notified of claims that it may be infringing patents issued to others. Although there are no pending actions against the Company regarding any patents, no assurance can be given that infringement claims by third parties will not have a material adverse effect on the Company's business and results of operations. As to any claims asserted against the Company, the Company may seek or be required to obtain a license under the third party's intellectual property rights. There can be no assurance, however, that a license will be available under reasonable terms or at all. In addition, the Company could decide to resort to litigation to challenge such claims or a third party could resort to litigation to enforce such claims. Such litigation could be expensive and time consuming and could materially adversely affect the Company's business and results of operations.
EXECUTIVE OFFICERS OF THE COMPANY
Executive officers are chosen by and serve at the discretion of the Board of Directors of the Company.
Roger W. Blethen was appointed Chief Executive Officer of the Company in September 1996. Mr. Blethen has been a President since 1994 and has been a Director since 1980. He had been a Senior Vice President of the Company from 1985 until February 1994. Mr. Blethen was a founder of LTX and has served in a number of senior management positions with the Company since its formation in 1976.
John J. Arcari has been Chief Financial Officer and Treasurer of the Company since 1987. He had been Controller of LTX since joining the Company in 1981. Prior to joining LTX, Mr. Arcari spent ten years with the public accounting firm of Price Waterhouse as a certified public accountant.
Kenneth E. Daub was appointed a Senior Vice President of the Company in 1991 and is responsible for North American and Pacific Rim sales. From the time he joined the Company in 1987 until 1991, Mr. Daub served as Vice President responsible for North American Sales. Prior to joining the Company in 1987, Mr. Daub held various senior positions with Schlumberger Limited.
At July 31, 1996, the Company had a total of 1,032 employees, including 250 in engineering and product development, 207 in service and customer support, 366 in manufacturing and 209 in sales, marketing and administration. Many of the Company's employees are highly skilled, and the Company believes its future success will depend in large part on its ability to attract and retain such employees. None of the Company's employees are represented by a labor union, and the Company has experienced no work stoppages.
ENVIRONMENTAL AFFAIRS
The Company's manufacturing facilities are subject to numerous laws and regulations designed to protect the environment. The Company does not anticipate that compliance with these laws and regulations will have a material effect on its capital expenditures, earnings or competitive position.
ITEM 2.
ITEM 2. PROPERTIES
All of the Company's facilities are leased. The Company maintains its headquarters in Westwood, Massachusetts, where corporate administration, sales and customer support and manufacturing and engineering for its mixed signal products are located in a 167,000 square foot facility under a lease which expires in 2007. In May 1995, the Company subleased a 208,000 square foot facility in Westwood, Massachusetts for a ten year term. The Company's lease of this facility expires in 2010. Manufacturing and engineering for the Company's digital products are located in a 70,000 square foot facility in San Jose, California. The lease of
this facility expires in 1999. The Company also leases seven sales and customer support offices at various locations in the United States totaling approximately 40,000 square feet.
The Company's European headquarters is located in Woking, United Kingdom. The Company also maintains sales and support offices at four other locations in Europe. The manufacturing and engineering facilities for the Company's iPTest systems are located in Guildford, United Kingdom. The Company also maintains sales and support offices in six locations in the Far East. Office space leased in Europe and the Far East totals approximately 100,000 square feet.
The headquarters of LTX Co., Ltd., the Company's joint venture with SMI, is located in Kawasaki, Japan. The joint venture also leases additional offices in two other locations in Japan. Office space leased in Japan totals approximately 10,000 square feet.
The Company believes that its existing facilities are adequate to meet its current and foreseeable future requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company has been notified that the Korean semiconductor manufacturer Daewoo Corporation alleges that certain purchase agreements aggregating $50.1 million were not properly authorized and will not be honored, and the Company has commenced litigation seeking to enforce those agreements. At July 31, 1996, the Company's backlog of $65.5 million did not include these purchase agreements from Daewoo.
The Company has no other material pending legal proceedings other than routine litigation relating to its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the fourth quarter of fiscal 1996.
PART II
ITEM 5.
ITEM 5. MARKET VALUE FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company has never declared or paid cash dividends on the shares of Common Stock and does not anticipate paying any cash dividends on the shares of Common Stock in the foreseeable future. The Company currently intends to retain future earnings to fund the development and growth of its business.
