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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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)
(845) 425-2000
(Registrant's Telephone Number, Including Area Code)
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 ("X") whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
------ --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 28, 2003
----- -----------------------------
Common stock, par value $.01 share 10,349,145
LECROY CORPORATION
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of March 31, 2003 (Unaudited) and June 30, 2002 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three and Nine Months ended March 31, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows (Unaudited) 5
for the Nine Months ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
Results of Operation and 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature
20
Certifications Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 21
Exhibit 99 Certifications Pursuant to Section 906 of
the Sarbanes-Oxley Act Of 2002 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LECROY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
March 31, June 30,
In thousands, except par value and share data 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 27,426 $ 27,322
Accounts receivable, net 18,900 23,880
Inventories, net 25,791 28,108
Other current assets 10,668 11,873
---------- -----------
Total current assets 82,785 91,183
Property and equipment, net 20,390 21,354
Other assets 17,702 14,454
---------- -----------
TOTAL ASSETS $ 120,877 $ 126,991
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,705 $ 12,971
Accrued expenses and other liabilities 13,045 14,947
---------- ----------
Total current liabilities 23,750 27,918
Deferred revenue and other non-current liabilities 3,386 4,302
---------- -----------
Total liabilities 27,136 32,220
Redeemable convertible preferred stock, $.01 par value (authorized 5,000,000
shares; 500,000 shares issued and outstanding; liquidation value, $15,314 and
$14,049 as of March 31, 2003 and June 30, 2002, respectively) 14,816 13,266
Stockholders' equity:
Common stock, $.01 par value (authorized 45,000,000 shares; 10,349,145 and
10,323,071 shares issued and outstanding as of
March 31, 2003 and June 30, 2002, respectively) 103 103
Additional paid-in capital 80,015 81,279
Warrants to purchase common stock 2,165 2,165
Accumulated other comprehensive loss (2,481) (3,695)
Retained earnings (deficit) (877) 1,653
---------- -----------
Total stockholders' equity 78,925 81,505
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 120,877 $ 126,991
========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
LECROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
March 31, March 31,
In thousands, except per share data 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Digital oscilloscopes and related products $ 21,009 $ 21,333 $ 67,864 $ 74,813
High-energy physics products - 31 - 1,419
Service and other 5,527 2,244 10,300 6,514
---------- ----------- ---------- ----------
Total revenues 26,536 23,608 78,164 82,746
Cost of sales (included in Q3 of FY`02 is $616 of
severance; included in the nine months of FY`03 is
$2,280 of intangible asset impairment charges and
$204 of severance, and in the nine months of FY`02
is $3,601 of inventory charges and $986 of severance) 11,478 12,409 38,989 45,518
---------- ----------- ---------- ----------
Gross profit 15,058 11,199 39,175 37,228
Operating expenses:
Selling, general and administrative (included in Q3
of FY`02 is $1,348 of severance; included in the nine
months of FY`03 and FY`02 is $1,921 and $2,906 of
severance, respectively) 9,552 9,712 29,484 30,511
Research and development(included in the nine months
of FY'03 is $529 of severance) 4,667 5,390 13,544 13,671
---------- ----------- ---------- ----------
Total operating expenses 14,219 15,102 43,028 44,182
Operating income (loss) 839 (3,903) (3,853) (6,954)
Other (expense) income, net (10) (397) (161) (144)
---------- ----------- ---------- ----------
Income (loss) before income taxes 829 (4,300) (4,014) (7,098)
Provision for (benefit from) income taxes 307 (1,591) (1,485) (3,026)
---------- ----------- ---------- ----------
Net income (loss) 522 (2,709) (2,529) (4,072)
Charges related to convertible preferred stock 518 469 1,550 1,404
---------- ----------- ---------- ----------
Net income (loss) applicable to common stockholders $ 4 $ (3,178) $ (4,079) $ (5,476)
========== =========== ========== ==========
Income (loss) per common share applicable to common stockholders:
Basic $ - $ (0.31) $ (0.39) $ (0.55)
Diluted $ - $ (0.31) $ (0.39) $ (0.55)
Weighted average number of common shares:
Basic 10,348 10,233 10,337 9,976
Diluted 10,404 10,233 10,337 9,976
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
LECROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
Nine Months Ended
March 31,
In thousands 2003 2002
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,529) $(4,072)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,949 4,459
Deferred income taxes (1,871) (2,999)
Inventory and severance charges - 3,772
Impairment of intangible assets 2,030 -
Impairment of marketable securities - 492
Recognition of deferred license revenue (972) (972)
Change in operating assets and liabilities
Accounts receivable 4,195 6,603
Inventories 2,088 (4,042)
Other current and non-current assets (314) (26)
Accounts payable, accrued expenses and other liabilities (4,787) (9,785)
-------- --------
Net cash provided by (used in) operating activities 2,789 (6,570)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,032) (2,920)
Purchase of intangible assets (1,260) -
-------- ---------
Net cash used in investing activities (3,292) (2,920)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings (62) (61)
Proceeds from the issuance of common stock - 23,182
Proceeds from employee stock purchase and option plans 259 684
------- -------
Net cash provided by financing activities 197 23,805
------- -------
Effect of exchange rate changes on cash 410 282
------- -------
Net increase in cash and cash equivalents 104 14,597
Cash and cash equivalents at beginning of the period 27,322 11,449
------- -------
Cash and cash equivalents at end of the period $ 27,426 $ 26,046
======== ========
Supplemental Cash Flow Disclosure
Cash paid during the period for:
Interest $ 74 $ 109
Income taxes 514 578
Non-cash investing and financing activities:
Acquisition of distributor in exchange for amounts
due to the company 300 -
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements
include all the accounts of LeCroy Corporation (the "Company" or "LeCroy") and
its wholly-owned subsidiaries. These condensed consolidated financial statements
are unaudited and should be read in conjunction with the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002. The condensed consolidated balance sheet as
of June 30, 2002 has been derived from these audited consolidated financial
statements. Certain reclassifications have been made to prior-year amounts to
conform to the current-year presentation. All material inter-company
transactions and balances have been eliminated.
