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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000
Commission File Number 0-26634
LECROY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2507777
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
700 CHESTNUT RIDGE ROAD, CHESTNUT RIDGE, NEW YORK 10977
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (845) 425-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of Class)
Indicate by check mark ("X") whether the Registrant: (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the registrant's Common Stock, as of
August 18, 2000, was 8,430,214 shares. The aggregate market value on August 18,
2000 of the Common Stock held by non-affiliates of the registrant was
$85,291,650.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
are incorporated by reference in Part III hereof.
Portions of the Prospectus to Form S-3 Registration statement No. 333-43690
are incorporated by reference in Part II hereof.
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1
TABLE OF CONTENTS
Page
PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 11
Item 3. Legal Proceedings.......................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders........................................ 11
Item 4A. Executive Officers of the Registrant....................................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 14
Item 6. Selected Financial Data.................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17
Item 8. Financial Statements and Supplementary Data................................................ 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 44
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 45
Item 11. Executive Compensation..................................................................... 45
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 45
Item 13. Certain Relationships and Related Transactions............................................. 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 45
2
PART I
ITEM 1. BUSINESS.
LeCroy Corporation (the "Registrant" and "Company") was founded in 1964 and
is incorporated in the State of Delaware.
Through August 2000, the Company operated in two business segments, the
Test and Measurement segment ("T&M") and the Vigilant Networks segment
("Vigilant Networks"). The T&M segment, using its core competency of capturing
and analyzing complex electronic signals, develops, manufactures, sells and
licenses signal acquisition and analysis products. Its principal product line
consists of a family of high-performance digital oscilloscopes used primarily by
electrical design engineers in various markets, including communications test,
data storage, power measurement and automotive. The T&M segment also produces
modular digitizers, embedded signal analyzers and various electronic components.
In addition, it generates revenue by offering service on all of its products
beyond the normal warranty period.
In fiscal 1998, pursuant to a strategy of using its core competency of
capturing and analyzing complex electronic signals to expand its product
offering, the Company introduced a Local Area Network ("LAN") analyzer which at
that time was called NEWSLine(TM). During fiscal 1999, the Company formed a
subsidiary, Vigilant Networks, Inc. ("Vigilant") to provide a separate identity
for this new network analysis product. After several iterations of product
development and improvement, the network analyzer was re-launched in the third
quarter of fiscal 2000 as the Big Tangerine(TM). During fiscal 1998, the Company
acquired Digitech Industries, Inc. ("Digitech") to incorporate their LAN and
Wide Area Network ("WAN") protocol analysis technology into Vigilant's product
line. Together, Vigilant and Digitech comprise the Company's Vigilant Networks
segment.
Vigilant Networks' principal product, the Big Tangerine network analyzer,
was not only a new product, it was also sold into a new market for the Company.
Since this product's inception, LeCroy has made substantial investments in
Vigilant Networks in terms of selling, marketing, research and development, and
administrative expenses. While the Company believes that this product has a
unique technology, it has decided that it cannot continue to invest the
financial resources necessary to capitalize on its future growth potential. As
such, in August 2000, the Company announced its intention to divest the Vigilant
Networks business and treat the segment as a discontinued operation. The Company
subsequently announced in August 2000 that it sold the assets and business of
Vigilant and a portion of the assets and business of Digitech for $12.0 million
before fees and expenses. The buyer also assumed certain liabilities of
Vigilant. The remaining business of Digitech will be discontinued (see Note 17
to the Consolidated Financial Statements for further information). The remaining
discussion in this document will primarily relate to the continuing Test and
Measurement segment.
PRODUCT APPLICATION
Researchers, engineers and production technicians rely on test and
measurement instrumentation such as signal analyzers in designing, developing
and manufacturing electronic equipment. When designing and developing electronic
circuits, researchers and engineers use signal analyzers to ensure that the
circuits are performing as designed. Production technicians use such instruments
to diagnose electronic equipment to determine whether it is performing as
intended.
The most general-purpose test and measurement instrument used for signal
analysis is the oscilloscope. Digital oscilloscopes are signal analyzers that,
like their earlier analog counterparts, can display a representation of an
electronic signal's "shape," which is essentially a measure of a signal's
voltage as a function of time. Digital oscilloscopes, however, go beyond the
capabilities of analog oscilloscopes in that they capture a signal in digital
form by sampling it over time and storing the data or measurements in memory.
The stored signal can then be viewed later, and more importantly, the instrument
can perform various analyses on the stored data. Certain oscilloscope users
still prefer the analog style oscilloscope. These instruments are less
complicated to use and they acquire a view of signal changes at a faster rate
than digital oscilloscopes. The Company is the sole supplier in North America
and Europe of high-performance analog oscilloscopes produced by Iwatsu Electric
Co., Ltd. ("Iwatsu").
3
Signal shape analysis is becoming increasingly important as data rates in
applications such as computers, LANs and telecommunications systems increase.
Within a given digital circuit, it takes a finite amount of time for a digital
signal to change from a "zero" or "off" state to a "one" or "on" state. As
digital data rates increase, signals within a circuit may not have sufficient
time to cleanly change from a "zero" to a "one" or vice-versa. This distorts, or
changes the shape of the digital signal, which can lead to computation or
information errors. To identify such problems, engineers use digital
oscilloscopes to analyze the signal's shape, which is not generally possible
using other types of measurement and analysis instruments.
MARKET OVERVIEW
Market Trends
The global explosion in communications, driven in part by the expansion of
the internet and wireless communication devices, has resulted in the need for
increasingly faster and more complex electronic signals. Through the use of
complex encoding schemes, the flow of data is exceeding signal speeds. For
example, the signal rate of a personal computer microprocessor has approximately
doubled every two years since 1996, while LAN data rates increased approximately
10 times every two years over the same period. Achieving these data rates on
phone lines, fiber optics or in the wireless domain requires faster and more
complex electronic signals. Testing these signals requires oscilloscopes with
high sample rates and long memories to enable the required analysis.
In addition to the growth in communications, there has been an increasing
proliferation of electronics in general and digital electronics in particular.
The growth in digital electronics has been driven primarily by the growth in
stand-alone computers and related systems and the increase in embedded digital
controls within other electronic and electrical devices.
Signal Analyzer Market
Signal Analyzers are a component of the overall Test and Measurement
Instrument market, in which the Company currently participates primarily in the
oscilloscope segment.
Oscilloscope Market. The Company believes that the digital oscilloscope
market is generally segmented according to bandwidth, and that with
advances in technology, the bandwidth requirements of each market segment
will increase. Products in the low-end or commodity segment of the market
(less than 500 MHz) cannot capture fast, long, complex signals. Such
products typically do not have the appropriate combination of bandwidth,
sample rate and memory that is needed for analysis of long complex
signals. These instruments typically sell for under $5,000. The
high-performance market segment (bandwidth of 500 MHz or higher) is
characterized by instruments with high sample rates (from 500 MS/s to
more than 10 GS/s) and long record lengths (from 10,000 to 16 million
sample points) and greater processing power to perform more sophisticated
analyses. These high-performance digital oscilloscopes typically range in
price from $5,000 to $35,000, although certain very high bandwidth
oscilloscopes for specialized applications are priced above $35,000. The
Company's Waverunner(TM) and LC series digital oscilloscope product
families and its high- performance analog oscilloscopes are all targeted
at customers in the high-performance market segment.
Within the oscilloscope market, the Company has targeted several specific
application segments. These application segments include communications,
data storage, power measurement and automotive.
* Communications. The communications market itself can be segmented
into five submarkets: Telecommunications - the broadband
transmission of data over copper or fiber; Datacommunications - the
transmission of data over LANs and WANs; Residential Broadband -
the connection of broadband transmission of data to the home;
Mobile - data transmission using wireless devices; and Peripheral
Equipment - the transmission of data to devices such as computers,
printers, etc. In each of these sub-segments, the need for instant
access and uniform service has required the encoding of data and
more complex electronic signals. The Company believes that the
accurate acquisition, long memory and rapid analysis features of
its oscilloscopes provide the unique solution to testing these high
speed, complex signals.
* Data Storage. The data storage market includes companies that
provide magnetic and optical storage devices such as hard disk
drives, removable media, tape, compact disks (CD's) and digital
video disks (DVD's). The increasing need to store more information
requires the encoding of signals to achieve higher density on the
recording media. The Company believes that the high sample rates
and long memory of its oscilloscopes, along with its specialized
processing software that incorporates advanced algorithms designed
specifically for the measurement and analysis requirements of the
data storage market, provides the best solution to its customers'
testing requirements.
4
* Power Measurement. The power measurement market touches virtually
all industries. Circuit boards and devices within all electronic
products require varying levels of AC and DC voltages and currents.
Converting these sources of power has been predominantly
accomplished through the use of switch mode power circuits. The
Company believes that the long memory and advanced analysis
capabilities of its oscilloscopes, along with its specifically
designed current probing devices, provide design engineers with the
best measurement tool to improve the performance, efficiency and
reliability of their power supplies down to the component level.
* Automotive. The increasing trend towards the use of computers and
electronics in operational and diagnostic features of automobiles
has created a need for oscilloscopes in their design and test.
Automotive design engineers select LeCroy oscilloscopes for their
long memory, sophisticated analysis features and clear display.
STRATEGY
The Company's primary objectives are to increase the growth rate of its
oscilloscope business and to leverage its core competency, the capture and
analysis of complex electronic signals, to expand into new markets. The
following is a summary of the strategies that will be used to accomplish these
objectives:
* Increase the Growth Rate of the Oscilloscope Business. In order to increase
the growth rate of its oscilloscope business, the Company must:
* Gain market share by continuing to improve the "price to performance"
ratio of its products. Through its research and development ("R&D")
efforts, the Company has been successful in reducing the cost and size of
its custom integrated circuits, while delivering higher performance and
increased reliability. In addition, the Company's proprietary software and
operating system and unique processor and display architecture have
further enhanced the "price to performance" ratio of its products. The
Company believes that its new product offerings, to be introduced during
fiscal 2001, will further demonstrate its success and commitment to this
strategy.
* Expand the Company's addressable market by introducing products at the
higher end of the performance spectrum. This growth strategy is expected
to be accomplished through its continued investment in R&D efforts as well
as strategic acquisitions or partnerships. An example of the latter is the
Company's acquisition of Lightspeed Electronics, Inc. ("Lightspeed"),
which was announced in July 2000. By combining LeCroy's signal analysis
capabilities with Lightspeed's microwave signal acquisition technology,
the Company is projecting to launch a 60 GHz communications analyzer by
the end of calendar year 2000 for testing components used in broadband
electronic or optical communication systems.
* Expand the Company's share of targeted application segments where signal
complexity is high, such as communications test, data storage and power
measurement. To accomplish this strategy, the Company must continue to
introduce innovative software and hardware solutions tailored to the needs
of customers in this segment. Examples of such solutions currently offered
by the Company include:
- Communications Test:
* Jitter and Timing Analysis
* Digital Filter Design
* PolyMask(TM) Communications Test
- Data Storage:
* Disk Drive Analyzer
* Disk Drive Parameter Package
* Disk Drive Noise Analysis
* Optical Recording Measurements
5
- Power Measurement
* Power Scope
* Power Measure Analysis
* Full Line of Current Probes
* Differential Amplifiers
* Leverage the Company's Core Signal Analysis Competency to Expand into New
Markets. As noted in the "Market Trends" section, there is an increasing
proliferation of electronics in general and digital electronics in
particular. Given this trend and the Company's core competency, there are
increasing opportunities to expand its signal analysis capabilities into
new markets and applications. An example of this strategy includes the
recent introduction of eight models of PXI modular digitizers for use in
automated in-process manufacturing test systems, which are scheduled to
begin shipping by the end of calendar 2000.
There can be no assurance that the Company will be successful in implementing
its strategies.
PRODUCTS AND SERVICES
Overview
The Company's products capture and analyze complex electronic signals by
applying its hardware and software digitizing technology in different packages
and configurations. The digital oscilloscope product family includes three form
factors in instrument size and capabilities to address customer requirements
from a laboratory benchtop to portable applications. These products include the
LC series, Waverunner(TM) and Literunner(TM) digital oscilloscopes. Both the
Waverunner and Literunner products are manufactured for the Company by its
strategic partner, Iwatsu. The Company's products also include production test
digitizers and analyzers, analog oscilloscopes and other electronic components.
In addition, the Company offers a full range of aftermarket service and support
for all of its products. The following sections provide additional information
on the Company's more significant products.
LC Series High-Performance Digital Oscilloscopes
The LC series of oscilloscopes, which range in price from $15,000 to
$47,000, address customer applications with the highest performance measurement
requirements. These products currently offer bandwidths from 500 MHz to 1.5 GHz,
sample rates from 500 MS/s to 8 GS/s and an acquisition memory from 100 Kpts to
16 Mpts. Application segment specific software solutions are available to
interpret signal information and enhance the utility of the product.
Waverunner Series Digital Oscilloscopes
The Waverunner series of oscilloscopes was introduced in January 1999 and
includes several models that range in price from $5,000 to $15,000. Waverunner
products provide high value and broad utility in the oscilloscope market and are
also the platform for the Company's solution packages in the power measurement
and optical recording application segments. The Company believes that its ease
of operation, crisp display and application packages make it one of the most
versatile oscilloscopes available on the market. The Waverunner products
currently offer bandwidths from 200 MHz to 500 MHz, sample rates from 200 MS/s
to 1 GS/s and an acquisition memory of 100 Kpts to 2 Mpts.
Literunner Digital Oscilloscope
The Literunner oscilloscope, which was launched in the fourth quarter of
fiscal 2000, is the Company's first entry into small package oscilloscopes. This
portable product weighs approximately six pounds and has a bandwidth of 100 MHz,
sample rate of 500 MS/s and an acquisition memory of 100 Kpts. The Literunner
oscilloscope is priced under $5,000.
6
Production Test Digitizers and Analyzers
Applications in production test that require the measuring and analysis of
signals generally need a flexible configuration in a non-display format. The
Company currently offers two product families to support this application area:
* Embedded Signal Analyzers. The Company introduced its LSA 1000 product in
April 1998. This stand-alone product, which ranges in price from $16,000
to $26,000, has a bandwidth of 1 GHz, sample rate of 1 GS/s and an
acquisition memory of 100 Kpts to 4 Mpts. The LSA 1000 incorporates the
same technology as a LeCroy oscilloscope in a different form factor and
has a high speed LAN interface for remote control of an embedded
measurement.
* PXI Modular Digitizers. The Company announced the introduction of a
family of eight PXI standard modular digitizer models in June 2000. This
family of digitizers offers bandwidths from 150 MHz to 1 GHz, channel
densities from 1 to 4 channels per module and come in multiple
configurations of memory and sampling rates to address a broad number of
application segments. These products, which are priced at between $5,000
and $15,000, are expected to start shipping by the end of calendar 2000.
Other Products
To provide customers with what it believes are total solutions to their
signal measurement analysis problems, the Company offers various complementary
products. Some of these products include:
* Probes and Accessory Products. Probes provide the physical and electrical
connection from the circuit or semiconductor device under test to the
oscilloscope. Offering probing solutions is often a key to customer
satisfaction in solving general purpose and specific application segment
problems.
* Arbitrary Waveform Generators. The Company offers a complementary line of
signal source products that can create input signals so that an
electronic circuit can be evaluated under controlled conditions. Using a
digital oscilloscope, an engineer can analyze the shape of the signal
within a circuit, compare it to the shape of an "ideal" input signal
generated by the signal source and thereby identify problems in the
circuit. The arbitrary waveform generator can also be used as a signal
source to stimulate activity in a device under test.
Service and Aftermarket Products.
The Company provides aftermarket support, repair, maintenance and
recalibration of installed Company products, as well as installation of a
variety of post-sale upgrades and optional features. The Company maintains major
field service centers in Chestnut Ridge, New York (located at the Company's
corporate headquarters); Geneva, Switzerland; Osaka, Japan; and Seoul, Korea.