As of September 20, 1996, there were 1,265 stockholders of record.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth on page 12 of the registrant's 1996 Annual Report under the caption "Selected Financial Information Five Year Summary" is incorporated herein by reference. That information summarizes certain selected financial data and should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1996 Compared to Fiscal 1995
Orders of $233.6 million for the Company's products and services in fiscal 1996 were slightly lower than the fiscal 1995 level of $236.9 million. The Company experienced strong industry demand during the first half of fiscal 1996. However, industry conditions began to weaken during the Company's third fiscal quarter and demand for test equipment continued to fall through the balance of the fiscal year. Primarily as a result of weakening industry conditions, the Company's backlog declined to $65.5 million at July 31, 1996, as compared to $98.4 million at July 31, 1995.
Net sales were $266.5 million in fiscal 1996 as compared to $210.3 million in fiscal 1995, an increase of 27%. Sales of the Company's mixed signal test systems were 18% higher in fiscal 1996 as compared to fiscal 1995 and sales of digital test systems in fiscal 1996 increased 55% over fiscal 1995. The increase in sales for both product lines in fiscal 1996 was primarily a result of strong semiconductor industry conditions during the first half of fiscal 1996 together with the large backlog of unshipped orders at the beginning of the fiscal year. Sales to customers outside of North America represented 64% of total sales in fiscal 1996 as compared to 66% of total sales in fiscal 1995.
The gross profit margin was 37.9% of net sales in fiscal 1996 as compared to 35.0% of net sales in fiscal 1995. The improvement in the gross profit margin in fiscal 1996 was a result of proportionately lower fixed manufacturing costs on the higher shipment levels, savings from product cost reduction programs and higher average selling prices, particularly on the Synchro Series. These improvements were partially offset by a provision of $3.6 million for excess and obsolete inventories in the fourth quarter of fiscal 1996. This provision was largely a result of obsolete components and parts due to product redesigns associated with the Company's Delta Series test systems.
Engineering and product development expenses were $22.9 million, or 8.6% of net sales, in fiscal 1996 as compared to $19.8 million, or 9.4% of net sales, in fiscal 1995. The increase in engineering and product development expenses reflects additional resources the Company has invested in product development programs relating to its Synchro, Delta and iPTest product lines.
Selling, general and administrative expenses were $46.8 million, or 17.5% of net sales, in fiscal 1996, as compared to $39.0 million, or 18.5% of net sales, in fiscal 1995. The increase in expenses in fiscal 1996 included the introduction of an employee profit sharing bonus plan and matching of contributions to the Company's 401(k) plan along with higher travel expenses and sales commissions on the higher level of sales.
Net interest income was $0.3 million in fiscal 1996 as compared to net interest expense of $3.8 million in fiscal 1995. Interest expense of $2.5 million in fiscal 1996 was $1.7 million lower than fiscal 1995 primarily as a result of the conversion of the Company's 13 1/2% Convertible Subordinated Debentures into 2,241,000 shares of the Company's common stock in July 1995. In fiscal 1996, the Company generated $2.8 million in interest income, $2.4 million more than in fiscal 1995, primarily as a result of the investment of the $55.8 million in proceeds received in October 1995 from a public offering of the Company's common stock.
The Company's tax provision in fiscal 1996 was $1.4 million, or 4.4% of pre-tax income. The Company fully used its United States federal net operating loss carryforward, and a portion of its United States federal tax credit carryforwards, during fiscal 1996. As a result, the tax provision represents a minimal level of U.S. federal, state and foreign income taxes. In fiscal 1995, the tax provision of $0.4 million represented only certain state and foreign tax liabilities.
The Company's Japanese subsidiary's results of operations were approximately break-even in fiscal 1996 and 1995. As a result, the minority partner's share of the Company's Japanese subsidiary's results was insignificant.
The Company had net income of $30.3 million, or $0.82 per share, in fiscal 1996, as compared to $10.7 million, or $0.36 per share, in fiscal 1995. The 183% increase in net income year-to-year was largely a result of the combination of higher sales levels, an improvement in the gross profit margin as a percentage of net sales, the reduction in operating expenses as a percentage of net sales and added interest income.
Management believes that the current weak semiconductor equipment industry conditions will continue for the near term. These conditions will adversely affect the Company's results of operations. The Company has reduced its workforce by approximately 150 employees, since July 1996, and has taken additional steps to reduce discretionary spending and limit capital expenditures in fiscal 1997.