The Company's condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States, which require management to make estimates and assumptions that
affect the consolidated financial statements and related disclosures. These
estimates and assumptions are based on judgment and available information and,
consequently, actual results could differ from these estimates. In addition,
certain information and footnote disclosures normally included in financial
statements have been condensed or omitted as permitted by accounting principles
generally accepted in the United States.
These unaudited condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, that are, in the
opinion of management, necessary for a fair statement of the financial position
and the results of operations for the interim periods presented. Interim period
operating results may not be indicative of the operating results for a full
year.
2. STOCK PLANS AND AWARDS
LeCroy accounts for stock-based compensation plans under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
stock-based employee compensation cost for the stock option plans is reflected
in the Company's Condensed Consolidated Statements of Operations, as all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. Compensation cost for restricted
stock is recorded based on the market value on the date of grant. The fair value
of restricted stock is charged to Stockholders' Equity and amortized to expense
over the requisite vesting periods.
The following table illustrates the effect on net income (loss) and net
income (loss) per common share applicable to common stockholders as if the
Company had applied the fair value recognition provisions of Financial
Accounting Standards Board ("FASB") No. 123, "Accounting for Stock-based
Compensation," for the three and nine months ended March 31, 2003 and 2002.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
In thousands, except per share amounts 2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $ 522 $ (2,709) $ (2,529) $ (4,072)
Add: stock-based compensation expense included
in reported net income, net of tax 10 15 29 80
Deduct: stock-based compensation expense
determined under fair value based method for
all awards, net of tax (550) (907) (1,546) (2,551)
------------ ------------ ------------ ----------
Net income (loss), pro forma (18) (3,601) (4,046) (6,543)
Charges related to convertible preferred stock 518 469 1,550 1,404
------------ ------------ ------------ ----------
Net income (loss) applicable to common
stockholders, pro forma $ (536) $ (4,070) $ (5,596) $ (7,947)
============ ============ ============ ==========
Income (loss) per common share applicable
to common stockholders:
Basic and Diluted, as reported $ - $ (0.31) $ (0.39) $ (0.55)
Basic and Diluted, pro forma $ (0.05) $ (0.40) $ (0.54) $ (0.80)
6
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. RESTRUCTURING
During the first quarter of fiscal 2003, the Company adopted a plan to
scale down fixed infrastructure due to the difficult economic environment and to
implement new management operating systems designed to improve processes in
sales, order management, customer relationship management and financial
performance management. In connection with the adoption of this plan, the
Company recorded a charge for severance and other related expenses in the first
quarter of fiscal 2003 of $2.6 million; $0.2 million of which was recorded in
Cost of sales, $1.9 million recorded in Selling, general and administrative
expense and $0.5 million recorded in Research and Development in the Condensed
Consolidated Statement of Operations. The plan implemented during fiscal 2003
resulted in improved operating efficiencies and reduced the Company's headcount
by 38 employees or approximately 9.3% as compared to June 30, 2002. As of March
31, 2003, $1.3 million of the total $2.6 million has been paid and $1.3 million
remains in Accrued expenses and other liabilities in the Condensed Consolidated
Balance Sheet. Severance and other related amounts under this plan will be paid
by the end of fiscal 2004.
The Company took steps during fiscal 2002 to reduce its expenses in
response to the continued weakness in the technology sector of the economy. As
part of this effort, LeCroy reduced its workforce by 69 employees or
approximately 15% as compared to June 30, 2001. In connection with these
workforce reductions, the Company recorded a $4.2 million charge ($1.0 million
in Cost of sales and $3.2 million in Selling, general and administrative
expense) for severance and related expenses, including costs associated with the
succession of the Company's Chief Executive Officer during the second quarter of
fiscal 2002. Of the $4.3 million total charge, $4.1 million was initially
credited to Accrued expenses and other liabilities and $0.2 million,
representing a non-cash expense for the amendment of employee stock options, was
credited to Additional paid-in capital. As of March 31, 2003, $3.6 million of
the total $4.1 million has been paid and $0.5 million remains accrued in Accrued
expenses and other liabilities in the Condensed Consolidated Balance Sheet.