Sophisticated service on certain key components of the Company's digital
oscilloscope products, including its printed circuit boards, is performed only
at the Company's facilities in Geneva, Switzerland and Chestnut Ridge, New York.
Service and aftermarket products (including product upgrades) generated
approximately 6% of the Company's total revenues in fiscal years ended June 30,
2000 and 1999 and approximately 5% in fiscal 1998.
CUSTOMERS
The largest group of users of the Company's digital oscilloscopes are
electronic product designers and test engineers. Researchers in many scientific
disciplines including high energy physics, medicine, geology, ultrasound and
mechanics also use the Company's digital oscilloscopes.
Revenue derived from one customer accounted for 12% of the Company's
consolidated revenues in fiscal 1998. No other customer accounted for more than
10% of the Company's consolidated revenues in any of the last three fiscal
years.
7
The Company's top 25 product customers by market consist of the following:
COMMUNICATIONS DATA STORAGE OTHER
-------------- ------------ -----
Ericsson Inc. Fujitsu Bruker Analytical Systems
Hyundai Electronics Hitachi Infineon Technologies
LG Electronics Co. Ltd. IBM Corporation U.S. Airforce
Lucent Technologies Maxtor Corporation
Marconi Quantum Corporation
Matsushita Electric Seagate Technologies
Motorola, Inc.
Nortel Networks
Philips AUTOMOTIVE
Samsung Electronics ----------
Sony Corporation Denso Corporation
ST Microelectronics Robert Bosch Corporation
Toshiba Siemens AG
SALES, MARKETING AND DISTRIBUTION
The Company maintains a direct sales force of highly trained, technically
sophisticated sales engineers who are knowledgeable in the use of signal
analyzers in general and the features and advantages of the Company's products
in particular. In addition, particularly because of the Company's focus on
high-performance digital oscilloscopes, its sales engineers are skilled in
performing product demonstrations for current and prospective customers. The
Company believes it has a competitive advantage in sales situations in which its
sales engineers have the opportunity to demonstrate the advantages of the
Company's digital oscilloscopes; accordingly, such demonstrations are an
integral part of the Company's sales strategy.
The Company sells its digital oscilloscope products through its own direct
sales force in the United States, Europe, Japan and South Korea, with regional
sales headquarters located in Chestnut Ridge, New York, Geneva, Switzerland and
Osaka, Japan. As of June 30, 2000, the Company's direct digital oscilloscope
sales force consisted of approximately 71 sales engineers and regional managers
worldwide. The Company also uses manufacturer's representatives in support of
its direct selling efforts and in territories where the sales potential does not
currently justify the maintenance of a direct sales force. In addition, in Japan
the Company maintains a strategic alliance with Iwatsu, a communications and
test and measurement company that sells and distributes some of the Company's
products under the "Iwatsu/LeCroy" and "Iwatsu" labels.
In order to raise market awareness of its products, the Company advertises
in trade publications, distributes promotional materials, conducts marketing
programs and seminars, issues press releases regarding new products, publishes
technical articles and participates in industry trade shows and conferences.
SEASONALITY
The Company historically has experienced somewhat lower activity during its
first fiscal quarter than in other fiscal quarters which, it believes, is due
principally to the lower level of orders and market activity during the summer
months, particularly in Europe. The Company believes this seasonable aspect of
its business is likely to continue in the future.
RESEARCH AND DEVELOPMENT
The Company believes there is a global trend resulting from the demand for
faster communication rates that continues to expand the use of higher speeds and
more complex electrical signals. The capture and analysis of these electrical
signals requires higher bandwidths, higher sample rates, longer memories and
more powerful, flexible processing capabilities. It is the primary objective of
the Company's research and development program to meet these demands by
extending its capabilities in these areas while improving the manufacturability,
cost, reliability and time-to-market of its products. There can be no assurance
that the Company will meet this objective.
8
The Company is continuing to develop its signal conditioning, sampling,
data storage, data movement and processing technologies using advanced
integrated circuit techniques and processes. In addition, it continues to
develop innovative electrical circuit probing technology that allows better
waveform fidelity and circuit connection capabilities. The Company's engineers
are currently working to deploy innovative signal conditioning and sampling
technologies fabricated on an extremely high speed Silicon Germanium process.
Higher density, higher speed data memories that accept data at well over one
billion data points per second are being developed using state of the art,
proprietary design techniques. These innovative techniques for data movement and
processing are focused on gaining significant increases in processing throughput
for long, complex electrical signals for use in future LeCroy oscilloscopes and
other products.
The Company conducts research and development activities at its various
facilities. The Company's research and development costs, which are expensed as
incurred, were approximately $13.8 million, $13.9 million and $16.8 million in
its fiscal years ended June 30, 2000, 1999 and 1998, respectively, which
expenses represented 11.4%, 11.6% and 14.1% of total revenues, respectively, for
such fiscal years. In addition, incident to an acquisition in fiscal 1998, there
was a purchase of incomplete technology that resulted in a $1.6 million pre-tax
charge, which was included in the Consolidated Statements of Operations as
Non-recurring charges-acquisitions. The Company intends to continue to invest a
substantial percentage of its revenues in its research and development efforts.
MANUFACTURING AND SUPPLIERS
The Company's digital oscilloscopes and related products, other than the
Waverunner and Literunner oscilloscopes, are substantially all manufactured at
the Company's facilities in Chestnut Ridge, New York. Both the Waverunner and
Literunner products are manufactured for the Company by its strategic partner,
Iwatsu.
The Company obtains certain parts, components and sub-assemblies from
single sources. This has particularly been the case with several key integrated
circuits made by certain single source suppliers (Motorola, Philips, TRW and LSI
Logic). The Company believes that, for integrated circuits in particular,
alternative sources of supply would be difficult to develop over a short period
of time. An interruption in supply or an increase in price for its parts,
components and sub-assemblies would have a material adverse affect on the
Company's business, results of operations and financial condition.
As of June 30, 2000, the Company's Chestnut Ridge facility employed 80
manufacturing employees in an area of approximately 35,000 square feet devoted
to such tasks.
COMPETITION
The market for signal analyzers is highly competitive and characterized by
rapid and continual advances in technology. According to estimates provided by
Prime Data, Inc. ("Prime Data"), an independent industry survey organization,
total digital oscilloscope sales, excluding handhelds, grew from $638 million in
1994 to $830 million in 1999. Prime Data estimates that the three largest
suppliers of digital oscilloscopes, exclusive of handheld models, and their
approximate respective market shares for calendar 1999 were Tektronix, Inc. with
45%, Agilent Technologies with 19%, and LeCroy with 15%. Some of the Company's
principal competitors have substantially greater sales, marketing, development
and financial resources than the Company. The Company believes that each of
these companies offers a wide range of products that attempt to address most
segments of the digital oscilloscope market.
The Company believes that the principal bases of competition in the signal
analyzer market are a product's performance (bandwidth, sample rate, record
length and processing power), its price and quality, the vendor's name
recognition, reputation, product availability and the availability and quality
of post-sale support. The Company also believes that its success will depend in
part on its ability to maintain and develop the advanced technology used in its
signal analyzer products and its ability to offer high-performance products at a
favorable "price-to-performance" ratio. The Company believes that it currently
competes effectively with respect to each of the principal bases of competition
in the signal analyzer market in the general price range ($5,000 to $35,000) in
which its digital oscilloscopes are focused and that it will be able to continue
to do so, although there can be no assurance that this is or will be the case.
In addition, as discussed in the "Strategy" section, the Company intends to
expand its addressable market into higher performance applications that tend to
sell at a higher price level.
BACKLOG
The Company's backlog of unshipped customer orders was approximately $10.6
million and $11.2 million as of June 30, 2000 and 1999, respectively. Customers
may cancel orders at any time. The Company believes that its level of backlog at
any particular time is not necessarily indicative of future operating
performance of the Company.
9
PATENTS, TRADEMARKS AND LICENSES
The Company currently relies on a combination of patents, trademark and
trade secret laws, non-disclosure agreements and other intellectual property
protection methods, as well as technical expertise and continuing technological
research and development to establish and protect proprietary rights in its
products. The Company believes, however, that because of the rapid pace of
change and advancement in digital oscilloscope technology, legal intellectual
property protection is and will continue to be a less significant factor in the
Company's success than the Company's core competency in converting electronic
signals to digital form and the experience and expertise of its personnel.
The Company protects significant technologies, products and processes that
it considers important to its business by, among other things, filing
applications for patent protection. As of June 30, 2000, the Company held a
total of fourteen United States patents expiring in the years from 2000 to 2017
and five foreign patents expiring in the years from 2012 to 2017. The Company
also has a number of patent applications pending or under evaluation in the
United States and in various foreign jurisdictions. The patent positions of
high-technology companies such as LeCroy are uncertain and involve complex legal
issues and factual questions. There can be no assurance that any of the
Company's pending or future applications will result in issued patents or that
any issued patents will provide the Company with adequate protection of the
covered technologies, products or processes. Moreover, the laws of foreign
countries in which the Company's products are or may be developed or sold may
not protect the Company's intellectual property and other proprietary rights to
the same extent as the laws of the United States.
Although the Company believes that its products and technologies do not
infringe the proprietary rights of third parties, there can be no assurance that
third parties will not assert claims against the Company based on the
infringement or alleged infringement of any such rights. Such claims are
typically costly to defend, regardless of the legal outcome. There can be no
assurance that the Company would prevail with respect to any such claim, or that
a license to third-party rights, if needed, would be available on acceptable
terms. In any event, patent and proprietary rights litigation can be extremely
protracted and expensive.
In February 1994, the Company settled litigation with Tektronix, Inc.
involving allegations that the Company's digital oscilloscope products infringed
patents held by Tektronix. As part of the settlement, the Company entered into a
license agreement with respect to such patents. Pursuant to the license
agreement the Company made an initial payment of approximately $1.5 million. In
addition, the Company is required to make future royalty payments in a minimum
aggregate amount of $3.5 million over ten years ending June 30, 2004 and may be
required to make up to an additional $3.5 million in contingent royalty payments
depending on its sales of certain products in certain territories over the life
of the patents. Royalty expense approximated $1,029,000, $982,000 and $1,442,000
in fiscal 2000, 1999 and 1998, respectively. The total royalty payments made to
Tektronics through June 30, 2000 were $7.3 million. The settlement agreement
provides that Tektronix may terminate the license in the event that the Company
acquires 20% or more of the stock of, or a controlling interest in, any of a
number of specified companies participating in the oscilloscope market or any of
their respective affiliates (each, a "Restricted Company") or a Restricted
Company acquires 20% or more of the stock of, or a controlling interest in, the
Company or an affiliate of the Company, or any attempt to transfer the Tektronix
license to a Restricted Company is made. This provision of the settlement could
preclude the Company from making an investment in or acquisition of such
companies, and it also could discourage such companies or another third party
from attempting to acquire control of the Company or limit the price that such a
third party might be willing to pay for the Common Stock. In addition, this
provision could limit the price that investors might be willing to pay in the
future for the Common Stock.
EMPLOYEES
As of June 30, 2000, LeCroy had 424 full-time employees, of whom 266 work
in the Company's Chestnut Ridge facility. None of the Company's employees are
represented by a labor union and the Company has not experienced any work
stoppages. The Company believes that its employee relations are generally
satisfactory. A majority of the Company's senior managers has over five years of
service with the Company.
10
REGULATION
As the Company manufactures its products in the United States and sells its
products and purchases parts, components and sub-assemblies in a number of
countries, the Company is subject to legal and regulatory requirements,
particularly the imposition of tariffs, customs and export controls, in a
variety of countries. In addition, the export of digital oscilloscopes from the
United States is subject to regulation under the Treaty for Nuclear
Non-Proliferation.
The Company's subsidiary, Digitech Industries, Inc. has been involved in
environmental remediation activities, the liability for which has been retained
by the Company after the sale of the Vigilant Networks segment (see Note 14 to
Consolidated Financial Statements). The Company does not foresee that the
ultimate resolution of this environmental matter will have a material adverse
effect on the results of future operations, financial position or the
competitive position of the Company.
ITEM 2. PROPERTIES.
The Company's executive offices and its principal manufacturing facility
are located in a two-story, approximately 88,000 square foot building in
Chestnut Ridge, New York that is owned by the Company. In addition, the Company
leases other offices around the world to support its local sales and service
operations.
The Company believes that its facilities are in good working condition and
are suitable for its current operations.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Walter O. LeCroy, Jr. 65 Honorary Chairman of the Board of Directors
Lutz P. Henckels 59 President, Chief Executive Officer and Director
Thomas H. Reslewic 41 Executive Vice President - Chief Operating Officer
Ronald S. Nersesian 40 Senior Vice President - General Manager Oscilloscope
Division
Luis B. Boza 63 Vice President - Quality
Werner H. Brokatzky 55 Vice President - Operations
Rene M. Haas 50 Vice President - Information Technology, Chief Information
Officer
Raymond F. Kunzmann 43 Vice President - Finance, Chief Financial Officer,
Secretary and Treasurer
James J. Mueller 47 Vice President - Technology Development
WALTER O. LECROY, JR., founder of the Company, has served as Honorary
Chairman of the Board since February 1999. Mr. LeCroy previously served as the
Chairman of the Board since the Company's inception and was instrumental in the
initial development of the Company's core technology. Mr. LeCroy has a Bachelor
of Arts degree in physics from Columbia University.
LUTZ P. HENCKELS has served as the President and the Chief Executive
Officer since July 1993. He served as a consultant for the Company from January
1993 until July 1993. Before joining the Company, Mr. Henckels served as the
President of U.S. Operations of Racal-Redac, Inc., an electronic design
automation company, from May 1989 until January 1993. Prior to 1989, Mr.
Henckels was the founder and Chief Executive Officer of HHB Systems, Inc., a
public computer-aided design and test company. Mr. Henckels has Bachelor of
Science and Master of Science degrees in electrical engineering and a Doctor of
Science degree in computer science from the Massachusetts Institute of
Technology.
THOMAS H. RESLEWIC has served as Executive Vice President - Chief Operating
Officer since February 1998. Mr. Reslewic served as Executive Vice President -
Signal Analysis Business Group from February 1997 until January 1998, as Vice
President - Worldwide Sales from March 1996 until November 1997, as Vice
President - Sales and Marketing from July 1994 until March 1996, as the General
Manager for North American Sales from 1993 until July 1994 and the Director of
Marketing for the Company's Signal Sources Division from 1990 until 1993.
Previously, he spent eight years in sales and marketing management with
Tektronix, Inc., a manufacturer of digital oscilloscopes and one of the
Company's principal competitors. Mr. Reslewic has a Bachelor of Science degree
in physics from The College of the Holy Cross and a Master of Business
Administration degree from the University of Oregon.
RONALD S. NERSESIAN has served as the Senior Vice President - General
Manager Oscilloscope Division since February 1998. Mr. Nersesian served as the
Senior Vice President - Worldwide Marketing from March 1997 until January 1998
and as Vice President - Worldwide Marketing from March 1996 until February 1997.
Before joining the Company, Mr. Nersesian spent eleven years with
Hewlett-Packard Company and held many marketing positions. Mr. Nersesian has a
Bachelor of Science degree in electrical engineering from Lehigh University and
a Master of Business Administration degree from New York University.
LUIS B. BOZA has served as Vice President - Quality since May 1998. Before
joining the Company, Mr. Boza spent twenty-eight years at Bell Laboratories, the
Research and Development division of Lucent Technologies (formerly AT&T) and
held many management positions. Mr. Boza has a Bachelor of Science degree in
mathematics from the University of Havana, a Master of Science degree in
Statistics from the University of Chile and a Doctor of Science degree in
Statistics from the University of California, Berkeley.