Fiscal 1995 Compared to Fiscal 1994
The Company experienced strong semiconductor industry conditions during fiscal 1995 which resulted in a significant increase in demand for its test systems. Orders for the Company's products and services were $236.9 million in fiscal 1995 as compared to $197.9 million in fiscal 1994, an increase of approximately 20%. Orders for the Company's linear and mixed signal test systems remained at a high level in fiscal 1995, increasing 11% over fiscal 1994, while orders for the Company's digital products increased 41% year-to-year. As a result, the Company's backlog of unfilled orders for products and services was $98.4 million at July 31, 1995 as compared to $71.8 million at July 31, 1994.
Net sales were $210.3 million in fiscal 1995 as compared to $168.3 million in fiscal 1994, an increase of approximately 25%. Sales of the Company's linear and mixed signal test systems were about 40% higher in fiscal 1995 as compared to fiscal 1994. Sales of the Company's digital test systems in fiscal 1995 were slightly higher than fiscal 1994.
The gross profit margin was 35.0% of net sales in fiscal 1995 as compared to 28.4% in fiscal 1994. The improvement in the gross profit margin was largely a result of proportionately lower fixed manufacturing costs on the higher level of shipments and higher average selling prices. In fiscal 1994, the gross profit margin was reduced by 2.1% as a result of a $3.5 million provision for excess and obsolete inventories.
Engineering and product development expenses were $19.8 million, or 9.4% of net sales, in fiscal 1995, as compared to $19.6 million, or 11.6% of net sales, in fiscal 1994. Engineering and product development expenses have remained approximately equal year-to-year reflecting the Company's continuing development efforts, particularly for its Delta Series and Synchro product lines.
Selling, general and administrative expenses were $39.0 million, or 18.5% of net sales, in fiscal 1995, as compared to $42.3 million, or 25.1% of net sales, in fiscal 1994. The decrease in selling, general and administrative expenses of $3.3 million was largely a result of cost reduction and restructuring measures in fiscal 1994.
In March 1994, the Company announced a major restructuring program which consisted of a consolidation of facilities and a workforce reduction of approximately 100 employees. As a result of those decisions, the Company took a $14.4 million restructuring charge to its second quarter results of operations in fiscal 1994. The restructuring charge largely related to the consolidation of excess leased facilities, primarily in Westwood, Massachusetts, and severance payments for terminated employees.
Net interest expense was $3.8 million in fiscal 1995 as compared to $3.9 million in fiscal 1994. In July 1995, the Company's 13 1/2% Convertible Subordinated Debentures Due 2011 were converted into 2,241,000 shares of Common Stock, which reduced interest expense beginning in the fourth quarter of fiscal 1995. In addition, lower average bank borrowings reduced interest expense in fiscal 1995 as compared to fiscal 1994. This reduction in interest expense was largely offset by an increase in interest due to a long-term loan the Company received in July 1994.
The tax provision of $0.4 million in fiscal 1995 reflected certain state and foreign tax provisions. The Company is in a net operating loss carryforward position in most tax jurisdictions. There was no tax provision in fiscal 1994 due to the net operating loss for the year.
The Company's Japanese subsidiary's results of operations were break-even in fiscal 1995. In fiscal 1994, the minority partner's share of the Company's Japanese subsidiary's net loss was $1.0 million.
The Company had net income of $10.7 million, or $0.36 per share, in fiscal 1995, as compared to a net loss of $31.3 million, or $1.23 per share, in fiscal 1994. The net loss in fiscal 1994 included a restructuring charge of $14.4 million and a provision for excess and obsolete inventories of $3.5 million. The Company's
operating results improved sequentially during fiscal 1995, beginning with net income of $0.8 million in the first quarter and ending with net income of $5.1 million in the fourth quarter. The quarterly improvement in the Company's results reflected the increasing level of sales, higher gross profit margin and reduction of operating expenses as a percentage of net sales.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short term investments were $76.0 million at July 31, 1996 as compared to $29.2 million at July 31, 1995. The increase in cash and short term investments of $46.8 million was a result of $7.7 million of net cash provided by operating activities, $20.0 million of net cash used for property and equipment expenditures and $59.7 million of net cash provided by financing activities.