Severance and other related amounts, including costs associated with the
succession of the Company's Chief Executive Officer, will be paid by the end of
the second quarter of fiscal 2004.
4. DERIVATIVES
The Company enters into foreign exchange forward contracts to minimize the
risks associated with foreign currency fluctuations on assets or liabilities
denominated in other than the functional currency of the Company or its
subsidiaries. These foreign exchange forward contracts are highly inversely
correlated to the hedged items and are considered effective economic hedges of
the underlying assets and liabilities. The net gains or (losses) resulting from
changes in the fair value of these derivatives and on transactions denominated
in other than their functional currencies were ($0.4) million and $42,000 for
the nine months ended March 31, 2003 and 2002, respectively, and are included in
Other (expense) income, net in the Condensed Consolidated Statements of
Operations. At March 31, 2003 and June 30, 2002, the Company had approximately
$4.5 million and $12.8 million, respectively, of open foreign exchange forward
contracts all with maturities of less than three months.
5. COMPREHENSIVE INCOME (LOSS)
The following table presents the components of comprehensive income (loss):
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands MARCH 31, MARCH 31,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss)........................................ $ 522 $ (2,709) $ (2,529) $ (4,072)
Cumulative unrealized foreign currency
translation gains................................ 301 85 1,214 1,310
Reversal of cumulative unrealized gain on marketable
securities....................................... - - - (360)
Reclassification adjustment for loss
realized on impairment of marketable
securities....................................... - 394 - -
--------- ---------- ---------- --------
Comprehensive income (loss).............................. $ 823 $ (2,230) $ (1,315) $(3,122)
========= ========== ========== ========
During the third quarter of fiscal 2002, the Company recorded a $0.4
million loss on the impairment of marketable equity securities classified as
available for sale ("marketable securities").
7
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
6. ACCOUNTS RECEIVABLE, NET
During the second quarter of fiscal 2002, the Company entered into an
agreement with one of its customers, who is also a vendor, in which it was
granted the legal right to offset outstanding accounts receivable balances
against outstanding accounts payable balances. For the nine months ended March
31, 2003 and 2002, the Company netted approximately $1.5 million and $4.2
million, respectively, of accounts receivable against accounts payable on the
Condensed Consolidated Balance Sheets.
7. INVENTORIES, NET
Inventories, including demonstration units in finished goods, are stated at
the lower of cost (first-in, first-out method) or market.
MARCH 31, JUNE 30,
2002 2003
--------- --------
IN THOUSANDS
Raw materials....................................... $ 6,500 $ 7,735
Work in process..................................... 4,704 5,571
Finished goods...................................... 14,587 14,802
----------- ---------
$ 25,791 $ 28,108
=========== =========
The value of demonstration units included in finished goods was $9.2
million and $7.5 million at March 31, 2003 and June 30, 2002, respectively.
During the second quarter of fiscal 2002, the Company increased its
allowance for excess and obsolete inventory by $3.6 million through a charge to
Cost of sales. This inventory charge relates to the cost of inventory associated
with discontinued product lines and inventory levels that were deemed to be in
excess of forecasted requirements.
8. OTHER CURRENT ASSETS
Other current assets consist of the following:
MARCH 31, JUNE 30,
2002 2003
--------- --------
IN THOUSANDS
Deferred tax assets, net............................ $ 6,010 $ 8,700
Other............................................... 4,658 3,173
----------- ----------
$ 10,668 $ 11,873
=========== ==========
9. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
MARCH 31, JUNE 30,
2002 2003
--------- --------
IN THOUSANDS
Land and building................................... $ 13,384 $ 12,814
Furniture, machinery and equipment.................. 33,523 31,556
Computer software................................... 6,074 6,074
----------- -----------
52,981 50,444
Less: Accumulated depreciation and amortization.... (32,591) (29,090)
------------ -----------
$ 20,390 $ 21,354
=========== ===========
Depreciation and amortization expense related to property and equipment for
the nine month periods ended March 31, 2003 and 2002 was $3.4 million and $3.1
million, respectively.
8
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
10. OTHER ASSETS
Other assets consist of the following:
MARCH 31, JUNE 30,
2003 2002
---- ----
IN THOUSANDS
Intangibles, net.................................... $ 5,145 $ 6,707
Deferred tax assets, net............................ 9,321 4,760
Goodwill............................................ 1,874 1,574
Other............................................... 1,362 1,413
----------- -----------
$ 17,702 $ 14,454
=========== ===========
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2001. Under
SFAS No. 142, goodwill is no longer amortized but reviewed for impairment
annually or more frequently if certain indicators arise. The Company completed
the annual impairment test required under SFAS No. 142 during the fourth quarter
of fiscal 2002 and determined that there was no impairment to its recorded
goodwill balances.