WERNER H. BROKATZKY has served as Vice President - Operations since April
1999. Previously, Mr. Brokatzky has served as Vice President--Operations
(Geneva) from January 1996 through March 1999. Mr. Brokatzky joined the Company
in August 1978 as the Manager of Finance and Administration and served as Vice
President--Finance (Geneva) from March 1990 to December 1995.
12
RENE M. HAAS has served as Vice President - Information Technology, Chief
Information Officer since June 1995. Before joining the Company, Mr. Haas served
as Executive Vice President and Director of Racal-Redac, Inc., an electronic
design automation company, from May 1989 to July 1993. Prior to 1989, Mr. Haas
was co-founder and Vice President of HHB Systems, Inc., a public computer-aided
design and test company. Mr. Haas has Bachelor of Science and Master of Science
Degrees in Electrical Engineering and Computer Science from the Massachusetts
Institute of Technology.
RAYMOND F. KUNZMANN has served as Vice President - Finance, Chief Financial
Officer, Secretary and Treasurer since February 2000. Before joining the
Company, Mr. Kunzmann was Vice President - Finance and Chief Financial Officer
of Axsys Technologies, Inc., a manufacturer of micro-positioning and precision
optical products, from June 1994 to February 2000. Mr. Kunzmann has a Bachelor
of Science degree in accounting from Fordham University and a Master of Business
Administration degree from Iona College.
JAMES J. MUELLER has served as the Vice President - Technology Development
since June 1998. Previously, Mr. Mueller served as Vice President - Worldwide
Engineering from June 1996 through May 1998, and served as R&D Manager - T&M
from April 1992 to May 1996. Mr. Mueller has a Bachelor of Arts degree in
physics from Rutgers University and a Master of Science and Doctor of Science
degrees in physics from Princeton University.
Executive officers of the Company are appointed by the Board of Directors
on an annual basis and serve until their successors have been duly elected and
qualified. There are no family relationships among any of the executive officers
or directors of the Company.
The Company has entered into indemnification agreements with its executive
officers and directors, pursuant to which the Company has agreed to indemnify
such persons to the fullest extent permitted by law, and providing for certain
other protections.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
LeCroy's Common Stock has been traded on the Nasdaq National Market under
the symbol LCRY. The following table sets forth, for the periods indicated, the
range of high and low sales prices for the Common Stock as reported by Nasdaq
National Market.
HIGH LOW
---- ---
FISCAL YEAR 2000
First Quarter.............................. $29.25 $15.13
Second Quarter............................. 18.00 10.38
Third Quarter.............................. 19.63 12.25
Fourth Quarter............................. 15.50 9.50
FISCAL YEAR 1999
First Quarter.............................. $23.75 $13.25
Second Quarter............................. 20.38 10.75
Third Quarter.............................. 24.75 15.25
Fourth Quarter............................. 25.44 13.25
The Company has never declared or paid cash dividends on its Common Stock
and intends to retain all available funds for use in the operation and expansion
of its business. The Company therefore does not anticipate that any cash
dividends will be declared or paid in the foreseeable future. As of August 7,
2000, there were approximately 256 holders of record of the Common Stock.
On June 30, 1999, the Company issued and sold an aggregate of 500,000
shares of its Series A Convertible Redeemable Preferred Stock ("Series A
Preferred Stock") for an aggregate purchase price of $10,000,000 and warrants to
purchase an aggregate of 250,000 shares of the Company's Common Stock, for an
aggregate purchase price of $0.01, in reliance on Section 4(2) of the Securities
Act of 1933, as amended. The securities were sold to Advent Global GECC III
Limited Partnership, EnviroTech Investment Fund I Limited Partnership, Adwest
Limited Partnership, Oakstone Ventures Limited Partnership, and Advent Partners
Limited Partnership, all of which are accredited investors as defined under
Regulation D of the Securities Act. Proceeds of the issuance of Series A
Preferred Stock and warrants to purchase Common Stock were allocated for general
working capital purposes.
The Series A Preferred Stock is convertible into shares of Common Stock at
any time at the option of the holder and, under certain circumstances specified
in the Company's Certificate of Incorporation, the Series A Preferred Stock is
automatically convertible into shares of Common Stock. The warrants are
exercisable, at an exercise price of $20 per share of Common Stock, at any time
until June 30, 2006.
In August 2000, the Company sold 517,520 shares of its Common Stock for
gross proceeds of $5.2 million in a private equity placement. Proceeds from this
sale of securities will be used to repay existing indebtedness, fund working
capital requirements and for other general corporate purposes. The Company has
agreed to register these shares within 120 days of the closing.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated Statements of Operations data for the
five years ended June 30, 2000 and the Balance Sheet data at June 30, 2000,
1999, 1998, 1997 and 1996 are derived from the Consolidated Financial Statements
of the Company and have been adjusted to reflect the discontinuance of the
Vigilant Networks segment. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and related Notes included
herein.
14
YEARS ENDED JUNE 30,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues:
Digital oscilloscopes and related products.......... $110,237 $100,366 $101,584 $100,582 $ 86,061
High energy physics products........................ 4,132 7,362 6,167 6,993 10,952
Service and other................................... 7,031 6,863 6,331 5,552 4,478
License fees........................................ - 4,900 5,500 4,000 -
-------- -------- -------- -------- --------
Total revenues................................... 121,400 119,491 119,582 117,127 101,491
Cost of sales (1)........................................ 61,706 60,298 54,000 49,829 45,545
-------- -------- -------- -------- --------
Gross profit ............................................ 59,694 59,193 65,582 67,298 55,946
Operating expenses:
Selling, general and administrative................. 38,998 37,511 37,645 39,115 34,623
Research and development............................ 13,811 13,867 16,812 14,208 12,639
Restructuring and non-recurring (credit) charges (2) (2,000) 6,788 5,852 3,857 -
Non-recurring charge - acquisition (3).............. - - 1,600 - -
-------- -------- -------- -------- --------
Total operating expenses......................... 50,809 58,166 61,909 57,180 47,262
-------- -------- -------- -------- --------
Operating income ........................................ 8,885 1,027 3,673 10,118 8,684
Gain on sale of marketable securities.................... 2,460 - - - -
Other (expenses) income, net............................. (276) 158 (3) 361 (134)
-------- -------- -------- -------- --------
Income from continuing operations before income taxes
and extraordinary charge................................. 11,069 1,185 3,670 10,479 8,550
Provision for income taxes............................... 3,498 2,499 3,160 3,521 2,992
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
extraordinary charge..................................... 7,571 (1,314) 510 6,958 5,558
(Loss) income from discontinued operations, net of tax... (11,009) (5,474) (2,390) 616 706
-------- -------- -------- -------- --------
(Loss) income before extraordinary charge................ (3,438) (6,788) (1,880) 7,574 6,264
Extraordinary charge for early retirement of debt ....... - - - - (1,300)
-------- -------- -------- -------- --------
Net (loss) income........................................ (3,438) (6,788) (1,880) 7,574 4,964
Charges related to convertible preferred stock........... 340 1,844 - - -
-------- -------- -------- -------- --------
(Loss) income available to common stockholders........... $ (3,778) $ (8,632) $ (1,880) $ 7,574 $ 4,964
======== ======== ======== ======== ========
Income (loss) per common share-basic:
Income (loss) from continuing operations............ $ 0.93 $ (0.41) $ 0.07 $ 1.10 $ 1.12
Income (loss) from discontinued segment............. (1.42) (0.72) (0.32) 0.10 0.14
Extraordinary charge................................ - - - - (0.26)
-------- -------- -------- -------- --------
Net income (loss)................................... $ (0.49) $ (1.13) $ (0.25) $ 1.20 $ 1.00
======== ======== ======== ======== ========
Income (loss) per common share-diluted:
Income (loss) from continuing operations............ $ 0.89 $ (0.41) $ 0.06 $ 0.92 $ 0.87
Income (loss) from discontinued segment............. (1.30) (0.72) (0.29) 0.08 0.11
Extraordinary charge................................ - - - - (0.20)
-------- -------- -------- -------- --------
Net income (loss)................................... $ (0.41) $ (1.13) $ (0.23) $ 1.00 $ 0.78
======== ======== ======== ======== ========
Weighted average number of shares:
Basic ............................................ 7,749 7,621 7,375 6,299 4,957
Diluted ............................................ 8,477 7,621 8,055 7,541 6,373
(See legend on following page)
15
(1) Included in cost of sales in fiscal 1999 and fiscal 1998 are inventory
write-downs of $2,170 and $2,697, respectively, pursuant to restructuring
of the Company's business.
(2) Restructuring costs were incurred in fiscal 1997 due to a restructuring of
the Company's High Energy Physics business; in fiscal 1998 due to a
restructuring of the Company's business in reaction to uncertainties in the
Pacific region and in fiscal 1999 due to the consolidation of the Company's
oscilloscope operations. In fiscal 2000, the Company reversed $2.0 million
of the restructuring charge taken in fiscal 1999 (see Note 2 to the
Consolidated Financial Statements).
(3) See Note 15 to the Consolidated Financial Statements.
YEARS ENDED JUNE 30,
------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital(1)..................................... $ 24,129 $ 31,516 $ 27,697 $ 41,978 $ 33,412
Total assets........................................... 100,849 99,685 89,110 79,389 65,008
Total debt and capitalized leases...................... 11,000 8,200 2,294 160 5,910
Redeemable convertible preferred stock................. 8,492 8,152 - - -
Total stockholders' equity............................. 48,309 51,855 54,107 54,324 39,159
(1) At June 30, 2000, all of the Company's outstanding debt of $11.0 million under its bank credit facility has
been classified as current and is included in net working capital.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K.
CONSOLIDATED RESULTS OF OPERATIONS
The following table indicates the percentage of total revenues represented
by each item in the Company's Consolidated Statements of Operations for the
fiscal years ended June 30, 2000, 1999 and 1998. On August 25, 2000, the Company
sold substantially all of the assets and business of its Vigilant Networks
segment. Accordingly, the results of operations of this business segment have
been reflected as discontinued operations.
YEARS ENDED JUNE 30,
2000 1999 1998
---- ---- ----
Revenues:
Digital oscilloscopes and related products................................... 90.8% 84.0% 84.9%
High energy physics products................................................. 3.4 6.2 5.2
Service and other............................................................ 5.8 5.7 5.3
License fees................................................................. - 4.1 4.6
------ ------ ------
Total revenues............................................................ 100.0 100.0 100.0
Cost of sales..................................................................... 50.8 50.5 45.2
------ ------ ------
Gross profit ..................................................................... 49.2 49.5 54.8
Operating expenses:
Selling, general and administrative.......................................... 32.1 31.4 31.5
Research and development..................................................... 11.4 11.6 14.0
Restructuring and non-recurring (credits) charges, net....................... (1.6) 5.6 4.9
Non-recurring charge - acquisition........................................... - - 1.3
------ ------ ------
Total operating expenses.................................................. 41.9 48.6 51.7
Operating income.................................................................. 7.3 0.9 3.1
Gain on sale of marketable securities............................................. 2.0 - -
Other (expenses) income, net...................................................... (0.2) 0.1 -
------ ------ ------
Income from continuing operations before income taxes............................. 9.1 1.0 3.1
Provision for income taxes........................................................ 2.9 2.1 2.7
------ ------ ------
Income (loss) from continuing operations.......................................... 6.2 (1.1) 0.4
Loss from discontinued operations, net of tax..................................... (9.0) (4.6) (2.0)
------ ------ ------
Net loss.......................................................................... (2.8)% (5.7)% (1.6)%
====== ====== ======
Comparison of Fiscal Years 2000 and 1999
Total revenues were $121.4 million in fiscal 2000 compared to $119.5
million in fiscal 1999, an increase of 1.6%, or $1.9 million. Excluding license
fees of $4.9 million in fiscal 1999, revenues increased 5.9%, or $6.8 million in
fiscal 2000. On a geographical basis, the Americas comprised $45.1 million, or
37%, of fiscal 2000 revenues compared to $51.0 million, or 43% in fiscal 1999,
Europe and the Middle East comprised $34.7 million, or 29%, compared to $35.7
million, or 30% in fiscal 1999 and the Asia/Pacific region accounted for $41.6
million, or 34%, compared to $32.8 million, or 27%, in fiscal 1999.
Revenues from digital oscilloscopes and related products increased 9.8%, or
$9.9 million, primarily due to the launch of a new 1.5 GHz oscilloscope in the
LC series product family in the second quarter of fiscal 2000, and higher unit
volume of the Company's successful Waverunner family of digital oscilloscopes
introduced in the third fiscal quarter of 1999. In addition, the Company had
$4.6 million of shipments to Kelly Air Force Base, fulfilling orders on a
four-year, $20 million contract awarded to the Company in the second fiscal
quarter of 2000. The increase in digital oscilloscopes and related product
revenues was partially offset by decreases in revenues from high energy physics
products. These products comprised only 3.4% of revenues in fiscal 2000 compared
to 6.4% for fiscal 1999, excluding license fees. The Company expects that
revenues from high energy physics products will continue to decline as a percent
of total revenues.
17
Gross margin was 49.2% in fiscal 2000 compared to 49.5% in fiscal 1999.
Included in gross profit for fiscal 1999 was the favorable effect of the $4.9
million license fee revenue noted above, partially offset by $2.2 million of
inventory related restructuring charges. Excluding the net effect of the license
fees and restructuring charges, gross margin in fiscal 1999 was 49.3%. The
slight decline in gross margin year over year was the result of lower margins on
the $4.6 million Kelly Air Force business noted above, partially offset by lower
warranty costs. The decline in warranty costs resulted from significant quality
enhancements in the Company's product offerings, warranty coverage provided by
Iwatsu on Waverunner parts they manufacture and a more refined methodology used
to determine the Company's accrual for warranty exposure. As a result, the
Company decreased its warranty reserve by $0.6 million in the third fiscal
quarter of 2000.
Selling, general and administrative expense increased by 4.0%, or $1.5
million, from $37.5 million in fiscal 1999 to $39.0 million in fiscal 2000.
Excluding the aforementioned revenue from license fees, selling, general and
administrative expense as a percentage of sales was 32.1% in fiscal 2000,
compared with 32.7% in fiscal 1999. The decrease as a percentage of sales was
primarily due to leveraging higher product revenues, as well as cost reduction
activities and greater productivity resulting from the Company's restructuring
at the end of fiscal 1999.
Research and development expense in fiscal 2000 of $13.8 million was
substantially the same as in fiscal 1999. As a percentage of sales before
license fees, research and development expense decreased from 12.1% in fiscal
1999 to 11.4% in fiscal 2000. The decrease as a percentage of sales was
primarily attributable to efficiencies resulting from the consolidation of the
oscilloscope operations at the end of fiscal 1999.
See "Restructuring and Non-Recurring Charges (Credits)" below for a
discussion and analysis of such amounts.
The Company recorded a pre-tax gain of $2.5 million on the sale of 2.7
million shares of Iwatsu common stock. This sale generated approximately $7.6
million of proceeds that were used to pay down existing debt. As of June 30,
2000, the Company has 1.0 million shares of such equity securities remaining
which are recorded on the Consolidated Balance Sheet at their fair value of $2.9
million.
Other (expense) income, net, which consists primarily of net interest
expense and foreign exchange gains or losses, was an expense of $276,000 in
fiscal 2000, compared with income of $158,000 in fiscal 1999. The increase in
expense in fiscal 2000 was due to higher interest expense resulting from higher
average outstanding borrowings under the Company's credit facility and lower
foreign exchange gains in 2000.
The Company's effective tax rate was 31.6% in fiscal 2000, compared to
210.9% in fiscal 1999. The unusually high effective tax rate in fiscal 1999 was
due primarily to certain restructuring and other non-recurring charges for which
a tax benefit was not recorded. In connection with recording the Vigilant
Networks segment as a discontinued operation, the Company's consolidated tax
provision was allocated between continuing and discontinued operations. As a
result of such allocation, substantially all of the Company's continuing
operation's U.S. tax provision in both fiscal 2000 and 1999 is offset by a tax
benefit netted against losses from discontinued operations.