The positive net cash flow of $7.7 million from operating activities was largely a result of the net income of $30.3 million and non-cash depreciation charges of $10.5 million, offset by a combined increase in accounts receivable and inventories of $33.7 million. The increase of $14.3 million in accounts receivable in fiscal 1996 was a result of the increase in fourth quarter sales of $7.3 million, in combination with a lower level of collections on fourth quarter shipments, as compared to the fourth quarter of fiscal 1995. The increase in inventories of $19.4 million during the fiscal year largely reflected the requirement to support higher sales levels. In addition, the increase in inventories also reflected the adverse effect of customers rescheduling test systems the Company had anticipated delivering in the fourth quarter. The increase in accounts payable of $6.9 million in fiscal 1996 is a result of the increase in inventories. The Company made cash expenditures of $4.9 million in fiscal 1996, primarily relating to sublease agreements associated with excess leased facilities, which reduced the balance of its restructuring reserve from $6.1 million at July 31, 1995 to $1.2 million at July 31, 1996.
Property and equipment additions of $20.0 million during fiscal 1996 were largely for use in product development and customer support activities, as well as leasehold improvements and furnishings for the Company's facility in Massachusetts. The Company anticipates that expenditures for property and equipment will not exceed $12 million (approximately equal to depreciation charges) in fiscal 1997.
The Company's Japanese subsidiary had bank borrowings of $8.3 million at July 31, 1996 as compared to $8.5 million at July 31, 1995. The Company had no borrowings outstanding under its domestic bank line at July 31, 1996 or 1995.
In October 1995, the Company received $55.8 million in proceeds as a result of a public offering of 5.25 million shares of common stock. In June 1996, Ando purchased 1.0 million shares of common stock, for $2.3 million, pursuant to the partial exercise of its warrant issued by the Company. In June 1996, the Company announced a stock repurchase program to purchase up to 3.5 million shares of its common stock. Under this program, the Company purchased 0.2 million shares of common stock, for $1.0 million, during the fourth quarter of fiscal 1996.
In July 1995, the Company's 13 1/2% Convertible Subordinated Debentures Due 2011 were converted into 2,241,000 shares of common stock. The outstanding principal amount of $15.7 million of Debentures was converted at the conversion price of $7.00 per share. As a result, long-term debt was reduced by $13.1 million for the book value of the Debentures and stockholders' equity was increased by $12.1 million.
Management believes that the Company has sufficient cash resources to meet its fiscal 1997 requirements. These resources include cash and short term investments of $76.0 million at July 31, 1996 together with future cash flows from operations.
FORWARD-LOOKING STATEMENTS
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, the Company's belief, under "Results of Operations" as to the continued weakness of industry conditions and under "Liquidity and Capital Resources", as to the adequacy of its cash resources. Such forward-looking statements involve risks and uncertainties including, but not limited to, the following important factors that could cause actual results to differ materially from those in the forward-looking statement:
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, and is currently experiencing, 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.
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 digital and linear/mixed signal and discrete component test systems sold in a particular period. The impact of these and other factors on the Company's sales and operating results in any future period cannot be forecast with accuracy. In addition, the need for continued investment in research and development, for capital equipment requirements and for extensive worldwide customer support capability results in significant fixed costs which would be difficult to reduce in the event that the Company does not meet its sales objectives.
Importance of New Product Introductions
The semiconductor test equipment ("STE") market is subject to rapid technological change and new product introductions, as well as advancing industry standards. The development of increasingly complex semiconductors and the utilization of semiconductors in a broader spectrum of products has driven the need for more advanced test systems to test such devices at an acceptable cost. The Company's ability to remain competitive in the digital, linear and mixed signal integrated circuit ("IC") and discrete component markets 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. The Company also has to manufacture its products in volume at a competitive price and on a timely basis to enable customers to integrate them into their operations as they begin to produce their next generation of semiconductors. The Company's failure to have a competitive test system available when required by a semiconductor manufacturer would make it substantially more difficult for the Company to sell test systems to that manufacturer for a number of years. The Company has in the past experienced delays in introducing certain of its products and enhancements, and there can be no assurance that it will not encounter technical or other difficulties that could in the future delay the introduction of new products or enhancements. If new products have reliability or functionality problems, then reduced, canceled or rescheduled orders, higher manufacturing costs, delays in collecting accounts receivable and additional warranty expense may result, which could reduce gross margins on new product sales and otherwise materially affect the Company's business and results of operations. The
Company's Delta Series of products continues to be subject to the risks associated with new product introductions, including the risk that reliability or functionality problems could increase expenses and reduce gross margins on new product sales. Furthermore, announcements by the Company or its competitors of new products could cause customers to defer or forego purchases of the Company's existing products, which would also adversely affect the Company's business and results of operations. There can be no assurance that the Company will be successful in the introduction and volume manufacture of its new products, that such introduction will coincide with the development by semiconductor manufacturers of their next generation semiconductors or that such products will satisfy customer needs or achieve market acceptance. The failure to do so could materially adversely affect the Company's business and results of operations.