The following table reflects the gross carrying amount and accumulated
amortization of the Company's goodwill and intangible assets included in Other
assets on the Condensed Consolidated Balance Sheets as of the dates indicated:
MARCH 31, JUNE 30,
2003 2002
---- ----
IN THOUSANDS
Intangible assets:
Amortized intangible assets:
Technology, manufacturing and distribution rights..... $ 8,819 $ 10,332
Patents and other intangible assets................... 201 201
Effect of currency translation on intangible assets... 42 162
Accumulated amortization.............................. (3,917) (3,988)
----------- -----------
Net carrying amount..................................... $ 5,145 $ 6,707
=========== ===========
Non-amortized intangible assets:
Goodwill............................................. $ 1,874 $ 1,574
=========== ===========
During the second quarter of fiscal 2003, the Company recorded a $2.1
million charge for the impairment of technology, manufacturing and distribution
rights and a $0.2 million charge for a future royalty payment, both of which are
recorded in Cost of sales. The impairment resulted from the Company's strategic
decision to exit certain older product lines and to make significant changes to
its manufacturing strategy to further improve operating efficiency. This
reduction to Other assets for the impairment of technology, manufacturing and
distribution rights along with the retirement of fully amortized assets was
partially offset by the purchase of a new $2.0 million technology license
recorded in Other assets in the Condensed Consolidated Balance Sheet. As of
March 31, 2003, the Company has paid $1.3 million for the technology license.
During the third quarter of fiscal 2003, the Company acquired a former
distributor in Singapore for $0.3 million and the preliminary purchase price
allocation resulted in $0.3 million of goodwill.
Amortization expense for those intangible assets with finite lives was $1.5
million and $1.1 million for the nine months ended March 31, 2003 and 2002,
respectively. The cost of technology, manufacturing and distribution rights
acquired is amortized primarily on the basis of the higher of units shipped over
the contract periods through June 2008 or on a straight-line basis. The Company
estimates amortization expense on a straight-line basis during the years ending
in fiscal 2003 through 2008 will approximate $2.0 million, $1.5 million, $1.7
million, $0.4 million, $0.4 million and $0.4 million, respectively.
9
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
11. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
MARCH 31, JUNE 30,
2003 2002
------ ------
IN THOUSANDS
Compensation and benefits........................... $ 4,376 $ 5,348
Income taxes........................................ 2,432 2,634
Deferred license fee revenue........................ 1,296 1,296
Warranty............................................ 1,233 1,247
Retained liabilities from discontinued operations... 855 1,474
Other............................................... 2,853 2,948
----------- -----------
$ 13,045 $ 14,947
=========== ===========
12. WARRANTIES
The Company provides a warranty on its products, typically extending three
years after delivery and accounted for in accordance with FASB No. 5,
"Accounting for Contingencies," such that an accrual is made when it is
estimable and probable. These estimates are derived from historical data of
product reliability. The expected failure is arrived at in terms of units, which
are then converted into labor hours and an average fully burdened cost per hour
is applied to the number of failure hours to derive the amount of accrued
warranty required. On a quarterly basis, the Company studies trends of warranty
claims and takes action to improve the quality of its products and minimize its
warranty exposure. The following table is a reconciliation of the changes in the
Company's aggregate product warranty liability for the reporting period.
THREE MONTHS ENDED NINE MONTHS ENDED
In thousands MARCH 31, MARCH 31,
2003 2002 2003 2002
---- ---- ---- ----
Balance at beginning of period...................... $ 1,235 $ 1,286 $ 1,247 $ 1,529
Accruals for warranties issued during the period.. 280 320 897 662
Warranty costs incurred during the period......... (282) (332) (911) (917)
---------- ---------- --------- --------
Balance at end of period............................ $ 1,233 $ 1,274 $ 1,233 $ 1,274
========== ========== ========= ========
In connection with the agreement to license the Company's MAUI(TM)
Instrument Operating System technology during the third quarter of fiscal 2003,
the Company agreed to indemnify the purchaser for defense, settlement, or
payment of a judgment for intellectual property claims related to the license
agreement. As of March 31, 2003, there have been no claims under such
indemnification provisions.
As is customary in the test and measurement industry, and as provided for
in local law in the U.S. and other jurisdictions, the Company's standard terms
of sale provide remedies to customers, such as defense, settlement, or payment
of a judgment for intellectual property claims related to the use of the
Company's products. Based on the Company's experience, claims made under such
indemnifications are rare and the associated estimated fair value of the
liability is not material.
13. COMMON STOCK
On August 15, 2001 (the "Closing"), the Company sold 1,428,572 shares of
its Common Stock for gross proceeds of $25.0 million in a private equity
placement. The Company intends to use the proceeds for operating needs and to
fund growth through acquisitions and other transactions. In connection with the
private equity placement, the Company issued to its placement agent a warrant to
purchase up to 28,571 shares of Common Stock at an exercise price of $17.50. On
the Closing, the Company used the Black-Scholes option-pricing model to assign
an aggregate value of $0.3 million to this warrant.
10
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
14. 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 (the "Preferred
Stock") for proceeds of $10.0 million. The shares of the Preferred Stock are
convertible at any time by the holders into 500,000 shares of Common Stock.