Comparison of Fiscal Years 1999 and 1998
Total revenues were $119.5 million in fiscal 1999, a slight decrease from
$119.6 million in fiscal 1998. Included in revenues were license fees of $4.9
million and $5.5 million in fiscal 1999 and 1998, respectively. Excluding
license fees, revenues in fiscal 1999 increased by 0.4%, or $509,000, over
fiscal year 1998.
Revenues from digital oscilloscopes and related products declined 1.2%, or
$1.2 million, from $101.6 million in fiscal 1998 to $100.4 million in 1999. This
reduction in revenues resulted from a 5.0% decrease in unit sales, partially
offset by a 1.0% increase in average selling prices primarily in the LC564/584
products introduced in the fourth fiscal quarter of 1998.
Revenues from sales of high energy physics products increased 19.4%, or
$1.2 million, to $7.4 million in fiscal 1999 from $6.2 million in fiscal 1998.
This increase was primarily the result of unanticipated last time procurement
from government laboratories. The Company believes that revenues from high
energy physics products, which represented 6.4% and 5.4%, respectively, of
product revenues (excluding license fees) in fiscal 1999 and 1998, will likely
represent a declining portion of future total revenues.
18
Service and other revenues increased 8.4%, or $532,000, to $6.8 million in
fiscal 1999 from $6.3 million in fiscal 1998 primarily due to the continued
increase in marketing of the Company's service and support offerings for digital
oscilloscopes and related products as well as increased sales of upgrades for
such products.
License fees declined to $4.9 million in fiscal 1999 from $5.5 million in
fiscal 1998. The Company believes that revenues from license fees are likely to
continue to represent a declining portion of its total revenue in the future.
Gross margin, excluding the impact of license fees ($4.9 million and $5.5
million in fiscal 1999 and 1998, respectively) and restructuring charges ($2.2
million and $2.7 million in fiscal 1999 and 1998, respectively), was 49.3% in
fiscal 1999 compared to 55.0% in fiscal 1998. The decline was caused by higher
material costs for the LC564/584 product line introduced in the fourth fiscal
quarter of 1998 and lower gross margins on the Waverunner products introduced in
the second half of fiscal 1999.
Selling, general and administrative expense decreased by 0.4%, or $134,000,
from $37.6 million in fiscal 1998 to $37.5 million in fiscal 1999. Excluding the
aforementioned license fee revenue, selling, general and administrative expense
as a percentage of sales was 32.7% in fiscal 1999, compared with 33.0% in fiscal
1998. The slight decrease resulted primarily from operating efficiencies.
Research and development expense decreased by 17.5%, or $2.9 million, from
$16.8 million in fiscal 1998 to $13.9 million in fiscal 1999. This decrease was
primarily due to a $2.5 million payment for purchased technology in 1998.
See "Restructuring and Non-Recurring Charges (Credits)" below for a
discussion and analysis of such amounts.
Other (expense) income, net increased by $161,000, from ($3,000) in fiscal
1998 to $158,000 in fiscal 1999. Interest income (expense), included in other
(expense) income, net, was income of $474,000 in fiscal 1998, compared with
interest expense of $584,000 in fiscal 1999. This change was due primarily to an
increased usage of cash for the purchase of capital equipment in fiscal 1999 as
well as cash usage for purchased manufacturing and distribution rights and an
investment in marketable equity securities of a strategic partner in the second
half of fiscal 1998. Substantially offsetting the increase in interest expense
was a change in foreign exchange gains (losses), from a loss of $477,000 in
fiscal 1998 to a gain of $742,000 in fiscal 1999.
The Company's effective tax rate was 210.9% in fiscal 1999, compared to
86.1% in fiscal 1998. The unusually high effective tax rate in both fiscal 1999
and 1998 was due primarily to certain restructuring and other non-recurring
charges for which a tax benefit was not recorded. Partially offsetting this
impact in fiscal 1998, was a favorable mix of earnings in various foreign
jurisdictions with lower tax rates.
RESTRUCTURING AND NON-RECURRING CHARGES (CREDITS)
Restructuring Charges (Credits)
During fiscal year 1999, the Company adopted a restructuring plan, the
objectives of which were to consolidate the oscilloscope operations in order to
enhance operating efficiencies and to dedicate additional resources to the
development of advanced technologies. In connection with this consolidation, the
Company recorded total restructuring and non-recurring charges of $11.3 million,
$10.4 million of which related to restructuring costs. The remaining $0.9
million of the total charge related to additional costs to redeploy
manufacturing, engineering and employee resources. The restructuring costs were
comprised of inventory write-offs of $2.2 million which were included in cost of
sales, an accrual for the future minimum lease payments for the Geneva,
Switzerland manufacturing facility of $3.4 million, severance and employee
benefit costs of $3.0 million for the reduction of full and part-time employees
and the write-down of plant assets and capitalized management information system
software and other costs of $1.8 million.
As of June 30, 2000, $7.7 million of the initial restructuring reserve
established had been paid or used to reduce asset balances. Of this $7.7
million, $2.0 million related to inventories, $2.9 million related to severance
and other employee benefit costs, $1.1 million related to the Geneva facility
lease and $1.7 million related to plant assets, capitalized management
information system software and other costs. In addition, during fiscal 2000,
the Company negotiated the assignment of the remaining lease payments on the
Geneva facility to a third party as of August 1, 2000. As such, a restructuring
credit of $2.0 million relating to the reversal of the remaining lease payments,
net of fees, was recorded in the fourth quarter of fiscal 2000. As of June 30,
2000, the 1999 restructuring plan had been substantially completed.
19
In the fourth quarter of fiscal 1998, the Company finalized a restructuring
plan amounting to $8.5 million in response to uncertainties in the Pacific
Region. These charges included inventory write-offs of $2.7 million, which were
included in cost of sales, the write-down of plant assets, leases and contracts
of $2.9 million, and the reduction of 90 full and part-time employees of the
Company's workforce, which approximated $2.9 million. In the fourth quarter of
fiscal 1999, the Company recorded restructuring credits of $2.4 million relating
to the reversal of restructuring accruals for severance and leases related to
the decision to continue certain European sales offices. As of June 30, 2000,
the 1998 restructuring plan had been substantially completed.
Non-recurring Charge-Acquisition
In October 1997 the Company acquired all of the assets of Preamble
Instruments, Inc. of Beaverton, Oregon, a manufacturer of stand-alone
differential amplifiers and probes, for approximately $1.8 million, of which
approximately $411 was cash and 35,181 shares of the Company's Common Stock at
$39.99 per share. Incident to the acquisition was the purchase of incomplete
technology activities that resulted in a one-time pretax charge of $1.6 million.
The purchased incomplete technology that had not reached technological
feasibility and which had no alternative future use was valued using a
risk-adjusted cash flow model. Acquired complete technology of approximately
$220 is being amortized over five years.
DISCONTINUED OPERATIONS
In August 2000, the Company announced that it would discontinue its
Vigilant Networks segment, which is comprised of its Vigilant Networks, Inc.
("Vigilant") and Digitech Industries, Inc. ("Digitech") subsidiaries.
Subsequently in August 2000, the Company sold the assets and the business of
Vigilant and a portion of the assets and business of Digitech for gross proceeds
of $12.0 million. The buyer also assumed certain liabilities of Vigilant. In
connection with the sale, the Company issued warrants to purchase 200,000 shares
of LeCroy Common Stock at $10.05 per share to the buyer. Using the Black-Scholes
option pricing model, these warrants were valued at approximately $1.3 million.
The remaining business of Digitech will be discontinued. Accordingly, the
results of the Vigilant Networks segment have been reclassified as discontinued
operations and reported separately from continuing operations in all periods
presented. The Company expects to break even on the sale and discontinuance of
the Vigilant Networks segment.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $24.1 million at June 30, 2000, which represented a
working capital ratio of 1.5 to 1, compared to $31.5 million, or 2.0 to 1, at
June 30, 1999. The reduction of the current ratio was due to the classification
of the Company's borrowings under its credit agreement to current liabilities in
the Consolidated Balance Sheet (see further discussion below).
Net cash provided by (used in) operating activities for the fiscal years
ended June 30, 2000, 1999 and 1998 was $4.9 million, $(3.3) million and $(1.5)
million, respectively. The improvement in cash provided by operating activities
in fiscal 2000 from fiscal 1999 was primarily due to working capital reductions
partially offset by lower operating earnings before restructuring and
non-recurring charges (credits). The increase in cash used by operations from
fiscal 1998 to fiscal 1999 was primarily due to lower operating earnings before
restructuring and non-recurring charges (credits), substantially offset by a
reduction in working capital requirements.
Net cash used in investing activities for the fiscal years ended June 30,
2000, 1999 and 1998 was $599,000, $13.7 million and $19.2 million, respectively.
The decrease in cash usage during fiscal 2000 was primarily due to the sale of
marketable securities in October 1999, which generated $7.6 million in proceeds.
In addition, during fiscal 1999, the Company purchased manufacturing rights for
complementary products from its strategic partner, Iwatsu Electric Co., Ltd.
("Iwatsu") for $5.0 million. The decrease in cash used in investing activities
from fiscal 1998 to 1999 was primarily due to a $7.0 million investment in the
marketable equity securities of Iwatsu made in fiscal 1998.
20
Net cash provided by financing activities for the fiscal years ended June
30, 2000, 1999 and 1998 was $3.7 million, $17.2 million and $5.8 million,
respectively. The decrease in cash provided in fiscal 2000 was primarily due to
the issuance of preferred stock for gross proceeds of $10.0 in fiscal 1999. The
increase in cash provided by financing activities from fiscal 1998 to fiscal
1999 was due to the aforementioned issuance of preferred stock in fiscal 1999
and additional borrowings under the Company's line of credit.
The Company has a credit facility with two banks that expires on January
31, 2002. At March 31, 2000, primarily due to the losses incurred by its
Vigilant Networks segment, the Company violated certain financial covenants
related to this credit facility. In connection with the waiver of such
violations and an amendment of covenants for the fourth quarter of fiscal 2000,
the maximum borrowings under the credit facility were reduced to $12.0 million
and the interest rate on outstanding borrowings increased to the higher of the
prime rate, or the federal funds rate plus 1/2 % (as defined), plus 2%. In
addition, the credit facility is now comprised of a $6.0 million revolving
credit line and a $6.0 million term loan, which is secured by a mortgage on the
Company's facility in Chestnut Ridge, New York. The Company has met its
financial covenant requirements as of June 30, 2000. However, based on the
Company's projections, it appears likely that it will be in violation of certain
of its financial covenants at the end of the first quarter of fiscal 2001 that
were established as part of a September 7, 1999 amendment. As such, outstanding
borrowings under the Credit Agreement as of June 30, 2000 have been classified
as a current liability.
As discussed in Note 17 to the Consolidated Financial Statements
"Subsequent Events," in August 2000 the Company raised gross proceeds of $5.2
million in connection with a private placement of 517,520 shares of its Common
Stock. In addition, in August 2000, the Company sold its Vigilant segment for
$12.0 million, before fees and retained liabilities. The proceeds from these two
transactions will be used to repay existing bank debt. As of August 25, 2000,
the Company had cash balances of $15.7 million and outstanding debt of $3.9
million. The Company is currently evaluating financing opportunities with new
lenders, which it expects will provide additional credit availability and
financial flexibility.
The Company believes that its cash on hand, together with the proceeds from
the aforementioned private equity placement and sale of Vigilant and cash flow
generated by its continuing operations, will be sufficient to fund working
capital and capital expenditure requirements for at least the next twelve
months.
In addition to the above U.S.-based facility, the Company maintains certain
short-term foreign credit facilities, principally facilities with two Japanese
banks totaling 150 million yen ($1.4 million as of June 30, 2000). No amounts
were outstanding under such facilities as of June 30, 2000.
RISK MANAGEMENT
The Company purchases materials from suppliers and sells its products
around the world and maintains investments in foreign subsidiaries and
securities, all denominated in a variety of currencies. As a consequence, it is
exposed to risks from fluctuations in foreign currency exchange rates with
respect to a number of currencies, changes in government policies and legal and
regulatory requirements, political instability, transportation delays and the
imposition of tariffs and export controls. Among the more significant potential
risks to the Company of relative fluctuations in foreign currency exchange rates
is the relationship among and between the United States dollar, Swiss franc and
Japanese yen, and, to a lesser extent, the German deutschemark, British pound,
French franc, Italian lira, Korean won and the European monetary unit. Local
currency expenses resulting from the worldwide sourcing of parts, components and
sub-assemblies are not generally offset by related local currency revenues, if
any. The Company does not attempt to reduce its foreign currency exchange risks
by entering into foreign currency management programs or hedging transactions
and has no plans to do so in the near term. As a consequence, there can be no
assurance that the Company's results of operations will not be adversely
effected by fluctuations in foreign currency exchange rates in the future as a
result of mismatches between local currency revenues and expenses, the
translation of foreign currencies into the United States dollar, the Company's
financial reporting currency, or otherwise. Moreover, fluctuations in exchange
rates could affect demand for the Company's products. During the fiscal years
ended June 30, 2000, 1999 and 1998 the Company reported foreign currency
exchange gains (losses) of $600,000, $742,000 and $(477,000), respectively.
The Company's investment in the common stock of Iwatsu, which is recorded
in "Marketable securities" on the Consolidated Balance Sheet, is subject to the
impact of fluctuations in foreign exchange rates and in the Japanese stock
market. In October 1999, the Company sold 2.7 million shares of such stock
reducing its exposure to these market risks. As of June 30, 2000, Japanese stock
market and currency fluctuations resulted in a cumulative increase of
approximately $0.9 million to the remaining investment's original cost. The
change in the value of this investment, which is deemed temporary, is included
as part of "Accumulated other comprehensive loss" on the Consolidated Balance
Sheet and, accordingly, not in net income or loss.
21
The Company is also subject to market risk exposure through changes in
interest rates on amounts payable under its bank credit facility. At June 30,
2000, the Company had $11.0 million of bank debt outstanding under a $12.0
million variable rate credit facility for which the interest rate at that date
was 11.5%. Assuming that principal amounts outstanding under the Company's
credit facility remained at this year-end level for an entire year and the prime
rate increased or decreased, respectively, by 1.15%, the Company would pay or
save, respectively, an additional $0.1 million in interest that year.
NEW PRONOUNCEMENTS
On March 31, 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," that clarifies guidance for certain issues related to the
application of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Some topics on which more significant guidance was provided by Interpretation
No. 44 included: (a) definition of an employee; (b) stock option repricings; (c)
awards granted between entities within a consolidated group; (d) modifications
to extend the term, accelerate vesting, increase the number of shares, or add a
reload feature; (e) use of stock options shares to cover tax withholding; and
(f) options exchanged in a purchase business combination.
The Interpretation is effective July 1, 2000, and is applied prospectively
to all new awards, modifications to outstanding awards, and changes in employee
status after that date, with the following exceptions: (a) the requirements
related to the definition of an employee apply to new awards granted after
December 15, 1998; (b) the requirements of repricings apply to modifications
made after December 15, 1998 that either directly or indirectly reduce the
exercise price of an award; and (c) the new rules relating to reloads apply to
modifications to add a reload feature after January 12, 2000. Because the FASB
decided that the Interpretation should be applied prospectively from July 1,
2000 (except for certain events described above), no adjustments would be made
to financial statements upon the initial application of the Interpretation for
periods prior to July 1, 2000. Currently, this standard has no impact on the
Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101, which for the Company is effective beginning in the fourth
quarter of fiscal year 2001, summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Prior to the adoption of SAB 101, the Company's policy has
been to recognize license fee revenue when a non-refundable fee was received
and, from the Company's perspective, all of its significant obligations under
the license agreement were completed. Under SAB 101, such license agreements are
deemed to be multiple element agreements that, among other elements, include
various exclusivity clauses. In addition, SAB 101 requires such license fee
agreements to be analyzed from the licensee's perspective as to the ongoing
requirements or expectations of the agreements. As such, under SAB 101, certain
of the Company's previously recognized license fee revenue would be deferred and
recognized in future periods over the term of the various agreements. The
Company's preliminary estimate is that if SAB 101 was adopted as of June 30,
2000, it would result in a charge for the cumulative effect of a change in
accounting principle and the establishment of deferred revenue of approximately
$8.5 million. The Company intends to adopt the provisions of SAB 101 in the
first quarter of fiscal 2001.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 2000. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations or cash flows of the Company.
