part 2:
...
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains certain forward-looking statements
relating to, among other things, estimates of economic and industry
conditions, sales trends, expense levels and capital expenditures.
Actual results may vary from those contained in such
forward-looking statements. See "Business Risks" below.
RESULTS OF OPERATIONS
During the latter half of fiscal 1998 (primarily in the Company's
fourth quarter) and the three months ended October 31, 1998, the
semiconductor test equipment ("STE") industry and the
semiconductor and semiconductor equipment industries experienced
a significant decline in demand due to over capacity and also due to the
Asia currency revaluations and the resultant economic slowdown in
Asia and Japan. As a result of this steep decline and the Company's
product transition to Fusion, its system-on-a-chip test platform, the
Company experienced lower than expected revenues and
consequently experienced losses from operations. The Company
initiated actions to restructure its operations and recorded
restructuring and other charges totaling $47.0 million during fiscal
1998. The restructuring initiated by the Company includes
consolidating its San Jose manufacturing facility with its
Massachusetts facility, restructuring its sales channels in Japan and
Asia and divesting its iPTest division in the U.K. The actions initiated
will reduce the Company's workforce by approximately 30%; the
reduction of its workforce affected all functions of its business.
Three Months Ended October 31, 1998 Compared to the Three
Months Ended October 31, 1997
Net sales for the three months ended October 31, 1998 were $27.0
million (including $2.5 million of deferred revenue from the
Company's Fusion alliance with Ando Electric Co., Ltd.) as compared
to $54.2 million in the same quarter of the prior year, a decrease of
50.2%. The decrease in revenue is a result of the STE and
semiconductor industries experiencing a significant decline in activity.
The Company anticipates that revenues will continue to be adversely
affected by decreased demand for semiconductors during the
remainder of fiscal 1999. Geographically, sales to customers outside of
North America were 54% and 67% of total net sales in the three
months ended October 31, 1998 and 1997, respectively.
The gross profit margin was 26.5% of net sales in the three months
ended October 31, 1998, compared to 35.1% of net sales in the same
quarter of the prior year. The decrease in the gross margin is a result
of the change in the Company's product mix coupled with lower sales
prices due to the slowdown in the industry and costs associated with
the Company's transition to its Fusion product line. The decrease also
results from a lower level of sales relative to fixed manufacturing
costs. The Company anticipates that its gross margin as a percentage
of sales will improve as revenues from its Fusion product line increase
and as the Company realizes the full impact of the consolidation of its
manufacturing facilities.
Engineering and product development expenses were $6.0 million or
22.2% of net sales, in the three months ended October 31, 1998, as
compared to $6.7 million, or 12.4% of net sales, in the same quarter of
the prior year. During the first quarter of fiscal 1999, the Company
began to realize savings in relation to the higher levels of spending
during fiscal 1998 when the Company was at an earlier stage of
development of Fusion product. Engineering and product
development expenses are expected to continue to decline as key
Fusion development projects are completed during fiscal 1999.
Selling, general and administrative expenses were $7.9 million or
29.1% of net sales, in the three months ended October 31, 1998, as
compared to $10.9 million, or 20.1% of net sales, in the same quarter of
the prior year. The decrease in selling, general and administrative
expenses in absolute dollars largely relates to the Company's
restructuring efforts taken during the fourth quarter of fiscal 1998.
The Company anticipates selling, general and administrative
expenses will continue to decrease during fiscal 1999 as the Company
realizes the savings of its restructuring efforts.
Net interest expense was $0.2 million in the three months ended
October 31, 1998, as compared to net interest income of $0.1 million in
the same quarter in the prior year and occurred because of the
reduction in the Company's average cash balances.
The Company had no tax provision for the three months ended
October 31, 1998, as compared to $0.4 million in the same quarter in
the prior year. The change in the provision relates to the net loss from
operations and the net operating loss carryforward.
Net loss was $6.9 million, or ($0.19) per share, in the three months
ended October 31, 1998. The Company had a net income of $1.1
million, or $0.03 per share, in the same quarter of the prior year.