After the fifth anniversary of the Closing, the holders may redeem their shares
at cost plus a 12% compounding annual dividend since the date of issue. The
shares of Preferred Stock automatically convert to Common Stock on a one-for-one
basis in the event of a firmly underwritten public offering raising at least
$20.0 million, provided that the price per share is at least $40 if the offering
takes place after the second anniversary of the Closing (an "automatic
conversion"). Upon an automatic conversion, the holders of the Preferred Stock
will also receive payment of all accrued 12% dividends from the issue date to
the conversion date. The holders of the Preferred Stock are also entitled to
payment of the 12% compounding annual dividend in the event of a liquidation of
the Company or upon a merger or sale of substantially all of the Company's
assets. Using the 12% dividend rate, the liquidation value of the Preferred
Stock at March 31, 2003 was $15.3 million.
15. REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which summarizes certain of the SEC Staff's views in applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. Under SAB 101, which the Company adopted in
fiscal 2001, certain previously recognized license fee revenue was deferred and
recognized in future periods over the terms of the agreements. The adoption of
SAB 101 was recorded as of the beginning of fiscal 2001 and resulted in a
non-cash charge for the cumulative effect of an accounting change of $4.4
million, net of a tax benefit of $2.7 million. The deferred revenue will be
amortized into revenue over 5.5 years, the remaining terms of the license
agreements. The Company recognized pre-tax deferred license fee revenue of $0.3
million and $1.0 million for the three and nine months ended March 31, 2003 and
2002, respectively. Such license fees were included in Service and other revenue
in the Condensed Consolidated Statements of Operations. As of March 31, 2003,
the remaining balance of pre-tax deferred license fee revenue was $3.6 million.
The Company recognizes software license revenue in accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position
98-9 ("SOP 98-9"). Revenue from perpetual software license agreements are
recognized upon shipment of the software if evidence of an arrangement exists,
pricing is fixed and determinable, and collectibility is probable. If an
acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. The Company
allocates revenue on software arrangements involving multiple elements to each
element based on the relative fair values of the elements. The Company's
determination of fair value of each element in multiple element-arrangements is
based on vendor specific objective evidence ("VSOE"). The Company has analyzed
all of the elements and determined that it has sufficient VSOE to allocate
revenue to maintenance included in multiple element-arrangements. Accordingly,
assuming all other revenue recognition criteria are met, revenue is recognized
upon delivery using the residual method in accordance with SOP 98-9, where the
fair value of the undelivered elements is deferred and the remaining portion of
the arrangement fee is recognized as revenue. The revenue allocated to licenses
generally is recognized upon delivery of the products. The revenue allocated to
maintenance is generally recognized ratably over the term of the support. In
accordance with SOP 97-2, the Company recognized $3.0 million of revenue for the
perpetual license of the Company's MAUI Instrument Operating System technology
in the third quarter of fiscal 2003. Maintenance fees included in the license
agreement will be recognized as services are performed beginning the fourth
quarter of fiscal 2003.
16. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, whereas EITF Issue No. 94-3 had recognized the
liability at the commitment date to an exit plan. The Company adopted the
provisions of SFAS No. 146 effective for exit or disposal activities initiated
after December 31, 2002. SFAS No. 146 changes the timing of liability and
expense recognition related to exit or disposal activities, but not the ultimate
amount of such expenses.
11
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In October 2002, the EITF issued EITF Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." This issue addresses revenue
recognition accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. This issue is to be effective for the
Company's fiscal year 2004. Management believes the adoption of EITF Issue No.
00-21 will not have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Fin 45"). Fin 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee and does not apply to product
warranties or to guarantees accounted for as derivatives. Fin 45 also requires
enhanced disclosures of product warranties (see note 12). The recognition
provisions of Fin 45 apply to guarantees issued or modified after December 31,
2002 and will not have a material effect on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to the fair value method of accounting for stock-based
employee compensation set forth in SFAS No. 123. This Statement also amends the
disclosure provisions of SFAS No. 123 and APB No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The Company adopted the interim
disclosure provisions in the current period (see note 2). The FASB recently
indicated that they will require stock-based employee compensation to be
recorded as a charge to earnings pursuant to standards they are currently
deliberating. Management continues to closely monitor the issuance of this
standard as well as evaluate the Company's position with respect to current
guidance.
17. SUBSEQUENT EVENTS
In April 2003, the Company adopted a plan to consolidate its probe
development activities into its Chestnut Ridge, New York facility. In connection
with this plan, the Company closed its Beaverton, Oregon facility. The Company
estimates that the adoption of this plan will result in charges of approximately
$0.4 million in the fourth fiscal quarter of 2003 comprising severance and lease
termination costs. Management believes that this plan will not materially impact
the Company's results of operations.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
LeCroy currently operates as one business segment in the Test and
Measurement Instrument market. Using its core competency of Wave Shape Analysis,
defined as the capture and analysis of complex electronic signals, the Company
develops, manufactures and sells 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 computer / semi-conductor, data storage, communications and
automotive. The Company also produces modular digitizers and various electronic
components. In addition, it generates revenue by offering service on all of its
products beyond the normal warranty period.
CONSOLIDATED RESULTS OF OPERATIONS
The following table indicates the percentage of total revenues represented
by each item in the Company's Condensed Consolidated Statements of Operations
for the three and nine months ended March 31, 2003 and 2002.