22
FORWARD LOOKING STATEMENTS
This Form 10-K may contain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including without limitation,
statements regarding the intent, belief or current expectations of the Company
or its directors or officers with respect to, among other things, (i) market
trends in the Company's industries and the projected impact on the Company, (ii)
the increasing importance of signal shape analysis; (iii) the Company's ability
to meet its customers' evolving needs; (iv) the Company's position within its
industries and ability to effectively compete; (v) the Company's ability to
expand into new markets; (vi) the success of the Company's new product
introductions; (vii) trends in the seasonality of the Company's sales; (viii) a
shift in technology towards higher speed digital signals containing more complex
data and the demands of users of signal analyzer products; (ix) market
opportunities for dedicated signal analyzers; (x) the resolution of certain
environmental remediation activities; (xi) year 2000 compliance of the Company's
products, and the impact of the year 2000 problem on the Company; (xii)
sufficiency of the Company's cash flow and the availability of external
financing sources to fund working capital and capital expenditure requirements;
(xiii) trends affecting the Company's financial condition and results of
operations; (xiv) the Company's business and growth strategies; (xv) the impact
of adoption of accounting conventions; and (xvi) certain other statements
identified or qualified by words such as "likely," "will," "suggests," "may,"
"would," "could," "should," "expects," "anticipates," "estimates," "plans,"
"projects," "believes," "is optimistic about," or similar expressions (and
variants of such words or expressions). Investors are cautioned that
forward-looking statements are inherently uncertain. These forward-looking
statements represent the best judgment of the Company as on the date of this
Form 10-K, and the Company cautions readers not to place undue reliance on such
statements. Actual performance and results of operations may differ materially
from those projected or suggested in the forward-looking statements due to
certain risks and uncertainties including, without limitation, risks associated
with fluctuations in the Company's operating results; volume and timing of
orders received; changes in the mix of products sold; competitive factors,
including pricing pressure, technological developments and products offered by
competitors; the Company's ability to deliver a timely flow of competitive new
products and market acceptance of these products; the Company's ability to
anticipate changes in the market; the Company's ability to negotiate new
financing arrangements with lenders on terms that are acceptable; the Company's
ability to attract and retain qualified personnel, including the Company's
management; changes in the global economy and fluctuations in foreign currency
rates; inventory risks due to changes in market demand or the Company's business
strategies; risks due to an interruption in supply or an increase in price for
the Company's parts, components and sub-assemblies; the Company's ability to
realize sufficient margins on the sales of its products, as well as other risk
factors listed from time to time in the Company's reports filed with the
Securities and Exchange Commission and press releases, specifically, those
discussed in the section entitled "Risk Factors" in the Prospectus to Form S-3
Registration Statement No. 333-43690.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
LECROY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.......................................................................... 25
Consolidated Balance Sheets as of June 30, 2000 and 1999................................................ 26
Consolidated Statements of Operations for the Years Ended June 30, 2000, 1999 and 1998.................. 27
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 2000, 1999 and 1998........ 28
Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 1999 and 1998.................. 29
Notes to Consolidated Financial Statements.............................................................. 30
24
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LeCroy Corporation
We have audited the accompanying consolidated balance sheets of LeCroy
Corporation as of June 30, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
LeCroy Corporation at June 30, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
August 25, 2000
25
LECROY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
2000 1999
---- ----
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 9,022 $ 1,684
Accounts receivable, less allowance of $541 in 2000 and $518 in 1999.............. 27,788 27,829
Inventories, net.................................................................. 24,389 25,102
Other current assets.............................................................. 1,953 3,059
Net assets of discontinued operations............................................. 5,025 6,593
-------- --------
Total current assets......................................................... 68,177 64,267
Property and equipment, net............................................................ 15,093 13,528
Marketable securities.................................................................. 2,870 7,383
Other assets........................................................................... 14,709 14,507
-------- --------
Total assets................................................................. $100,849 $ 99,685
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt...................................................................... $ 11,000 $ 1,600
Accounts payable.................................................................. 16,309 11,595
Accrued expenses and other liabilities............................................ 16,739 19,556
-------- --------
Total current liabilities.................................................... 44,048 32,751
Long-term debt......................................................................... - 6,600
Deferred compensation.................................................................. - 327
Contingencies and commitments
Redeemable convertible preferred stock, $.01 par value (Authorized 5,000,000
shares; 500,000 shares issued and outstanding; liquidation value, $11,200,000
at June 30, 2000)..................................................................... 8,492 8,152
Stockholders' Equity:
Common stock, $.01 par value (Authorized 45,000,000 shares; 7,802,694 and
7,704,994 issued and outstanding in 2000 and 1999, respectively)............... 78 77
Additional paid-in capital........................................................ 43,759 42,869
Accumulated other comprehensive loss.............................................. (4,629) (3,970)
Retained earnings................................................................. 9,101 12,879
-------- --------
Total stockholders' equity................................................... 48,309 51,855
-------- --------
Total liabilities and stockholders' equity................................... $100,849 $ 99,685
======== ========
The accompanying notes are an integral part of these financial statements.
26
LECROY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JUNE 30,
2000 1999 1998
---- ---- ----
Revenues:
Digital oscilloscopes and related products............................. $ 110,237 $ 100,366 $ 101,584
High energy physics products........................................... 4,132 7,362 6,167
Service and other...................................................... 7,031 6,863 6,331
License fees........................................................... - 4,900 5,500
--------- --------- ----------
Total revenues................................................... 121,400 119,491 119,582
Cost of sales............................................................... 61,706 60,298 54,000
--------- --------- ----------
Gross profit........................................................... 59,694 59,193 65,582
Operating expenses:
Selling, general and administrative.................................... 38,998 37,511 37,645
Research and development............................................... 13,811 13,867 16,812
Restructuring and non-recurring (credit) charges , net................. (2,000) 6,788 5,852
Non-recurring charge - acquisition..................................... - - 1,600
--------- --------- ----------
Total operating expenses............................................... 50,809 58,166 61,909
--------- --------- ----------
Operating income ........................................................... 8,885 1,027 3,673
Gain from sale of marketable securities..................................... 2,460 - -
Other (expense) income, net................................................. (276) 158 (3)
--------- --------- ----------
Income from continuing operations before income taxes....................... 11,069 1,185 3,670
Provision for income taxes.................................................. 3,498 2,499 3,160
--------- --------- ----------
Income (loss) from continuing operations.................................... 7,571 (1,314) 510
Loss from discontinued operations, net of tax benefit of $2,730, $1,350 and
$1,260 in 2000, 1999 and 1998, respectively................................ (11,009) (5,474) (2,390)
--------- --------- ----------
Net loss.................................................................... (3,438) (6,788) (1,880)
Charges related to convertible preferred stock.............................. 340 1,844 -
--------- --------- ----------
Net loss applicable to common stockholders.................................. $ (3,778) $ (8,632) $ (1,880)
========= ========= ==========
Income (loss) per common share-basic:
Income (loss) from continuing operations................................. $ 0.93 $ (0.41) $ 0.07
Loss from discontinued segment........................................... (1.42) (0.72) (0.32)
--------- --------- ----------
Net loss................................................................. $ (0.49) $ (1.13) $ (0.25)
========= ========= ==========
Income (loss) per common share-diluted:
Income (loss) from continuing operations................................. $ 0.89 $ (0.41) $ 0.06
Loss from discontinued segment........................................... (1.30) (0.72) (0.29)
--------- --------- ----------
Net loss................................................................. $ (0.41) $ (1.13) $ (0.23)
========= ========= ==========
Weighted average number of common shares:
Basic....................................................................... 7,749 7,621 7,375
Diluted..................................................................... 8,477 7,621 8,055
The accompanying notes are an integral part of these financial statements.
27
LECROY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER
------------ PAID-IN --------------- COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT LOSS EARNINGS TOTAL
------ ------ ------- ------ ------ ------------- -------- -----
Balance at June 30, 1997 ........................ 7,277 $ 73 $33,642 (112) $ (813) $ (1,969) $23,391 $54,324
Comprehensive loss:
Net loss..................................... (1,880) (1,880)
Foreign currency translation................. (1,920) (1,920)
Unrealized loss on marketable securities..... (1,458) (1,458)
Total comprehensive loss......................... (5,258)
Stock option and stock purchase plans............ 257 3 2,729 112 813 3,545
Issuance of stock for business acquisition....... 35 1,407 1,407
Tax benefit from exercise of stock options....... 89 89
----- ----- ------- ----- ------- -------- ------- -------
Balance at June 30, 1998......................... 7,569 76 37,867 (5,347) 21,511 54,107
Comprehensive loss:
Net loss..................................... (6,788) (6,788)
Foreign currency translation................. (754) (754)
Unrealized gain on marketable securities..... 2,131 2,131
-------
Total comprehensive loss......................... (5,411)
Stock option and stock purchase plans............ 136 1 1,300 1,301
Tax benefit from exercise of stock options....... 30 30
Issuance of warrants with preferred stock........ 1,848 1,848
Charges related to convertible preferred stock... 1,844 (1,844)
Securities offering costs........................ (20) (20)
----- ----- ------- -------- ------- -------
Balance at June 30, 1999......................... 7,705 77 42,869 (3,970) 12,879 51,855
Comprehensive loss:
Net loss..................................... (3,438) (3,438)
Foreign currency translation................. (853) (853)
Unrealized gain on marketable securities..... 194 194
-------
Total comprehensive loss......................... (4,097)
Stock option and stock purchase plans............ 98 1 951 952
Charges related to convertible preferred stock... (340) (340)
Securities offering costs........................ (61) (61)
----- ----- ------- -------- ------- -------
Balance at June 30, 2000......................... 7,803 $ 78 $43,759 $ (4,629) $ 9,101 $48,309
===== ===== ======= ======== ======= =======
The accompanying notes are an integral part of these financial statements.
28
LECROY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JUNE 30,
----------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................... $ (3,438) $ (6,788) $ (1,880)
Adjustments for noncash items included in operating activities:
Depreciation and amortization............................................ 5,868 4,769 3,818
Restructuring (credits) provisions ...................................... (2,000) 7,380 7,298
Non-recurring (credits) charges - acquisitions........................... - (1,140) 3,100
Deferred income taxes.................................................... - - 640
Gain on sale of marketable securities.................................... (2,460) - -
Gain on disposal of fixed assets......................................... - (14) -
Change in operating asset and liability components:
Accounts receivable...................................................... 2,164 (1,874) (8,253)
Inventories.............................................................. 186 (4,435) (9,333)
Other current and non-current assets..................................... 1,035 (400) 487
Accounts payable, accrued expenses and other liabilities, and deferred
compensation.......................................................... 3,499 (801) 2,606
--------- --------- ---------
Net cash (used in) provided by operating activities.............................. 4,854 (3,303) (1,517)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (6,766) (7,330) (4,544)
Business acquisitions, net of acquired cash ................................ - - (1,013)
Investment in marketable securities ........................................ - - (7,054)
Purchase of intangible assets .............................................. - (5,125) (4,700)
Investment in computer software ............................................ (1,463) (1,217) (1,952)
Proceeds from the sale of marketable securities............................. 7,630 - -
Proceeds from disposal of property and equipment............................ - - 19
-------- -------- --------
Net cash used in investing activities............................................ (599) (13,672) (19,244)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt............................................... (1,575) (710) 2,332
Repayment of debt, capitalized leases and other............................. - - (76)
Borrowings under line of credit, net........................................ 4,400 6,600 -
Proceeds from sale of preferred stock....................................... - 9,980 -
Proceeds from exercise of stock options and stock purchases................. 891 1,301 3,545
--------- --------- ---------
Net cash provided by financing activities........................................ 3,716 17,171 5,801
--------- --------- ---------
Effect of exchange rates on cash favorable (unfavorable)......................... (711) (300) (3,029)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............................ 7,260 (104) (17,989)
Cash and cash equivalents at beginning of the year.......................... 1,791 1,895 19,884
--------- --------- ---------
Cash and cash equivalents at end of the year................................ $ 9,051 $ 1,791 $ 1,895
========= ========= =========
Supplemental Cash Flow Disclosure
Cash paid during the year for:
Interest.............................................................. $ 1,016 $ 662 $ 45
Income taxes.......................................................... 880 1,797 2,631
Tax benefit of disqualifying dispositions of stock options................. - 30 89
The accompanying notes are an integral part of these financial statements.
29
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company develops, manufactures, sells and licenses signal acquisition
and analysis products.
Principles of Consolidation
The consolidated financial statements include the accounts of LeCroy
Corporation (the "Company") and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform to the current year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
Fiscal Year Ending Dates
The operations of the U.S. parent company, LeCroy Corporation, have a
fiscal year ending on the Saturday closest to June 30 (June 27, 1998, July 3,
1999 and July 1, 2000). For 1998 and 2000, the fiscal years represented a 52
week period. For 1999 the fiscal year represented a 53 week period. The majority
of foreign subsidiaries have a June 30 fiscal year-end. The consolidated
financial statement year-end references are stated as June 30.
Revenue Recognition
Substantially all revenue is recognized when products are shipped or
services are rendered to customers. Revenues from service contracts are
recognized ratably over the contract period. A deferral is recorded for
post-contract support and any other further deliverables included within the
sales contract agreement. This deferral is earned as contract elements are
completed. Accounts receivable have been reduced by estimated amounts for
allowances related to future charges for uncollectible accounts and product
returns. Revenue from license fees is recognized when non-refundable payments
are received and all significant obligations under the license agreements have
been fulfilled.
Warranty
Estimated future warranty obligations related to products are provided by
charges to operations in the period that the related revenue is recognized.
Research and Development
Research and development costs are expensed as incurred.
Cash Equivalents
Cash equivalents represent highly liquid debt instruments with a maturity
of three months or less at the time of purchase. Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
primarily of short-term deposits in the United States and Europe with major
banks with investment levels and debt ratings set to limit exposure with any one
institution.
30
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Marketable Securities
The Company classifies its equity investments as available for sale and
reports them at fair market value. Unrealized gains or losses are reported net
of tax and foreign exchange effect in stockholders' equity until disposition. In
October 1999, the Company recorded a pre-tax gain of $2.5 million on the sale of
2.7 million shares of its equity investment in Iwatsu Electric, Co. ("Iwatsu").
At June 30, 2000, the cost of its remaining equity investment in Iwatsu was
$1,911, gross unrealized gain was $959 and fair market value was $2,870.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization
are provided on the straight-line basis. The estimated useful lives are as
follows:
Building................................................... 20-32 years
Furniture, machinery and equipment......................... 3-12 years
Intangible Assets
The cost of product technology and manufacturing and distribution rights
acquired is amortized primarily on units produced or shipped over the contract
period, generally five years, but in no event longer than their expected useful
lives. Excess of cost over fair market value of net assets acquired is being
amortized on a straight line basis over fifteen years.
Concentration of Credit Risk
The Company manufactures and sells electronic equipment, principally a line
of digital oscilloscopes, to research facilities, governmental agencies and the
test and measurement industry. Sales are to all regions of the United States as
well as to a multitude of foreign countries. The Company performs periodic
credit evaluations of its customers' financial condition. Credit losses have
been minimal and within management's expectations. There is no significant
concentration of the Company's accounts receivable portfolio in any customer or
geographical region that presents a risk to the Company based on that
concentration.