Industry conditions were severely depressed during the latter half of
fiscal 1998 and the first three months of fiscal 1999, particularly in the
Asian and Japanese markets due to economic conditions in those
regions. Management believes that weak semiconductor equipment
industry conditions will continue for the near term. Until there is
substantial improvement in industry conditions, the Company's
results of operations may continue to be adversely affected. The
Company's results of operations would be further adversely affected if
it were to experience lower than anticipated order levels, cancellations
of orders in backlog, extended customer delivery requirements, lower
than anticipated revenues or lower than anticipated margins due to
unfavorable product mix.
Liquidity and Capital Resources
At October 31, 1998, the Company had $19.6 million in cash and
equivalents and working capital of $29.4 million, as compared to $25.1
million of cash and equivalents and $34.0 million of working capital at
July 31, 1998. The decrease in cash balance of $5.5 was a result of net
cash used in operating activities of $4.5 million, net cash used for
additions to property and equipment of $0.5 million, net cash used in
financing activities of $1.1 million and a $0.6 million net cash increase
due to the affect of exchange rates on cash.
The Company's Japanese subsidiary had borrowings of $5.3 million at
October 31, 1998 as compared to $4.8 million at July 31, 1998. The
increase is a result of exchange rate fluctuation.
In October 1998, the Company obtained a $10.0 million domestic
credit facility from a bank. The facility is secured by all assets of the
Company and bears interest at the bank's prime rate plus 1%.
Borrowing availability under the facility is based on a formula of
eligible accounts receivable. During fiscal 1998, the Company had a
$20 million domestic credit facility which had no outstanding
borrowings and expired in July 1998. In addition, the Company had a
$5 million equipment lease line with the same banks which had an
outstanding balance of $2,278,000 at October 31, 1998. The Company
repaid the lease line in full during November 1998 upon its
termination.
The Company's working capital has continued to decrease subsequent
to year-end. The Company has taken and continues to take
significant steps to reduce spending and capital expenditures and sell
its non-strategic assets. The Company anticipates that these steps,
combined with its working capital and its recently obtained credit
facility will be adequate to fund the Company's currently proposed
operating activities for the next twelve months. However, a significant
shortfall from plan as a result of further deterioration in the STE
industry or delayed acceptance of the Company's new Fusion
products would unfavorably impact the Company's cash flow. In that
event, the Company would need to seek additional debt or equity
financing. There can be no assurance that the Company could obtain
the necessary financing.
Year 2000
A discussion of the impact of the Year 2000 to the Company appears
under the heading "Business Risks" below.
BUSINESS RISKS
The Company in this report makes, and may from time to time
elsewhere make, disclosures which contain forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Such disclosures in this report include, without
limitation, statements regarding the development, introduction,
acceptance, and market for Fusion, the Company's belief, under
"Results of OperationsThree Months Ended October 31, 1998 As
Compared to the Three Months Ended October 31, 1997," as to
anticipated revenues, margins and levels of engineering and product
development expenses and the Company's belief, under "Liquidity and
Capital Resources," as to the adequacy of its cash resources. Such
forward-looking statements involve risks and uncertainties
including, but not limited to, the following important factors that could
cause actual results to differ materially from those in the
forward-looking statement.
Fluctuations in Sales and Operating Results
Given the relatively large selling prices of the Company's test systems,
sales of a limited number of test systems account for a substantial
portion of sales in any particular fiscal quarter and a small number of
transactions could therefore have a significant impact on sales and
gross margins for that fiscal quarter. The Company's sales and
operating results have fluctuated and could in the future fluctuate
significantly from period to period, including from one quarterly
period to another, due to a combination of factors, including the
cyclical demand of the semiconductor industry, order cancellations or
rescheduling by customers, the large selling prices of the Company's
test systems (which typically result in a long selling process),
competitive pricing pressures and the mix between and configuration
of test systems sold in a particular period. The impact of these and
other factors on the Company's sales and operating results in any
future period cannot be forecast with accuracy. In addition, the need
for continued investment in research and development, for capital
equipment requirements and for extensive worldwide customer
support capability results in significant fixed costs which would be
difficult to reduce in the event that the Company does not meet its
sales objectives.
Importance of New Product Introduction
The STE market is subject to rapid technological change and new
product introductions, as well as advancing industry standards. The
development of increasingly complex semiconductors and the
utilization of semiconductors in a broader spectrum of products has
driven the need for more advanced test systems to test such devices at
an acceptable cost. The Company's ability to remain competitive in the
mixed signal and system-on-a-chip IC markets will depend upon its
ability to successfully enhance existing test systems, develop new
generations of test systems, such as its new Fusion platform, and to
introduce these new products in a timely and cost-effective manner.