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
---- ---- ----- -----
Revenues:
Digital oscilloscopes and related products................................ 79.2% 90.4% 86.9% 90.4%
High-energy physics products.............................................. - 0.1 - 1.7
Service and other......................................................... 20.8 9.5 13.1 7.9
------- ------ ------ ------
Total revenues.......................................................... 100.0 100.0 100.0 100.0
Costof sales (included in Q3 of FY`02 is $616 of severance (2.6% of sales);
included in the nine months of FY`03 is $2,280 of intangible asset
impairment charges (2.9% of sales) and $204 of severance (0.3% of sales),
and in the nine months of FY`02 is $3,601 of inventory charges
(4.3% of sales) and $986 of severance (1.2% of sales)).................... 43.3 52.6 49.9 55.0
------- ------ ------- ------
Gross profit............................................................ 56.7 47.4 50.1 45.0
Operating expenses:
Selling, general and administrative (included in Q3 of FY`02 is $1,348 of
severance (5.7% of sales); included in the nine months of FY`03 and FY`02
is $1,921 and $2,906 of severance (2.5% and 3.5% of sales), respectively) 36.0 41.1 37.7 36.9
Research and development(included in the nine months of FY '03 is
$529 of severance (0.7% of sales)........................................ 17.6 22.8 17.3 16.5
------ ------- ------ -------
Total operating expenses................................................ 53.6 63.9 55.0 53.4
Operating income (loss)...................................................... 3.1 (16.5) (4.9) (8.4)
Other (expense) income, net............................................. - (1.7) (0.2) (0.2)
------ ------- ------ -------
Income (loss) before income taxes............................................ 3.1 (18.2) (5.1) (8.6)
Provision for (benefit from) income taxes............................... 1.1 (6.7) (1.9) (3.7)
------ ------- ------ -------
Net income (loss)............................................................ 2.0% (11.5)% (3.2)% (4.9)%
======= ======= ====== =======
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Total revenues were $26.5 million in the third quarter of fiscal 2003,
compared to $23.6 million in the third quarter of fiscal 2002, an increase of
12.4%, or $2.9 million. Third quarter fiscal 2003 revenues included a $3.0
million agreement to license the Company's MAUI Instrument Operating System
technology in Service and other revenue. Revenues from Digital oscilloscopes and
related products in the third quarter of fiscal 2003 were $21.0 million,
virtually flat compared to the third quarter of fiscal 2002. Lower sales from
discontinued product lines and lower sales of distributed products in the third
quarter of fiscal 2003 were partially offset by sales of the Company's WavePro
7000(TM) family of digital oscilloscopes and the WaveLink(TM) family of
high performance differential probes launched in the third quarter of fiscal
2003.
13
Gross margin was 56.7% in the third quarter of fiscal 2003 compared to
47.4% in the same period in fiscal 2002. Included in Cost of sales in the third
quarter of fiscal 2002 was a $0.6 million (2.6% of sales) charge for severance
expense. The increase in gross margin in the third quarter of fiscal 2003
resulted from the $3.0 million technology license included in Service and other
revenue, more favorable product margins on the existing base of products due to
higher average selling prices in the Company's high-end products, increased
operational efficiency and improved cost structure in the third quarter of
fiscal 2003.
Selling, general and administrative expense was $9.6 million in the third
quarter of fiscal 2003 compared to $9.7 million in the same period in fiscal
2002. Included in Selling, general and administrative expense in the third
quarter of fiscal 2002 was a $1.3 million (5.7% of sales) charge for severance
expense. As a percentage of sales, Selling general and administrative expense
decreased from 41.1% in the third quarter of fiscal 2002 to 36.0% in the third
quarter of fiscal 2003. This decrease as a percentage of sales was primarily due
to the $1.3 million charge for severance and the inability to fully leverage
expenses over the lower sales base in the third quarter of fiscal 2002. This
decrease was partially offset by increased fixed selling costs as a result of
the conversion, in the fourth quarter of fiscal 2002, of the U.S. sales force
from partial coverage by manufacturers' representatives to full coverage by the
Company's direct sales force, establishing a direct presence in Singapore and
the opening of two new offices in China.
Research and development expense was $4.7 million in the third quarter of
fiscal 2003, compared to $5.4 million in the third quarter of fiscal 2002, a
decrease of 13.4% or $0.7 million. The decrease was due primarily to higher
material costs in the third quarter of fiscal 2002 related to the launch of
WaveMaster(TM), the Company's first silicon germanium-based family of
oscilloscopes. As a percentage of sales, Research and development expense
decreased from 22.8% in the third quarter fiscal 2002 to 17.6% in the third
quarter of fiscal 2003. This decrease as a percentage of sales was primarily due
to the ability to leverage expenses over the higher sales base in fiscal 2003
and the increased spending in the third quarter of fiscal 2002. The Company
intends to continue to invest a substantial percentage of its revenues in its
research and development efforts.