Highly Competitive Industry
The STE industry is highly competitive in all areas of the world. Most of the Company's major competitors have substantially greater financial resources and some have more extensive engineering, manufacturing, marketing and customer support capabilities than the Company. The Company expects its competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. The Company principally competes on the basis of performance, cost of test, reliability, customer service, applications support, price and ability to deliver its products on a timely basis. New product introductions by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's existing products and could prevent the successful introduction of the Company's new products. In addition, increased competitive pressure could lead to intensified price-based competition, resulting in lower prices and adversely affecting the Company's business and results of operations. The Company believes that to remain competitive it will require significant financial resources for investment in new product development and for the maintenance of customer support centers worldwide. There can be no assurance that the Company will be able to compete successfully in the future.
Customer Concentration
The loss of a major customer or reduction in, or rescheduling or cancellation of, orders by major customers, including reductions, cancellations or rescheduling due to market or competitive conditions in the semiconductor industry, has had in the past and would have in the future an adverse effect on the Company's business and results of operations. In addition, the Company's ability to increase its sales will depend in part upon its ability to obtain orders from new customers. The loss of one or more of its top ten customers could have a material adverse effect on the Company's business and results of operations.
Dependence upon Key Personnel
The Company's success is dependent upon certain key management and technical personnel. There is intense competition for a limited number of qualified employees among companies in the semiconductor test equipment industry, and the loss of certain of the Company's employees or an inability to attract and motivate highly skilled employees could adversely affect its business.
Dependence upon Key Suppliers
Most of the components for the Company's products are available from a number of different suppliers; however, certain components are purchased from a single supplier. Any disruption or termination of supply of components, particularly single source components, could have an adverse effect on the Company's business and results of operations.
Acquisitions
The Company from time to time may acquire technologies, product lines or businesses that are complementary to those of the Company. Although the Company believes that integration of acquired technologies, product lines and businesses will result in long-term growth and profitability, there can be no assurance that the Company will be able to successfully negotiate finance or integrate such acquired technologies, product lines or businesses. Furthermore, the integration of an acquired company or business may cause a diversion of management time and resources. There can be no assurance that a given acquisition, if consummated, would not materially adversely affect the Company.
Proprietary Rights
The Company's future success depends in part upon its proprietary technology. Although the Company attempts to protect its proprietary technology through a combination of contract provisions, trade secrets, copyrights and patents, it believes that its future success depends more upon its engineering, manufacturing, marketing and service skills. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology or the independent development by others of similar technology. Although there are no pending actions against the Company regarding any patents, no assurance can be given that infringement claims by third parties will not have a material adverse effect on the Company's business and results of operations.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of LTX Corporation:
We have audited the accompanying consolidated balance sheet of LTX Corporation and subsidiaries as of July 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended July 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts September 6, 1996
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our report, included in this Form 10-K, into LTX Corporation's previously filed registration statements on Form S-8 (File No. 2-77475, File No. 2-90698, File No. 33-7018, File No. 33-14179, File No. 33-32140, File No. 33-32141, File No. 33-33614, File No. 33-38675, File No. 33-51683, File No. 33-51685, File No. 33-57457, File No. 33-57459, File No. 33-65245 and File No. 33-65247).
ARTHUR ANDERSEN LLP
Boston, Massachusetts October 14, 1996
LTX CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
LTX CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
LTX CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
LTX CORPORATION
The accompanying notes are an integral part of these consolidated financial statements.