The Company also has to manufacture its products in volume at a
competitive price and on a timely basis to enable customers to
integrate them into their operations as they begin to produce their
next generation of semiconductors. The Company's failure to have a
competitive test system available when required by a semiconductor
manufacturer would make it substantially more difficult for the
Company to sell test systems to that manufacturer for a number of
years. The Company has in the past experienced delays in introducing
certain of its products and enhancements, and there can be no
assurance that it will not encounter technical or other difficulties that
could in the future delay the introduction of new products or
enhancements. If new products have reliability or functionality
problems, then reduced, canceled or rescheduled orders, higher
manufacturing costs, delays in collecting accounts receivable and
additional warranty expense may result, which would reduce gross
margins on new product sales and otherwise materially affect the
Company's business and results of operations. The Company's Fusion
product is subject to the risks associated with new product
introductions, including the risk that delays in development, reliability
or functionality problems could increase expenses and reduce gross
margins on new product sales. Furthermore, announcements by the
Company or its competitors of new products could cause customers to
defer or forego purchases of the Company's existing products, which
would also adversely affect the Company's business and results of
operations. There can be no assurance that the Company will be
successful in the introduction and volume manufacture of its new
productions, that such introduction will coincide with the development
by semiconductor manufacturers of their next generation
semiconductors or that such products will satisfy customer needs or
achieve market acceptance. The failure to do so could materially
adversely affect the Company's business and results of operations.
Asia Economic Conditions
In light of the continuing economic downturn in certain Asian
countries, there can be no assurance that the Company will be able to
obtain additional orders or that it will not experience cancellations of
existing orders from customers in or dependent upon such countries,
any of which would have an adverse effect on the Company's business
and results of operations.
Cyclicality of Semiconductor Industry
The Company's business is largely dependent upon the capital
expenditures of semiconductor manufacturers. The semiconductor
industry is highly cyclical and has historically experienced recurring
periods of oversupply, which often have had a severely detrimental
effect on such industry's demand for test equipment and could cause
cancellations, rescheduling or reductions of customer orders. No
assurance can be given that the Company's business and results of
operations will not be materially adversely affected if the current
downturn continues for a prolonged period or if downturns or changes
in any particular market segments of the semiconductor industry
occur in the future, especially if all of the market segments in which
the Company participates experience downturns at the same time.
Market Risk
Financial instruments that potentially subject the Company to
concentrations of credit-risk consist principally of investments in cash
equivalents, short-term investments and trade receivables. The
Company places its investment with high- quality financial
institutions, limits the amount of credit exposure to any one institution
and has established investment guidelines relative to diversification
and maturities designed to maintain safety and liquidity. The
Company's trade receivables result primarily from sales to
semiconductors manufacturers located in North America, Japan, the
Pacific Rim and Europe. Receivables are from major corporations or
are supported by letters of credit. The Company maintains reserves
for potential credit losses and such losses have been immaterial.
The fair value of the Company's notes payable and long-term
liabilities is estimated based on quoted market prices for the same or
similar issues or on current rates offered to the Company for debt of
the same remaining maturities. For all other balance sheet financial
instruments, the carrying amount approximates fair value.
Year 2000
Many computer systems will experience problems handling dates
beyond the Year 1999 because the systems are coded to accept only
two-digit entries in the date code field. The Company is assessing the
readiness of its products sold to customers for handling Year 2000
issues, as well as its own internal business systems and the products
and internal business systems of its suppliers. In connection with the
foregoing, the Company has established a Year 2000 Program to
address both LTX product compliance and internal business systems
and suppliers compliance. The Program is sponsored by a member of
senior management who is charged with apprising senior
management and the Board of Directors of the status of the
Company's compliance efforts.
Certain hardware and software products currently installed at sites
will require upgrade or other remediation to become Year 2000
compliant. The Company is identifying and contacting affected
customers to advise them of non-compliant products. The Company
has established three ongoing product-based teams to ensure product
compliance. The teams are managed in accordance with the
Company's engineering product development process. The Company
anticipates that it will incur costs of approximately $400,000 to make
its products Year 2000 compliant. A majority of such Year 2000
compliance expenses is represented by existing engineering personnel
assigned to the project. The Company does not believe that there will
be a material adverse impact as a result of making its products Year
2000 compliant since the Company's products are not "date
dependent".