Other (expense) income, net, which consists primarily of net interest
income or expense and foreign exchange gains or losses, was an expense of
($10,000) in the third quarter of fiscal 2003, compared to an expense of ($0.4)
million in the third quarter of fiscal 2002. The decrease in the net expense
was primarly due to a ($0.4) million charge to reflect the impairment in the
value of the Company's equity investment in Iwatsu Electric Co. in the third
quarter of fiscal 2002, partially offset by lower net interest income earned on
the Company's cash balances and higher foreign exchange losses on transactions
denominated in other than the functional currency of the Company or its
subsidiaries in the third quarter of fiscal 2003.
The Company's effective tax rate was 37.0% in the third quarter of fiscal
2003 and 2002.
Charges related to convertible preferred stock, the Preferred Stock
dividend and the accretion for the value of fully exercisable warrants granted
in connection with the private placement of the Preferred Stock, was $0.5
million in the third quarter of fiscal 2003 and 2002.
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
Total revenues were $78.2 million in the nine months ended March 31, 2003,
compared to $82.7 million in the nine months ended March 31, 2002, a decrease of
5.5%, or $4.6 million. Service and other revenue in the nine months ended March
31, 2003 included a $3.0 million agreement to license the Company's MAUI
Instrument Operating System technology. This decrease, which was substantially
all in Digital oscilloscopes and related products, was primarily due to the
continuing impact of the current difficult economic environment, lower sales
from discontinued product lines and lower component sales.
14
Gross margin was 50.1% in the nine months ended March 31, 2003 compared to
45.0% in the same period in fiscal 2002. Included in Cost of sales in the nine
months ended March 31, 2003 was a $2.3 million (2.9% of sales) charge for the
write-off of impaired intangible assets resulting from the Company's decision to
exit certain product lines and to make a significant change in its manufacturing
strategy and $0.2 million (0.3% of sales) of severance charges. Included in Cost
of sales in the nine months ended March 31, 2002, was a $1.0 million (1.2% of
sales) charge for severance expense and an increase of $3.6 million (4.3% of
sales) to the Company's allowance for excess and obsolete inventory to
write-down inventory associated with discontinued product lines and inventory
levels considered to be in excess of forecasted requirements. The increase in
gross margin in the nine months ended March 31, 2003 resulted from the $3.0
million technology license included in Service and other revenue, favorable
margins on the Company's new high-end WaveMaster product line of digital
oscilloscopes launched in the third quarter of fiscal 2002, more favorable
product margins on the existing base of products due to higher average selling
prices in the Company's high-end products, increased operational efficiency and
improved cost structure.
Selling, general and administrative expense was $29.5 million for the nine
months ended March 31, 2003 compared to $30.5 million in the same period in
fiscal 2002. Included in Selling, general and administrative expense in the nine
months ended March 31, 2003 was a $1.9 million (2.5% of sales) charge for
severance expense. Included in Selling, general and administrative expense in
the nine months ended March 31, 2002 was a $2.9 million (3.5% of sales) charge
for severance expense, including costs associated with the succession of the
Company's Chief Executive Officer. As a percentage of sales, Selling general and
administrative expense increased from 36.9% in the nine months ended March 31,
2002 to 37.7% in the nine months ended March 31, 2003. This increase as a
percentage of sales was primarily due to higher fixed selling costs increased as
a result of the conversion, in the fourth quarter of fiscal 2002, of the U.S.
sales force from partial coverage by manufacturers' representatives to full
coverage by the Company's direct sales force, establishing a direct presence in
Singapore, the opening of two new offices in China and the inability to fully
leverage expenses over the lower sales base, partially offset by the higher
severance charges of $1.0 million in the nine months ended March 31, 2002.
Research and development expense for the nine months ended March 31, 2003
was $13.5 million, compared to $13.7 million in the same period in fiscal 2002.
Included in Research and development expense in the nine months ended March 31,
2003 was a $0.5 million (0.7% of sales) charge for severance expense. As a
percentage of sales, Research and development expense increased from 16.5% for
the nine months ended March 31, 2002 to 17.3% for the nine months ended March
31, 2003. This increase as a percentage of sales was primarily due to the
inability to fully leverage expenses over the lower sales base. The Company
intends to continue to invest a substantial percentage of its revenues in its
research and development efforts.
Other (expense) income, net, which consists primarily of net interest
income or expense and foreign exchange gains or losses, was an expense of ($0.2)
million for the nine months ended March 31, 2003, compared to an expense of
($0.1) million for the nine months ended March 31, 2002. Included in other
income (expense), net for the nine months ended March 31, 2002 was a ($0.4)
million charge to reflect the impairment in the value of the Company's equity
investment in Iwatsu Electric Co. This $0.1 million increase in expense for the
nine months ended March 31, 2003 was primarily due to higher foreign exchange
losses on transactions denominated in other than the functional currency of the
Company or its subsidiaries and lower net interest income earned on the
Company's cash balances, partially offset by the impairment charge in the nine
months ended March 31, 2002.
The Company's effective tax rate was 37.0% for the nine months ended March
31, 2003, compared to 42.6% for the nine months ended March 31, 2002. The
effective tax rate for the nine months ended March 31, 2002 was based on an
estimated annual effective tax rate of approximately 37.0%, increased by the
release of a $0.4 million tax reserve related to a favorable audit settlement in
the first quarter of fiscal 2002.