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
LTX Corporation ("the Company") designs, manufactures, and markets automatic test equipment for the semiconductor industry that is used to test digital, linear and mixed signal (a combination of digital and linear) integrated circuits ("ICs") and discrete semiconductor components. The Company is headquartered in Westwood, Massachusetts, has development and manufacturing facilities in Westwood, Massachusetts and San Jose, California, and worldwide sales and service facilities to support its customer base.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned domestic subsidiaries and wholly-owned and majority-owned foreign subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The Consolidated Statement of Cash Flows for fiscal year 1994 has been reclassified to conform with the current year's presentation.
Minority interest in net loss of subsidiary represents the minority shareholder's proportionate share of the results of operations of the Company's majority-owned Japanese subsidiary.
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 amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. 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. 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 nonmonetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year, except for sales, cost of sales and depreciation which are primarily translated at historical rates. Net realized and unrealized gains and losses resulting from foreign currency remeasurement and transaction gains and losses, which have not been significant in the past three fiscal years, are included in the results of operations.
Revenue Recognition
Revenue from product sales and related warranty costs are recognized at the time of shipment. Service revenues are recognized over the applicable contractual periods or as services are performed. Revenues from engineering contracts are recognized over the contract period on a percentage of completion basis.
Engineering and Product Development Costs
The Company expenses all engineering, research and development costs as incurred. Expenses subject to capitalization in accordance with the Statement of Financial Accounting Standards No. 86, relating to certain software development costs, were insignificant.
Income Taxes
Deferred income taxes are recorded for temporary differences between the financial reporting and tax basis of assets and liabilities. Research and development tax credits are recognized for financial reporting purposes to the extent they can be used to reduce the tax provision. The Company has not provided for federal income taxes on the cumulative undistributed earnings of its foreign subsidiaries, which is not significant, in the past since it reinvested those earnings. At July 31, 1996, most of the Company's foreign subsidiaries had accumulated deficits.
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Income (Loss) per Share
Primary and fully diluted net income per share are based on the weighted average number of shares of common stock and common stock equivalents (shares issuable under stock option plans and warrants) outstanding. None of the Company's Convertible Subordinated Debentures are common stock equivalents. Net loss per share is based on the weighted average number of shares of common stock outstanding only, as the inclusion of common stock equivalents would be anti-dilutive.
Financial Instruments
Cash and Short-Term Investments
The Company considers all highly liquid investments which are readily convertible to cash and which have original maturity dates of three months or less to be cash equivalents. Cash equivalents consist primarily of repurchase agreements and commercial paper. Effective August 1, 1995 the Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (FAS 115). In accordance with FAS 115, investments in debt securities are classified as trading, available-for-sale or held-to-maturity. Investments are classified as held-to-maturity when the Company has the positive intent and ability to hold those securities to maturity. Held-to-maturity securities are stated at amortized cost with premiums and discounts amortized to interest income over the life of the investment.
All of the Company's short-term investments are considered as held-to-maturity and consist of $2,992,000 of commercial paper, $1,950,000 of U.S. Treasury bills and $4,999,000 of other corporate debt securities. 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 the Fair Value of Financial Instruments," which was adopted by the Company effective August 1, 1995, requires that disclosure be made of estimates of the fair value of financial instruments. The fair value of the Company's notes payable and long-term liabilities is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At July 31, 1996, the carrying value of $8,252,000 for notes payable and $20,788,000 for long-term liabilities, including current portion, approximates fair value. At July 31, 1996, the Company's 7 1/4% Convertible Subordinated Debentures Due 2011 had a carrying value of $7,308,000 and the estimated fair value was approximately $5,800,000. For all other balance sheet financial instruments the carrying amount approximates fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments in cash equivalents, short-term investments and trade receivables. The Company places its investments with high-quality financial institutions, limits the amount of credit exposure to any one institution and has established investment guidelines relative to diversification and maturities designed to maintain safety and liquidity. The Company's trade receivables result primarily from sales to semiconductor manufacturers located in North America, Japan, the Pacific Rim and Europe. Receivables are from major corporations or are supported by letters of credit. The Company maintains reserves for potential credit losses and such losses have been immaterial.
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Property and Equipment
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121), which is effective for the Company's fiscal year beginning August 1, 1996. FAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management anticipates that the application of the new statement will not have a significant impact on the results of operations or financial condition of the Company.
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123) which is effective for the fiscal year ending July 31, 1997. FAS 123 requires employee stock-based compensation to be either recorded or disclosed at its fair value. The Company will adopt the disclosure-only alternative under FAS 123 and will include the additional required disclosures in its fiscal 1997 consolidated financial statements.