Foreign Exchange
The Company's foreign subsidiaries use their local currency as the
functional currency and translate all assets and liabilities at current exchange
rates and all income and expenses at average exchange rates. The adjustment
resulting from this translation is included in comprehensive income (loss).
Gains (losses) in fiscal 2000, 1999, and 1998 resulting from foreign currency
transactions approximated $600, $742, and $(477), respectively, and are included
in other (expense) income, net.
Income Taxes
Deferred tax assets and liabilities are recognized on the income reported
in the financial statements regardless of when such taxes are payable. These
deferred taxes are measured by applying current enacted tax rates. The Company's
policy is not to provide for U.S. taxes on undistributed earnings of foreign
subsidiaries to the extent such earnings are determined to be permanently
invested outside the United States.
31
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25, if
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
generally recognized.
Per Share Information
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or other contracts to issue
common stock were exercised and resulted in the issuance of common stock that
then shared in the earnings of the Company. Diluted EPS is computed using the
treasury stock method when the effect of common stock equivalents would be
dilutive. Common stock equivalents, which are comprised of employee stock
options and warrants to purchase common stock, were 728,363, 308,000 and
680,000, in fiscal years 2000, 1999 and 1998, respectively. Such common stock
equivalents in fiscal 1999 were excluded from the loss per common share
calculation because the effect would be anti-dilutive.
Comprehensive Income (Loss)
Comprehensive loss for the three years ended June 30, 2000, 1999, and 1998
included foreign currency translation losses of $0.9 million, $0.7 million and
$1.9 million, respectively, and unrealized gains and (losses) on marketable
equity securities classified as available for sale of $0.2 million, $2.1 million
and $(1.4) million, respectively. The cumulative foreign currency translation
losses were $5.5 million at June 30, 2000 and $4.7 million at June 30, 1999. The
cumulative unrealized gains on marketable equity securities classified as
available for sale were $0.9 million at June 30, 2000 and $0.7 million at June
30, 1999. The unrealized gain (loss) on marketable equity securities classified
as available for sale includes deferred tax expense of $0.3 million and $0.4
million for fiscal 2000 and 1999, respectively.
Change in Accounting Estimate
The Company has experienced improved quality on its newer product offerings
and has refined its methodology to reflect these improvements in its assessment
of warranty exposure. As a result, the Company reduced its warranty reserve and
increased operating income by $0.6 million in the quarter ended March 31, 2000.
New Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101, which for the Company is effective beginning in the fourth
quarter of fiscal year 2001, summarizes certain of the SEC Staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. Prior to the adoption of SAB 101, the Company's policy has
been to recognize license fee revenue when a non-refundable fee was received
and, from the Company's perspective, all of its significant obligations under
the license agreement were completed. Under SAB 101, such license agreements are
deemed to be multiple element agreements that, among other elements, include
various exclusivity clauses. In addition, SAB 101 requires such license fee
agreements to be analyzed from the licensee's perspective as to the ongoing
requirements or expectations of the agreements. As such, under SAB 101, certain
of the Company's previously recognized license fee revenue would be deferred and
recognized in future periods over the term of the various agreements. The
Company's preliminary estimate is that if SAB 101 was adopted as of June 30,
2000, it would result in a charge for the cumulative effect of a change in
accounting principle and the establishment of deferred revenue of approximately
$8.5 million. The Company intends to adopt the provisions of SAB 101 in the
first quarter of fiscal 2001.
32
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Discontinued Operations
The Consolidated Statements of Operations have been restated to segregate
the operating results of the Vigilant Networks segment, which is comprised of
its Vigilant Networks, Inc. ("Vigilant") and Digitech Industries, Inc.
("Digitech") subsidiaries, and to report them as "Loss from discontinued
operations" for all periods presented. In addition, the net assets of the
Vigilant Networks segment that were sold in August 2000, along with the assets
related to any remaining portion of the Vigilant Networks segment not included
in the sale but which will be discontinued, have been reclassified as "Net
assets of discontinued operations" on the Consolidated Balance Sheet for all
periods presented (See Note 17).
2. RESTRUCTURING AND NON-RECURRING CHARGES
During fiscal year 1999, the Company adopted a restructuring plan, the
objectives of which were to consolidate the oscilloscope operations in order to
enhance operating efficiencies and to dedicate additional resources to develop
advanced technologies. In connection with this consolidation, the Company
recorded total restructuring and non-recurring charges of $11.3 million, $10.4
million of which related to restructuring costs. The remaining $0.9 million of
the total charge related to additional costs to redeploy manufacturing,
engineering and employee resources. The restructuring costs were comprised of
inventory write-offs of $2.2 million, which were included in cost of sales, an
accrual for the future minimum lease payments for the Geneva, Switzerland
manufacturing facility of $3.4 million, severance and employee benefit costs of
$3.0 million for the reduction of full and part-time employees and the
write-down of plant assets and capitalized management information system
software and other costs of $1.8 million.
As of June 30, 2000, $7.7 million of the initial restructuring reserve
established has been paid or used to reduce asset balances. Of this $7.7
million, $2.0 million related to inventories, $2.9 million related to severance
and other employee benefit costs, $1.1 million related to the Geneva facility
lease and $1.7 million related to plant assets, capitalized management
information system software and other costs. In addition, during fiscal 2000,
the Company negotiated the assignment of the remaining lease payments on the
Geneva facility to a third party as of August 1, 2000. As such, a restructuring
credit of $2.0 million relating to the reversal of the remaining lease payments,
net of fees, was recorded in the fourth quarter of fiscal 2000. As of June 30,
2000, the 1999 restructuring plan has been substantially completed.
In the fourth quarter of fiscal 1998, the Company finalized a restructuring
plan amounting to $8.5 million in response to uncertainties in the Pacific
Region. These charges included inventory write-offs of $2.7 million, which were
included in cost of sales, the write-down of plant assets, leases and contracts
of $2.9 million, and the reduction of 90 full and part-time employees of the
Company's workforce, which approximated $2.9 million. In the fourth quarter of
fiscal 1999, the Company recorded restructuring credits of $2.4 million relating
to the reversal of restructuring accruals for severance and leases related to
the decision to continue certain European sales offices. As of June 30, 2000,
the 1998 restructuring plan has been substantially completed.
3. INVENTORIES
Inventories, including demonstration units in finished goods, are stated at
the lower of cost (first-in, first-out method) or market.
JUNE 30,
2000 1999
---- ----
Raw materials...................................... $ 6,863 $ 9,059
Work in process.................................... 7,348 4,776
Finished goods..................................... 10,178 11,267
------- -------
$24,389 $25,102
======= =======
The allowance for excess and obsolete inventory included above amounted to
$2,937 in 2000 and $3,260 in 1999.
33
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30,
2000 1999
---- ----
Land and building................................. $11,729 $ 9,281
Furniture, machinery and equipment................ 28,098 26,958
------- -------
39,827 36,239
Less: Accumulated depreciation and amortization... (24,734) (22,711)
------- -------
Property and equipment, net....................... $15,093 $13,528
======= =======
5. OTHER ASSETS
Other assets consist of the following:
JUNE 30,
2000 1999
---- ----
Manufacturing and distribution rights, net........ $ 8,889 $ 9,470
Computer software for internal use................ 3,719 2,256
Excess of cost over net assets acquired, net...... 1,031 1,461
Other............................................. 1,070 1,320
------- -------
$14,709 $14,507
======= =======
The excess of cost over net assets acquired is net of accumulated
amortization of $841 and $411 for fiscal 2000 and fiscal 1999, respectively.
Manufacturing and distribution rights are net of accumulated amortization of
$591 and $173 for fiscal 2000 and fiscal 1999, respectively.
6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
JUNE 30,
2000 1999
---- ----
Compensation and benefits......................... $ 6,527 $ 6,903
Deferred revenue.................................. 1,131 1,644
Restructuring..................................... 328 3,420
Income taxes...................................... 3,247 3,194
Warranty.......................................... 1,608 1,822
Other............................................. 3,898 2,573
------- -------
$16,739 $19,556
======= =======
7. INCOME TAXES
The components of income from continuing operations before income taxes are
as follows:
2000 1999 1998
---- ---- ----
Domestic.......................................... $ 4,913 $ 5,165 $ 523
Foreign........................................... 6,156 (3,980) 3,147
------- ------- -------
$11,069 $ 1,185 $ 3,670
======= ======= =======
34
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The provision for income taxes from continuing operations for the fiscal
year June 30 is as follows:
2000 1999 1998
---- ---- ----
Current US......................................................... $3,030 $1,291 $1,940
Current Foreign.................................................... 468 543 880
Deferred Foreign................................................... - 665 340
------ ------ ------
$3,498 $2,499 $3,160
====== ====== ======
In connection with recording the Vigilant Networks segment as a
discontinued operation, the Company's consolidated tax provision was allocated
between continuing and discontinued operations. Included in the loss from
discontinued operations on the Consolidated Statements of Operations are net tax
benefits of $2,730, $1,350 and $1,260 in fiscal years 2000, 1999 and 1998,
respectively.
The reconciliation between U.S. federal statutory rate and the Company's
effective tax rate from continuing operations is as follows:
2000 1999 1998
---- ---- ----
Tax at U.S. federal statutory rate...................................... $ 3,874 $ 415 $ 1,285
Increase (reduction) to statutory tax rate from:
Difference between U.S. and foreign rates.......................... 21 (365) (1,411)
Tax effect of restructuring....................................... (1,156) 1,966 2,344
Change in valuation allowances..................................... (160) 321 1,306
Repatriation of foreign earnings................................... 444 - -
State taxes ....................................................... 319 135 204
Other, net......................................................... 156 27 (568)
-------- ------ -------
Income tax expense...................................................... $ 3,498 $2,499 $ 3,160
======== ====== =======
Significant components of the Company's deferred tax assets as of June 30,
2000 and 1999 were as follows:
2000 1999
---- ----
Federal and state loss and credit carryforwards................................. $ 7,149 $ 5,018
Foreign loss and credit carryforwards........................................... 2,218 1,633
Inventory and other reserves.................................................... 2,802 4,049
-------- --------
Total deferred tax assets....................................................... 12,169 10,700
Valuation allowance............................................................. (12,169) (10,700)
-------- --------
Net deferred tax assets......................................................... $ - $ -
======== ========
Included in current income taxes payable in 2000 and 1999 is $228 and $89,
respectively, of current deferred income taxes payable associated with foreign
inventory provisions and other foreign tax reserves.
At June 30, 2000, the Company had a deferred tax asset of $12,169 (before
valuation allowance) consisting primarily of the future tax benefits from net
operating loss carryforwards, temporary differences and other tax credits.
Realization of the deferred tax asset depends on the Company's ability to
generate future U.S. taxable
35
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
income. Included in the total is $2,562 related to employee stock option
exercises, the benefit of which, if realized, will increase paid-in-capital.
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109), the Company is required to recognize all or a
portion of its net deferred tax asset if it believes that it is more likely than
not, given the weight of all available evidence, that all or a portion of the
benefits of the carryforward losses and tax credits will be realized. Management
believes that it is more likely than not that the Company will not realize any
benefits from its net deferred tax asset, and has recorded a 100% reserve
against the asset at June 30, 2000. Management will continue to assess the
reliability of the deferred tax asset at each interim and annual balance sheet
date based on actual and forecasted operating results.
In general it has been the practice of the Company to reinvest unremitted
earnings of foreign subsidiaries. The cumulative amount of undistributed
earnings of consolidated foreign subsidiaries for which U.S. federal income tax
has not been provided is $27.2 million at June 30, 2000. These earnings, which
reflect full provision for non-U.S. income taxes, are anticipated to be
reinvested permanently outside the United States or will be remitted
substantially free of additional tax. Determining the U.S. income tax liability
that might be payable if these earnings were remitted is not practicable.
At June 30, 2000, the Company has a U.S. federal income tax net operating
loss carryforward of $12.6 million available to offset future taxable income.
The carryforward has various expiration dates beginning in 2009 and ending in
2020. Foreign tax net operating losses of $756 at June 30, 2000 are available to
offset future taxable income of certain foreign subsidiaries. The foreign losses
expire in future periods based on year and country of origin. Federal, State and
foreign tax credits expire at various dates beginning in 2002.
8. DEBT
As of June 30, 2000, the Company had a $12.0 million credit facility with
two commercial banks (the "Credit Facility"), which is comprised of a $6.0
million term loan and a $6.0 million revolving line of credit. Borrowings under
the Credit Facility since an April 19, 2000 amendment bear interest at the
higher of the prime rate, or the federal funds rate plus 1/2% (as defined), plus
2%. Prior to that date, borrowings bore interest at the higher of the prime
rate, the federal funds rates plus 1/2% (as defined) or, on foreign currency
borrowings, the Eurocurrency Interest Rate plus applicable Eurocurrency margins
(as defined). Foreign currency borrowings under the Credit Facility since the
aforementioned April 19, 2000 amendment are no longer permitted. A commitment
fee of 3/16 of 1% per annum is payable on any unused amount of the Credit
Facility. The term loan is secured by a mortgage on the Company's facilities in
Chestnut Ridge, New York. The revolving line of credit is secured by a pledge of
substantially all of the Company's domestic assets. The Credit Facility expires
on January 31, 2002.
The Credit Facility contains certain covenants that include maintaining
specified financial ratios and levels of earnings and limitations on capital
expenditures, which were amended for the quarter ending June 30, 2000. At June
30, 2000, the Company was in compliance with such covenants. Based on the
Company's projections, however, it appears likely that it will be in violation
of certain of its financial covenants at the end of the first quarter of fiscal
2001 that was established as part of a September 7, 1999 amendment. As such,
outstanding borrowings under the Credit Facility as of June 30, 2000 of $11.0
million have been classified as a current liability. As discussed in Note 17
"Subsequent Events," in August 2000 the Company raised gross proceeds of $5.2
million in connection with a private placement of 517,520 shares of its Common
Stock. In addition, in August 2000 the Company sold its Vigilant Networks
segment for $12.0 million, before fees and retained liabilities. The proceeds
from these two transactions will be used to repay its existing bank debt. The
Company is currently evaluating financing opportunities with new lenders, which
it expects will provide additional credit availability and financial
flexibility.
36
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Subsequent to June 30, 2000, the Company has secured a $2.0 million capital
lease line of credit to fund certain capital expenditures.
In addition to the above U.S. based facilities, the Company maintains
certain short-term foreign credit facilities, principally facilities with two
Japanese banks totaling 150 million yen ($1.4 million as of June 30, 2000). No
amounts were outstanding under such facilities as of June 30, 2000.
Interest income (expense), net, included in other income, net was $(877) in
fiscal 2000, $(584) in fiscal 1999 and $474 in fiscal 1998.
The Company's debt approximates fair value.
9. STOCK OPTION PLANS
Under the Company's Amended and Restated 1993 Stock Incentive Plan (the
"Plan") of the common shares outstanding, 1,521,739 shares of Common Stock can
be issued through the exercise of stock options, increasing annually by 5% of
the common shares outstanding each July 1 during the term of the Plan. At July
1, 2000, a maximum of 3,282,416 shares were reserved for issuance for both
incentive stock options and nonqualified stock options. These options allow
full-time employees, including officers, to purchase shares of Common Stock at
prices equal to fair market value at the date of grant. For individuals who own
more than 10% of the Common Stock of the Company, the option price of the shares
may not be less than 110% of the fair market value on the date of grant. No more
than an aggregate of 2,608,696 shares of Common Stock may be issued pursuant to
the exercise of incentive stock options granted under the Plan. This limitation
does not apply to nonqualified stock options or restricted stock awards that may
be granted under the Plan. The vesting period and expiration of each grant is
determined by the Compensation Committee of the Board of Directors. In general,
the vesting period is 25% per annum over a four year period, or 50% after the
second year and 25% for the third and fourth years. The life of the options are
either ten or eleven years from the date of grant.