The Company also has established a team to assess Year 2000
readiness of its internal business systems (including its facilities) and
the products and internal business systems of its suppliers. The team
has identified all mission critical systems and plans have been
formulated to ensure Year 2000 compliance. It is anticipated that the
Company will incur costs of approximately $300,000 in making its
internal business systems Year 2000 compliant. There can be no
assurance, however, that the Company will not experience
unanticipated material costs caused by undetected errors or defects in
such systems.
The impact to the Company of Year 2000 will also be dependent on the
manner in which Year 2000 issues are addressed by third parties that
either provide or receive services or data to or from the Company or
whose operations are critical to the Company. To reduce this risk, the
team has been identifying mission critical third parties to determine
their Year 2000 readiness.
The Company is also developing contingency plans if these third
parties fail to address adequately Year 2000 issues. These plans
primarily involve identifying alternative vendors and suppliers. There
can be no assurance that these plans will fully address these problems
and whether such alternative sources are in fact available.
Although the Company does not believe that there will be any material
adverse impact to its operations and products as a result of the Year
2000, there can be no assurance that the Company will not experience
unanticipated costs and consequences caused by Year 2000 which
could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence Upon Key Personnel
The Company's success is dependent upon certain key management
and technical personnel. There is intense competition for a limited
number of qualified employees among companies in the
semiconductor test equipment industry, and the loss of certain of the
Company's employees or an inability to attract and motivate highly
skilled employees could adversely affect its business.
Highly Competitive Industry
The STE industry is highly competitive in all areas of the world. Most
of the Company's major competitors have substantially greater
financial resources and some have more extensive engineering,
manufacturing, marketing and customer support capabilities than
the Company. The Company expects its competitors to continue to
improve the performance of their current products and to introduce
new products with improved price and performance characteristics.
The Company principally competes on the basis of performance, cost
of test, reliability, customer service, applications support, price and
ability to deliver its products on a timely basis. New product
introductions by the Company's competitors could cause a decline in
sales or loss of market acceptance of the Company's existing products
and could prevent the successful introduction of the Company's new
products. In addition, increased competitive pressure could lead to
intensified price-based competition, resulting in lower prices and
adversely affecting the Company's business and results of operations.
The Company believes that to remain competitive it will require
significant financial resources for investment in new product
development and for the maintenance of customer support centers
worldwide. There can be no assurance that the Company will be able
to compete successfully in the future.
Customer Concentration
The loss of a major customer or reduction in, or rescheduling or
cancellation of, orders by major customers, including reductions,
cancellations or rescheduling due to market or competitive conditions
in the semiconductor industry, has had in the past and could have in
the future an adverse effect on the Company's business and results of
operations. In addition, the Company's ability to increase its sales will
depend in part upon its ability to obtain orders from new customers.
The loss of one or more of its top ten customers could have a material
adverse effect on the Company's business and results of operations.
Dependence Upon Key Suppliers
Most of the components for the Company's products are available
from a number of different suppliers; however, certain components
are purchased from a single supplier. Any disruption or termination of
supply of components, particularly single source components, could
have an adverse effect on the Company's business and results of
operations.
Proprietary Rights
The Company's future success depends in part upon its proprietary
technology. Although the Company attempts to protect its proprietary
technology through a combination of contract provisions, trade
secrets, copyrights and patents, it believes that its future success
depends more upon its engineering, manufacturing, marketing and
service skills. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or the independent development by
others of similar technology. Although there are no pending actions
against the Company regarding any patents, no assurance can be
given that infringement claims by third parties will not have a
material adverse effect on the Company's business and results of
operations.
Acquisitions
The Company from time to time may acquire technologies, product
lines or businesses that are complementary to those of the Company.
Although the Company believes that integration of acquired
technologies, product lines and businesses will result in long-term
growth and profitability, there can be no assurance that the Company
will be able to successfully negotiate, finance or integrate such
acquired technologies, product lines or business. Furthermore, the
integration of an acquired company or business may cause a diversion
of management time and resources. There can be no assurance that a
given acquisition, if consummated, would not materially adversely
affect the Company.
Item 3. Quantitive and Qualitative Disclosures About Market Risk
A discussion of the Company's exposure to and mangement of market
risk appears under the heading "Business Risks". |