3. NOTES PAYABLE
The Company's Japanese subsidiary had borrowings outstanding of $8,252,000 at July 31, 1996 under demand bank lines of credit. Borrowings of $7,130,000 at the local prime rate plus 1/4%, are guaranteed by the Company's minority partner in Japan, and borrowings of $1,122,000, at the local prime plus 3/4%, under a $1,869,000 demand bank line, are guaranteed by the Company. At July 31, 1995, the Company's Japanese subsidiary had borrowings outstanding of $8,457,000 under demand bank lines of credit.
The Company had no borrowings outstanding under a $5,000,000 domestic bank line at July 31, 1996 and 1995. This line of credit matures in December 1996 and bears interest at the bank's prime rate. Borrowing availability under the line is on a formula basis and borrowings are unsecured. The line of credit has financial covenants which largely relate to results of operations and a minimum level of liquidity.
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM LIABILITIES
In July 1994, the Company received $20,000,000 from Ando Electric Co., Ltd. of Japan ("Ando") under a long-term loan agreement which extends through July 2001. The loan bears interest at 8%, which is payable semi-annually and has semi-annual principal payments of $2,000,000 beginning in January 1997. The loan is secured by the Company's inventories and capital equipment and is subordinated in right of payment to senior indebtedness of the Company. In connection with this loan agreement, the Company issued to Ando a warrant to purchase up to 2,000,000 shares of common stock during the term of the loan agreement (See Note 7). The Company also expanded its existing license and development agreement with Ando to allow for further joint development of the Company's Delta 50 technology. Proceeds from the loan were used to repay domestic bank borrowings and to finance working capital requirements.
5. CONVERTIBLE SUBORDINATED DEBENTURES
On April 25, 1986, the Company issued and sold at par $35,000,000 of 7 1/4% Convertible Subordinated Debentures Due 2011. A total of $7,308,000 of the original issue of $35,000,000 remained outstanding on July 31, 1996 and 1995. The debentures are subordinated in right of payment to senior indebtedness and are convertible by the holders into common stock at $18 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 maturity date of debentures in 2011. Interest is payable semi-annually on April 15 and October 15.
In July 1995, the Company's 13 1/2% Convertible Subordinated Debentures Due 2011 were converted into 2,240,581 shares of common stock. The outstanding principal amount of $15,693,000 of Debentures was converted at the conversion price of $7.00 per share. On the conversion date, the Debentures had a book value of $13,149,000, which included the remaining unamortized original issue discount of $2,544,000.
6. INCOME TAXES
At July 31, 1996 the Company had, for tax purposes, $2,244,000 of federal tax credits available for carryforward, which expire in fiscal years 2000 through 2004.
The tax provision of $1,395,000 in fiscal 1996 consisted of $600,000 in currently payable federal income taxes, $195,000 in currently payable state income taxes and $600,000 in currently payable foreign income taxes. The tax provision of $372,000 in fiscal 1995 consisted of $50,000 in currently payable state income taxes and $322,000 in currently payable foreign income taxes.
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities as of July 31, 1995 have been reclassified to reflect the tax returns as actually filed. The valuation allowance relates to uncertainty surrounding the realization of the deferred tax assets.
7. STOCKHOLDERS' EQUITY
Authorized Shares
At the Company's Annual Meeting of Stockholders in December 1993, the stockholders approved an increase in the Company's authorized common stock from 50,000,000 shares to 100,000,000 shares.
Stock Repurchase Program
In June 1996, the Board of Directors authorized a stock repurchase program under which the Company may acquire up to 3,500,000 shares of its common stock over a 12 month period. In fiscal 1996, the Company purchased 200,000 shares, to be held in treasury, at a cost of $1,005,000 under this program.
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").
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 1990 Plan and the U.K. Plan provide for the granting of options to employees to purchase shares of common stock at not less than 100% of the fair market value on the date of grant. The 1990 Plan also provides for the granting of options to an employee, director or consultant of the Company or its subsidiaries to purchase shares of common stock at prices to be determined by the Board of Directors. Compensation expense relating to shares granted under this plan at less than fair market value has been charged to operations over the applicable vesting period. Options under both plans are exercisable over vesting periods which are typically three years beginning one year from the date of grant. In December 1995, the stockholders of the Company approved an increase to the number of shares of common stock that may be granted under the 1990 Plan, through October 2000, from 2,700,000 shares to 3,700,000 shares. At July 31, 1996, 2,105,857 shares were subject to future grant under the 1990 Plan and 100,000 shares were subject to future grant under the U.K. Plan.