Under the Plan, non-qualified stock options can be issued to full-time
employees, including officers and non-employee consultants. Options must be
granted at an exercise price of at least 85% of the fair market value on the
date of grant. The vesting period and expiration of each grant is determined by
the Compensation Committee of the Board of Directors.
37
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Transactions for incentive and non-qualified stock options for the Plan for
fiscal years 2000, 1999 and 1998 are as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
SHARES PER SHARE PRICE
----------------------------------------------
Outstanding at June 30, 1997..................................... 1,376,304 $ 6.33 - $32.25 $ 15.01
Granted.......................................................... 965,606 5.95 - 40.00 24.43
Exercised........................................................ (331,535) 5.95 - 22.25 8.16
Cancelled........................................................ (291,806) 6.33 - 40.00 32.01
---------- ------------------- ---------
Outstanding at June 30, 1998..................................... 1,718,569 5.95 - 36.75 18.74
Granted.......................................................... 384,000 14.88 - 20.50 15.71
Exercised........................................................ (71,726) 6.33 - 15.75 6.84
Cancelled........................................................ (71,440) 6.33 - 36.25 19.64
---------- ------------------ ---------
Outstanding at June 30, 1999..................................... 1,959,403 5.95 - 36.75 18.55
Granted.......................................................... 703,000 10.13 - 17.50 14.10
Exercised........................................................ (36,220) 5.95 - 9.20 6.83
Cancelled........................................................ (303,190) 5.95 - 36.75 21.56
----------- ------------------ ---------
Outstanding at June 30, 2000..................................... 2,322,993 $ 6.33 - $32.25 $ 16.99
========== ======= ====== =========
On February 4, 1998 at the election of its U.S. optionees, LeCroy repriced
outstanding options to purchase 193,538 shares of Common Stock having exercise
prices ranging from $27.25 to $40 per share. The new exercise price is $22.63
per share, the closing price of the Common Stock on that date. On March 19,
1998, at the election of its Swiss optionees, LeCroy repriced outstanding
options to purchase 46,000 shares of Common Stock having exercise prices ranging
from $27.25 to $32.25 per share. The new exercise price is $19.38 per share, the
closing price of the Common Stock on that date. The repriced options are
included as cancelled and re-granted options in the table above.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT JUNE 30, 2000 AT JUNE 30, 2000
-------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
RANGE SHARES PRICE LIFE (YEARS) SHARES PRICE
----- ------- -------- ------------ ------- --------
$ 5.95 - $ 12.00 299,821 $ 6.69 4.48 295,813 $ 6.67
$ 12.01 - $ 24.00 1,927,172 17.90 8.22 591,844 20.73
$ 24.01 - $ 32.25 96,000 30.90 6.69 77,001 30.98
----------- ------- --------- --------
Total 2,322,993 $ 16.99 964,658 $ 17.23
=========== =========
Of the total options outstanding under the 1993 Plan, 964,658, 804,147 and
487,992 were exercisable at June 30, 2000, 1999 and 1998, respectively. Stock
options available for grant were 99,774, 110,411 and zero at June 30, 2000, 1999
and 1998, respectively.
In October 1998, the Board of Directors and stockholders terminated the
1995 Non-Employee Director Stock Option Plan ("1995 Plan") and adopted the 1998
Non-Employee Director Stock Option Plan ("1998 Plan"). Pursuant to the 1998
Plan, each non-employee director received a stock option grant of 15,000 shares
exercisable at market price on the date the plan was adopted. These options vest
ratably over a 36 month period. Additionally, each non-employee director will
receive an annual stock option grant of 5,000 shares exercisable at the market
price on the date of grant. These options vest immediately. A total of 500,000
shares of Common Stock can be issued during the term of the 1998 Plan. As of
June 30, 2000, no shares of Common Stock had been issued upon exercise
38
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of options granted under the 1998 Plan and options for 60,000 shares of Common
Stock were outstanding at an exercise price of $14.875 and options for 25,000
shares of Common Stock were outstanding at an exercise price of $13.50. Stock
options issued pursuant to the 1995 Plan vested according to the provisions of
the plan on the date the plan was terminated.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS 123, and has been determined as if the Company had
been accounting for its employee stock options under the fair value method of
that Statement. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions:
weighted-average risk-free interest rates of 6.1% for 2000, 6.0% for 1999, and
5.5% for 1998; no dividends; volatility factors of the expected market price of
the Company's Common Stock of 0.592 for 2000, 0.582 for 1999 and 0.389 for 1998
and a weighted-average expected life of the options of 4.3 years for 2000, 4.7
years for 1999 and 5.0 years for 1998.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options granted in 2000, 1999 and 1998 is amortized to expense over the option
vesting periods. The weighted-average grant date fair value of options granted
during fiscal years 2000, 1999 and 1998 was $7.47, $8.47 and $10.87,
respectively. The Company's pro forma information follows:
2000 1999 1998
----- --------- ----
Pro forma net loss applicable to common stockholders............................ $ (7,064) $(12,999) $ (4,308)
Pro forma loss per common share applicable to common stockholders:
Basic ..................................................................... $ (0.91) $ (1.71) $ (0.58)
Diluted ................................................................... $ (0.79) $ (1.71) $ (0.53)
These amounts may not necessarily be indicative of the pro forma effect of
SFAS 123 for future periods in which options may be granted.
10. STOCKHOLDER RIGHTS PLAN
On November 2, 1998 the Company's Board of Directors declared a dividend
distribution of one right in respect to each share of the Company's Common Stock
outstanding at the record date, November 18, 1998. Initially, the rights will
trade together with the Common Stock and will not be exercisable or separately
tradable. The rights will be exercisable if a person or group acquires, in the
future, 15 percent or more of the Company's stock or announces a tender offer.
Right holders, other than the acquiring person or group, are then entitled to
purchase an amount of the Company's stock at a 50 percent discount to the share
price at that time. The amount of stock that a right holder is entitled to
purchase is based on the exercise price. Under certain circumstances, the right
will entitle the stockholder to buy shares in an acquiring entity at a discount.
LeCroy's Board of Directors may redeem the rights at a price of $0.001 per
right up until 10 days following a public announcement that any person or group
has acquired 15 percent or more of LeCroy's Common Stock. The rights will expire
on November 2, 2008, unless redeemed prior to that date.
39
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999 (the "Closing"), the Company completed a private placement
of 500,000 shares of convertible redeemable preferred stock for proceeds of $10
million. The shares of the convertible redeemable preferred stock are
convertible by the holders into 500,000 shares of Common Stock. In connection
with the convertible redeemable preferred stock, the Company issued 250,000
fully exercisable warrants to purchase shares of Common Stock at an exercise
price of $20. After the fifth anniversary of the Closing, the holders may redeem
their shares at cost plus a 12% compounding annual dividend. The shares
automatically convert to Common Stock on a one-for-one basis in the event of a
firmly underwritten public offering raising at least $20 million, provided that
the price per share is at least $28 if the public offering takes place prior to
the first anniversary of the closing, at least $36 prior to the second
anniversary of the Closing and at least $40 if the offering takes place after
the second anniversary of the Closing.
On the Closing, the Company used the Black Scholes option pricing model to
assign an aggregate value of $1.8 million to the 250,000 warrants. As such, $1.8
million of the $10 million proceeds was allocated to additional paid-in capital
and the remaining $8.2 million was allocated to redeemable preferred stock. The
value assigned to the warrants of $1.8 million will accrete to the value of the
preferred stock over five years. This will result in a non-cash charge to net
income of approximately $360,000 per year to arrive at net income available to
common stockholders.
On the Closing, the Company's stock price was $23.688 per share. This
caused the conversion feature of the redeemable preferred stock to be "in the
money". As a result, the intrinsic value of this conversion feature was
calculated to be $1.84 million. This $1.84 million was treated as an additional
preferred dividend to the preferred investors and was charged to additional
paid-in capital. This additional preferred dividend was deducted from net income
to arrive at net income available to common stockholders in the calculation of
earnings per share for fiscal 1999.
12. EMPLOYEE BENEFIT PLANS
The Company has a trusteed employee 401(k) savings plan for eligible U.S.
employees. Effective October 1, 1996, the Company, at its discretion, may match
up to 50% of employee contributions up to a maximum employer contribution of
2.5% of the employee's total compensation. For the years ended June 30, 2000,
1999 and 1998 the Company has expensed $130, $313 and $322, respectively, in
contributions to the plan. In November 1999, the Company made a decision not to
distribute its discretionary fiscal 1999 401(k) match and, therefore, reversed
such expense in November 1999.
The Company's subsidiary in Switzerland maintains a defined contribution
plan, which requires employee contributions based upon a percentage of the
employee's earnings currently ranging from 2.0% to 6.5%. The employer makes a
matching contribution based also upon a percentage of the employee's earnings
currently ranging from 3.5% to 11.0%. Company contributions amounting to $368 in
2000, $687 in 1999, and $759 in 1998 were charged to expense in each respective
period.
In July 1995, the Company adopted the 1995 Employee Stock Purchase Plan and
reserved for issuance an aggregate of 434,783 shares of Common Stock. The Plan
allows eligible employees to purchase Common Stock, through payroll deductions,
at prices equal to 85% of fair market value on the first or last business day of
the offering period, whichever is lower. The option to purchase stock will
terminate on July 7, 2005. To date, 245,623 shares have been issued under the
Employee Stock Purchase Plan and 189,160 shares were available for future
issuance.
The Company maintains a qualified Employee Stock Ownership Plan ("ESOP" or
the "Plan") which has been established in accordance with the requirements and
provisions of the Employee Retirement Income Security Act of
40
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1974 ("ERISA") and has been approved by the Internal Revenue Service ("IRS").
Annually, the Board of Directors determines the contribution, if any, to the
Employee Stock Ownership Trust ("ESOT"), which trust has been established under
the Plan for the purpose of administering and investing the funds contributed by
the Company. For the years ended June 30, 2000, 1999 and 1998, respectively, the
Company did not contribute to the ESOP and does not intend to contribute in the
future.
13. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in the signal analysis segment of the Test and
Measurement Instrument market, in which it develops, manufactures, sells and
licenses signal acquisition and analysis products principally in the form of
high-performance digital oscilloscopes. These products are used by design
engineers and researchers in a broad range of industries, including electronics,
computers and communications.
Revenues are attributed to countries based on customer ship-to addresses.
Revenues by geographic area are as follows:
2000 1999 1998
---- ---- ----
North America............................................................ $ 45,106 $ 51,068 $ 46,557
Europe................................................................... 34,674 35,652 31,019
Other foreign............................................................ 41,620 32,771 42,006
-------- -------- --------
Total............................................................... $121,400 $119,491 $119,582
======== ======== ========
Total assets by geographic area are as follows:
2000 1999
---- ----
North America............................................................ $ 67,445 $ 67,115
Europe................................................................... 25,512 25,502
Other foreign............................................................ 7,892 7,068
-------- --------
Total.............................................................. $100,849 $ 99,685
======== ========
Other foreign revenues consist principally of sales from Japan and Asia.
One customer accounted for 12% of the Company's revenue in fiscal 1998.
14. COMMITMENTS AND CONTINGENCIES
Leases
The Company has operating leases covering plant, certain office facilities,
and equipment that expire at various dates through 2005. Future minimum annual
lease payments required during the years ending in fiscal 2001 through 2005 and
later years under noncancelable operating leases having an original term of more
than one year are $1,315, $1,170, $964, $713, $730 and $425, respectively.
Aggregate rental expense on noncancelable operating leases for the years ended
June 30, 2000, 1999 and 1998 approximated $1,563, $2,784, and $2,965,
respectively.
Technology Dispute Settlement
In the normal course of business, the Company and its subsidiaries are
parties to various legal claims, actions and complaints. Included among these
claims in fiscal 1994 was an intellectual property claim in the form of a
lawsuit that alleged patent infringement with respect to some of the Company's
oscilloscope products. In February 1994, the Company concluded negotiations to
resolve this dispute and avoid extensive litigation. The result was a settlement
and a license agreement. Minimum annual future royalty payments are $350 for ten
years with potential for higher additional amounts annually. These additional
amounts are contingent on future product sales as
41
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
described in the settlement agreement and cannot exceed an aggregate of $3,500.
Royalty expense, which approximated $1,029 in 2000, $982 in 1999, and $1,442 in
1998, is included in cost of sales.
Environmental
The Company's subsidiary, Digitech Industries, Inc., was notified by the
Connecticut Department of Environmental Protection (the "DEP") that it may be
responsible for environmental damage that occurred at its previously leased
facilities in Ridgefield, Connecticut (the "Ridgefield Site"). Based upon
recommendations made by the DEP, Digitech engaged environmental consultants to
assist it in evaluating the costs associated with the DEP's recommendations for
monitoring and remediation of the environmental damage.
In May 1999, the Company, its subsidiary, Digitech Industries, Inc. and the
former owners of the Ridgefield site entered into an agreement with the current
owners of the Ridgefield Site. The current owners have purchased an insurance
policy providing for $2 million of coverage against certain environmental
liabilities related to the Ridgefield Site. This insurance policy names both the
Company and Digitech as insured parties. The current owners of the Ridgefield
Site have also agreed to remediate all environmental problems associated with
the property and to obtain all applicable approvals and certifications from the
DEP. The current owners of the Ridgefield Site have also agreed to hold both the
Company and Digitech Industries harmless in the event of a claim made against
them relating to these environmental matters. In return for the above,
forty-five days after the DEP has provided written notification to the Company
that the site remediation has been accomplished to its satisfaction, the Company
has agreed to pay the former owners of the Ridgefield Site $160,000 as
compensation for the reduced sale value of the property due to the environmental
problems existing on the site. The Company has retained this liability after the
sale of the Vigilant segment.
15. ACQUISITIONS
Purchase
In October 1997 the Company acquired all of the assets of Preamble
Instruments, Inc. of Beaverton, Oregon, a manufacturer of stand-alone
differential amplifiers and probes, for approximately $1.8 million, of which
approximately $411 was cash and 35,181 shares of the Company's Common Stock at
$39.99 per share. Incident to the acquisition was the purchase of incomplete
technology activities that resulted in a one-time pretax charge of $1.6 million.
The purchased incomplete technology that had not reached technological
feasibility and which had no alternative future use was valued using a
risk-adjusted cash flow model. Acquired complete technology of approximately
$220 is being amortized over five years.
In April 1998 the Company acquired selected assets of its Korean sales
distributor, Woojoo Hi-Tech Corporation, for approximately $1.6 million and an
additional amount not to exceed $1.7 million, contingent upon future revenues
achieved through the first quarter of fiscal year 2001. A non-compete agreement
of $0.6 million is being amortized over 30 months. The investment in excess of
fair market value of assets purchased of $0.8 million is being amortized over 15
years.