Of the total options outstanding at July 31, 1996, 1,469,082 shares were exercisable.
Warrants
In July 1994, in connection with a term loan agreement, the Company issued to Ando 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 loan agreement (see Note 4). On June 17, 1996 Ando purchased 1,000,000 shares of common stock under its warrant. At July 31, 1996, 1,000,000 shares of common stock under this warrant remained outstanding.
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 limits the number of shares which can be issued for any semi-annual plan period to 150,000 shares and, over the term of the plan, the Company may issue up to 1,200,000 shares. At July 31, 1996, 371,392 shares were available for future issuance under this plan.
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
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 upon 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
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 $2,006,000 in fiscal 1996.
9. GEOGRAPHIC AREA INFORMATION
Transfer prices on products sold to foreign subsidiaries are intended to produce profit margins that correspond to the subsidiary's sale and support efforts.
LTX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS
Total rental expense for fiscal 1996, 1995 and 1994 was $7,993,000, $9,611,000 and $9,849,000, respectively.
LTX CORPORATION
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEMS 10-13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE COMPENSATION SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under these Items is included in Item 1. of Part I of this report and in the Proxy Statement for the Annual Meeting of Stockholders to be held on December 10, 1996, under the headings "Certain Stockholders," "Election of Directors," and "Compensation of Executives," which information is incorporated herein by reference. Such Proxy Statement shall be filed with the Securities and Exchange Commission not later than 120 days after the end of the Company's fiscal year, July 31, 1996.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The following consolidated financial statements of LTX Corporation are included in response to Item 8:
Report of Independent Public Accountants
Consolidated Balance Sheet -- July 31, 1996 and 1995
Consolidated Statement of Operations for the years ended July 31, 1996, 1995 and 1994
Consolidated Statement of Stockholders' Equity for the years ended July 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows for the years ended July 31, 1996, 1995 and 1994
Notes to the Consolidated Financial Statements
(A) 2. SCHEDULES
Separate financial statements of LTX Corporation (parent only) have been omitted since they are not required.
All other schedules have been omitted since they are not required, not applicable or the information is included in the financial statements or notes thereto.
(A) 3. EXHIBITS
Certain of the exhibits listed hereunder have previously been filed with the Commission as exhibits to the Company's Registration Statement No. 2-75470 on Form S-1 filed December 23, 1981, as amended (the 1981 Registration Statement); to the Company's Registration Statement No. 2-94218 on Form S-1 filed November 8, 1984, as amended (the 1984 Registration Statement); to the Company's Registration Statement No. 33-35401 on Form S-4 filed June 26, 1990, as amended (the 1990 Registration Statement No. 1); to the Company's Registration Statement No. 33-39610 on Form S-3 filed June 10, 1991, as amended (the 1991 Registration Statement No. 1); to the Company's Amendment No. 1 to Registration Statement No. 33-62125 on Form S-3 filed September 11, 1995 (the 1995 Registration Statement No. 1); to the Company's Form 8A/A filed September 30, 1993 amending the Company's Registration Statement on Form 8-A filed November 24, 1982 (the 1993 8A/A); to the Company's Current Report on Form 8-K, filed May 11, 1989; or the Company's Annual Reports on Form 10-K for one of the years ended July 31, 1995, 1994, 1993, 1992, 1991, 1990, 1989, 1988, 1987, 1986, 1985, 1984 and 1983 and are hereby incorporated by reference. The location of each document so incorporated by reference is noted parenthetically.
Pursuant to Item 601 of Regulation S-K, certain instruments with respect to long-term debt not exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis are not filed herewith. The Company hereby agrees to furnish to the Commission a copy of each such instrument upon request.
ITEM 14(B). REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of fiscal 1996.
ITEM 14(C). EXHIBITS
The subsidiaries listed are all included in the consolidated financial statements of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LTX CORPORATION
/s/ ROGER W. BLETHEN By.................................. ROGER W. BLETHEN CHIEF EXECUTIVE OFFICER, PRESIDENT AND DIRECTOR
October 10, 1996