42
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized unaudited quarterly operating results for fiscal year 2000 and
1999 are as follows:
QUARTERS ENDED
----------------------------------------------------------------------------
FISCAL YEAR 1999 FISCAL YEAR 2000
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
----- ----- ---- ----- ---- ---- ---- ----
----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenues
Digital oscilloscopes and related
products........................... $24,126 $23,009 $25,534 $27,697 $23,623 $26,973 $28,343 $31,298
High energy physics products......... 1,498 2,038 2,313 1,513 1,437 1,320 828 547
Service and other.................... 1,505 1,730 1,781 1,847 1,846 1,642 1,860 1,683
License fees......................... - 2,500 2,400 - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.................... 27,129 29,277 32,028 31,057 26,906 29,935 31,031 33,528
------- ------- ------- ------- ------- ------- ------- -------
Cost of sales.......................... 13,320 13,887 17,280 15,811 13,897 15,739 14,879 17,191
------- ------- ------- ------- ------- ------- ------- -------
Gross profit..................... 13,809 15,390 14,748 15,246 13,009 14,196 16,152 16,337
Selling, general and administrative
expenses............................. 9,311 8,046 9,966 10,188 8,913 9,508 9,792 10,785
Research and development expenses...... 3,338 2,969 3,590 3,970 3,974 3,287 3,460 3,090
Restructuring and non-recurring
(credits) charges.................... - - 8,546 (1,758) - - - (2,000)
------- ------- ------- ------- ------- ------- ------- -------
Operating income .................... 1,160 4,375 (7,354) 2,846 122 1,401 2,900 4,462
Gain from sale of marketable securities - - - - 2,460 - -
Other (expenses) income, net........... (343) 150 194 157 (210) 449 (85) (430)
------- ------- ------- ------- ------- -------- ------- -------
Income from continuing operations
before income taxes.................... 817 4,525 (7,160) 3,003 (88) 4,310 2,815 4,032
Provision (benefit) for income taxes... 201 1,115 876 307 (28) 1,362 890 1,274
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations........................... 616 3,410 (8,036) 2,696 (60) 2,948 1,925 2,758
(Loss) income from discontinued
operations, net of tax............... (835) (1,244) (819) (2,576) (1,635) (733) (2,856) (5,785)
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income...................... (219) 2,166 (8,855) 120 (1,695) 2,215 (931) (3,027)
Charges related to convertible
preferred stock...................... - - - 1,844 84 85 85 86
------- ------- ------- ------- ------- ------- ------- -------
(Loss) income available to common
stockholders......................... $ (219) $ 2,166 $(8,855) $(1,724) $(1,779) $ 2,130 $(1,016) $(3,113)
======= ======= ======= ======= ======= ======= ======= =======
Income (loss) per common share-basic:
Income (loss) from continuing
operations......................... $ 0.08 $ 0.45 $ (1.05) $ 0.11 $ (0.02) $ 0.37 $ 0.24 $ 0.34
Income (loss) from discontinued
segment............................ (0.11) (0.16) (0.11) (0.33) (0.21) (0.09) (0.37) (0.74)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ................... $ (0.03) $ 0.29 $ (1.16) $ (0.22) $ (0.23) $ 0.28 $ (0.13) $ (0.40)
======= ======= ======= ======= ======= ======= ======= =======
Income (loss) per common share-diluted:
Income (loss) from continuing
operations......................... $ 0.08 $ 0.43 $ (1.05) $ 0.11 $ (0.02) $ 0.35 $ 0.23 $ 0.33
Income (loss) from discontinued
segment............................ (0.11) (0.16) (0.11) (0.33) (0.21) (0.09) (0.34) (0.69)
------- ------- ------- ------- ------- ------- ------- -------
Net (loss) income ................... $ (0.03) $ 0.27 $ (1.16) $ (0.22) $ (0.23) $ 0.26 $ (0.11) $ (0.36)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average number of shares:
Basic.................................. 7,572 7,605 7,629 7,683 7,708 7,738 7,757 7,792
Diluted................................ 7,914 7,861 7,629 7,683 7,708 8,412 8,491 8,424
The quarter ended March 31, 1999 reflects inventory write-downs of $2,170
included in cost of sales from restructuring.
17. SUBSEQUENT EVENTS (UNAUDITED)
In August 2000, the Company sold 517,520 shares of its Common Stock for
gross proceeds of $5.2 million in a private equity placement. Proceeds from this
sale of securities will be used to repay existing indebtedness, fund working
capital requirements and other general corporate purposes.
43
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In August 2000, the Company announced its intention to divest its
Vigilant Networks segment, which is comprised of its Vigilant Networks, Inc. and
Digitech Industries, Inc. subsidiaries. Vigilant Networks' principal product,
the Big Tangerine network analyzer, was a new product which was also being sold
into a new market for the Company. Since this product's inception, LeCroy has
made substantial investments in the Vigilant Networks segment in terms of
selling, marketing, research and development, and administrative expenses. While
the Company believes that this product has a unique technology, it has decided
that it cannot continue to invest the financial resources necessary to
capitalize on its future growth potential.
Subsequent to announcing its intention to divest the Vigilant Networks
segment, the Company closed on the sale of the assets and business of Vigilant
and a portion of the assets and business of Digitech in August 2000 for gross
proceeds of $12.0 million in cash. The buyer also assumed certain liabilities of
Vigilant. In connection with the sale, the Company issued warrants to purchase
200,000 shares of LeCroy Common Stock at $10.05 per share to the buyer. Using
the Black-Scholes option pricing model, these warrants are valued at
approximately $1.3 million. The remaining business of Digitech will be
discontinued. After deducting the value of these warrants, along with fees and
certain retained liabilities, the Company expects to break even on the sale and
discontinuance of the Vigilant Networks segment.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors of the Company and with respect
to Item 405 disclosure of delinquent Form 3, 4 or 5 filers will be contained in
the Company's definitive Proxy Statement relating to its 2000 Annual Meeting of
Stockholders, which is scheduled to be held October 25, 2000; said information
is incorporated herein by reference. The discussion of executive officers of the
Company is included in Item 4A in Part I of this report under "Executive
Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION.
A description of the compensation of the Company's executive officers will
be contained in the section captioned "Executive Compensation" of the Proxy
Statement for the Company's 2000 Annual Meeting of Stockholders, which is
scheduled to be held on October 25, 2000; said information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
A description of the security ownership of certain beneficial owners and
management will be contained in the Proxy Statement for the Company's 2000
Annual Meeting of Stockholders, which is scheduled to be held on October 25,
2000; said information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain relationships and related transactions with management will be
contained in the Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders, which is scheduled to be held on October 25, 2000; said
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
(a) (1) FINANCIAL STATEMENTS--See Index to Financial Statements at Item 8
of this report.
(a) (2) FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is included elsewhere in
the financial statements or notes thereto.
(a) (3) EXHIBITS
45
The following exhibits are filed with this report:
Exhibit
Number Description
- ------ -----------
2.1 Agreement and Plan of Merger, dated as of August 3, 1995, between
the Registrant and LeCroy Merger Corporation, filed as Exhibit 2.1
to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
2.2 Agreement and Plan of Merger and Reorganization between the
Registrant, the Merger Sub, Lightspeed, the Selling Stockholder and
Mickey Miller, filed as Exhibit 2.1 to Form S-3 Registration
Statement No.333-43690 and is incorporated herein by reference.
3.1 Certificate of Incorporation of the Registrant as of July 24, 1995,
filed as Exhibit 3.1 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
3.2 Current By-Laws of the Registrant, filed as Exhibit 3.3 to Form S-1
Registration Statement No. 33-95620, and is incorporated herein by
reference.
4.1 Share Purchase Agreement, dated August 15, 2000, between the
Registrant and the State of Wisconsin Investment Board.
4.2 Placement Agent Agreement, dated August 15, 2000, between the
Registrant and SG Cowen Securities Corporation.
4.3 Warrants, dated August 16, 2000, issued to SG Cowen Securities
Corporation to purchase 20,701 shares of the Registrant's Common
Stock.
4.4 Warrant, dated August 25, 2000, issued to Big T-2 Company LLC to
purchase 200,000 shares of the Registrants Common Stock, filed as
Exhibit 10.3 to Form 8-K dated August 31, 2000, and is incorporated
herein by reference.
10.1 Letter of Employment, dated as of August 23, 1993, between the
Registrant and Lutz. P. Henckels, filed as Exhibit 10.15 to Form
S-1 Registration Statement No. 33-95620, and is incorporated herein
by reference.
10.2 Letter of Employment, dated as of August 24, 1995, between the
Registrant and Lutz. P. Henckels, filed as Exhibit 10.30 to Form
S-1 Registration Statement No. 33-95620, and is incorporated herein
by reference.
10.3 Employee Agreement Regarding Inventions, Confidentiality and
Non-Competition, dated as of March 28, 1995, between the Registrant
and Lutz. P. Henckels, filed as Exhibit 10.12 to Form S-1
Registration Statement No. 33-95620, and is incorporated herein by
reference.
10.4 Employee Agreement Regarding Inventions, Confidentiality and
Non-Competition, dated as of March 28, 1995, between the Registrant
and Walter O. LeCroy, Jr., filed as Exhibit 10.13 to Form S-1
Registration Statement No. 33-95620, and is incorporated herein by
reference.
10.5 Employee Agreement Regarding Inventions, Confidentiality and
Non-Competition, dated as of March 28, 1995, between the Registrant
and Brian V. Cake, filed as Exhibit 10.14 to Form S-1 Registration
Statement No. 33-95620, and is incorporated herein by reference.
10.6 LeCroy Corporation Amended and Restated 1993 Stock Incentive Plan
filed as Exhibit 10.1 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
10.7 LeCroy Corporation 1995 Non-Employee Director Stock Option Plan
filed as Exhibit 10.2 to Form S-1 Registration Statement No.
33-95620 dated August 9, 1995, and is incorporated herein by
reference.
10.8 LeCroy Corporation 1995 Employee Stock Purchase Plan filed as
Exhibit 10.3 to Form S-1 Registration Statement No. 33-95620, and
is incorporated herein by reference.
10.9 Settlement and License Agreement, dated as of December 9, 1993,
between the Registrant and Tektronix, Inc. filed as Exhibit 10.11
to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
46
10.10 Multicurrency Credit Agreement, dated as of December 12, 1995,
between the Registrant and The Chase Manhattan Bank, N.A. as agent
for the lenders named therein, filed as Exhibit 10.11 to Form 10-K
for the year ended June 30, 1997, and is incorporated herein by
reference.
10.11 Securities Purchase Agreement, dated as of March 28, 1995, between
the Registrant and the purchasers named therein filed as Exhibit
10.7 to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
10.12 Shareholders Agreement, dated as of March 28, 1995, among the
Registrant, Walter O. LeCroy, Jr. And the investors named therein
filed as Exhibit 10.8 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
10.13 Form of Common Stock Purchase Warrant filed as Exhibit 10.10 to
Form S-1 Registration Statement No. 33-95620, and is incorporated
herein by reference.
10.14 Form of Indemnification Agreement, between the Registrant and each
of its executive officers and directors filed as Exhibit 10.29 to
Form S-1 Registration Statement No. 33-95620, and is incorporated
herein by reference.
10.15 Agreement dated as of August 2, 1995, amending the Securities
Purchase Agreement filed as Exhibit 10.12 hereto filed as Exhibit
10.34 to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
10.16 Agreement dated as of September 29, 1995, amending the Securities
Purchase Agreement filed as Exhibit 10.12 hereto filed as Exhibit
10.35 to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
10.17 LeCroy Corporation Employee Stock Ownership Trust Agreement,
between the Registrant and Cole Taylor Bank, dated September 13,
1995 filed as Exhibit 10.36 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
10.18 Amended and Restated LeCroy Corporation Employee Stock Ownership
Plan filed as Exhibit 10.37 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
10.19 OEM Purchase and Technology License Agreement, between the
Registrant and Guzik Technical Enterprises, Inc., dated February
19, 1997 filed as Exhibit 10.20 to Form S-3 Registration Statement
No. 333-22117, and is incorporated herein by reference.
10.20 Agreement and Plan of Merger and Reorganization between the
Registrant and Digitech Industries, Inc., dated December 10, 1997
filed as Exhibit 2 to Form S-3 Registration Statement No.
333-43699, and is incorporated herein by reference.
10.21 Amended and Restated Multicurrency Credit Agreement dated as of
March 31, 1999 between the Company, Chase Manhattan Bank and
BankBoston, filed as exhibit 1.1 to the quarterly report on Form
10-Q for the quarter ended March 31, 1999, and is incorporated
herein by reference.
10.22 Series A Convertible, Redeemable Preferred Stock Purchase Agreement
dated as of June 30, 1999 between the registrant and the purchasers
named therein, and is incorporated herein by reference.
10.23 First Amendment dated June 12, 1999 to the Amended and Restated
Multicurrency Credit Agreement between the Company, Chase Manhattan
Bank and Fleet National Bank, filed as Exhibit 10.23 to Form 10-Q
for the quarter ended March 31, 2000, and is incorporated herein by
reference.
10.24 Second Amendment dated September 7, 1999 to the Amended and
Restated Multicurrency Credit Agreement between the Compnay, Chase
Manhattan Bank and Fleet National Bank, filed as Exhibit 10.24 to
Form 10-Q for the quarter ended March 31, 2000, and is incorporated
herein by reference.
10.25 Third Amendment dated April 19, 2000 to the Amended and Restated
Multicurrency Credit Agreement between the Company, Chase Manhattan
Bank and Fleet National Bank, filed as Exhibit 10.25 to Form 10-Q
for the quarter ended March 31, 2000, and is incorporated herein by
reference.
10.26 Fourth Amendment dated May 5, 2000 to the Amended and Restated
Multicurrency Credit Agreement between the Company, Chase Manhattan
Bank and Fleet National Bank, filed as Exhibit 10.26 to Form 10-Q
for the quarter ended March 31, 2000, and is incorporated herein by
reference.
47
10.27 Fifth Amendment dated May 18, 2000 to the Amended and Restated
Multicurrency Credit Agreement between the Company, Chase Manhattan
Bank and Fleet National Bank, filed as Exhibit 10.27 to Form 10-Q
for the quarter ended March 31, 2000, and is incorporated herein by
reference.
10.28 Term Loan Agreement dated May 12, 2000 between the Company, Chase
Manhattan Bank and Fleet National Bank, filed as Exhibit 10.28 to
Form 10-Q for the quarter ended March 31, 2000, and is incorporated
herein by reference.
10.29 First Amendment dated May 18, 2000 to the Term Loan Agreement
between the Company, Chase Manhattan Bank and Fleet National Bank,
filed as Exhibit 10.29 to Form 10-Q for the quarter ended March 31,
2000, and is incorporated herein by reference.
10.30 Executive Employment Agreement, dated as of July 14, 2000, between
the Registrant and Robert Miller, filed as Exhibit 10.0 to Form S-3
Registration Statement No. 333-43690, and is incorporated herein by
reference.
10.31 Asset Purchase Agreement, dated August 23, 2000, by and among the
Registrant, Vigilant Networks, Inc., Digitech Industries, Inc. and
GenTek Inc., filed as Exhibit 10.1 to Form 8-K dated August 31,
2000, and is incorporated herein by reference.
10.32 License and Supply Agreement, dated August 23, 2000 by and between
the Registrant and Big T-1 Company LLC, filed as Exhibit 10.2 to
Form 8-K dated August 31, 2000, and is incorporated herein by
reference.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule for the fiscal year ended June 30, 2000.
(b) REPORTS ON FORM 8-K
The Company filed a Form 8-K, dated August 31, 2000, to report the sale of
the assets and business of Vigilant Networks, Inc. and a portion of the assets
and business of Digitech Industries, Inc. to GenTek Inc. on August 25, 2000.
48
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.
LeCROY CORPORATION
September 11, 2000 By /S/ RAYMOND F. KUNZMANN
-----------------------
Raymond F. Kunzmann
Vice President-Finance, Chief Financial Officer,
Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ CHARLES A. DICKINSON Chairman of the Board and Director September 11, 2000
- ------------------------------
Charles A. Dickinson
/S/ LUTZ P. HENCKELS President, Chief Executive Officer September 11, 2000
- ------------------------------ and Director
Lutz P. Henckels (Principal Executive Officer)
/S/ RAYMOND F. KUNZMANN Vice President - Finance, Chief September 11, 2000
- ------------------------------ Financial Officer, Secretary
Raymond F. Kunzmann and Treasurer
(Principal Accounting Officer)
/S/ ROBERT E. ANDERSON Director September 11, 2000
- ------------------------------
Robert E. Anderson
/S/ WALTER O. LECROY, JR.
- ------------------------------ Director September 11, 2000
Walter O. LeCroy, Jr.
/S/ DOUGLAS A. KINGSLEY Director September 11, 2000
- ------------------------------
Douglas A. Kingsley
/S/ WILLIAM G. SCHEERER Director September 11, 2000
- ------------------------------
William G. Scheerer
/S/ ALLYN C. WOODWARD JR. Director September 11, 2000
- ------------------------------
Allyn C. Woodward, Jr.
49