Charges related to convertible preferred stock, the Preferred Stock
dividend and the accretion for the value of fully exercisable warrants granted
in connection with the private placement of the Preferred Stock, was $1.6
million and $1.4 million in the nine months ended March 31, 2003 and 2002,
respectively.
RESTRUCTURING
During the first quarter of fiscal 2003, the Company adopted a plan to
scale down fixed infrastructure due to the difficult economic environment and to
implement new management operating systems designed to improve processes in
sales, order management, customer relationship management and financial
performance management. In connection with the adoption of this plan, the
Company recorded a charge for severance and other related expenses in the first
quarter of fiscal 2003 of $2.6 million; $0.2 million of which was recorded in
Cost of sales, $1.9 million recorded in Selling, general and administrative
expense and $0.5 million recorded in Research and Development in the Condensed
Consolidated Statement of Operations. The plan implemented during fiscal 2003
resulted in improved operating efficiencies and reduced the Company's headcount
by 38 employees or approximately 9.3% as compared to June 30, 2002. As of March
31, 2003, $1.3 million of the total $2.6 million has been paid and $1.3 million
remains in Accrued expenses and other liabilities in the Condensed Consolidated
Balance Sheet. Severance and other related amounts under this plan will be paid
by the end of fiscal 2004.
15
The Company took steps during fiscal 2002 to reduce its expenses in
response to the continued weakness in the technology sector of the economy. As
part of this effort, LeCroy reduced its workforce by 69 employees or
approximately 15% as compared to June 30, 2001. In connection with these
workforce reductions, the Company recorded a $4.2 million charge ($1.0 million
in Cost of sales and $3.2 million in Selling, general and administrative
expense) for severance and related expenses, including costs associated with the
succession of the Company's Chief Executive Officer during the second quarter of
fiscal 2002. Of the $4.3 million total charge, $4.1 million was initially
credited to Accrued expenses and other liabilities and $0.2 million,
representing a non-cash expense for the amendment of employee stock options, was
credited to Additional paid-in capital. As of March 31, 2003, $3.6 million of
the total $4.1 million has been paid and $0.5 million remains accrued in Accrued
expenses and other liabilities in the Condensed Consolidated Balance Sheet.
Severance and other related amounts, including costs associated with the
succession of the Company's Chief Executive Officer, will be paid by the end of
the second quarter of fiscal 2004.
LIQUIDITY AND CAPITAL COMMITMENTS
Working capital was $59.0 million at March 31, 2003, which represented a
working capital ratio of 3.5 to 1, compared to $63.3 million, or 3.3 to 1 at
June 30, 2002.
Net cash provided by (used in) operating activities for the nine months
ended March 31, 2003 was $2.8 million compared with ($6.6) million for the
comparable period in the prior year. The increase in net cash provided by
operating activities was primarily due to reductions in inventory of $2.1
million due to increased operating efficiencies and in accounts receivable of
$4.2 million resulting partly from increased collections activity and partly
from lower sales volume. These benefits to operating cash flows during the nine
months ended March 31, 2003 were partially offset by a $4.8 million reduction in
accounts payable, accrued expenses and other liabilities, which primarily
consisted of $3.4 million of severance payments. For the corresponding period
in the prior year, net cash used in operating activities reflects the reduction
in accounts payable, accrued expenses and other liabilities of $9.8 million,
which primarily consisted of $2.8 million of payments on retained discontinued
operations liabilities, payment of prior year incentive compensation, severance
payments and a reduction in accounts payable levels.
Net cash used in investing activities for the nine months ended March 31,
2003 was ($3.3) million, compared with ($2.9) million for the comparable period
for the prior year. This increase in net cash used in investing activities was
primarily due to a $1.3 million acquisition of a technology license partially
offset by a $0.9 million reduction in capital expenditures.
Net cash provided by financing activities for the nine months ended March
31, 2003 was $0.2 million, compared with $23.8 million for the comparable period
for the prior year. The decrease in cash provided by financing activities was
primarily due to net proceeds of $23.2 million raised from a private equity
placement in August 2001.
The Company has a $15.0 million revolving line of credit with a commercial
bank expiring on September 30, 2003, which can be used to provide funds for
general corporate purposes and acquisitions. Borrowings under this line bear
interest at prime plus a margin of between .25% and 1.25%, or LIBOR plus a
margin of between 1.5% and 2.5%, depending on the Company's Leverage Ratio. As
of March 31, 2003, there were no borrowings outstanding under this line of
credit.
On June 12, 2000, the Company secured a $2.0 million capital lease line of
credit to fund certain capital expenditures. As of March 31, 2003, the Company
had $0.3 million outstanding under this line of credit, $0.1 million of which
was included in Accrued expenses and other liabilities and the remaining $0.2
million in Other non-current liabilities on the Condensed Consolidated Balance
Sheet. The outstanding borrowings under this line bear interest at 12.2%.
In addition to the above U.S.-based credit facilities, the Company
maintains certain short-term foreign credit facilities, principally with two
Japanese banks totaling 150 million yen ($1.3 million as of March 31, 2003). No
amounts were outstanding under such facilities as of March 31, 2003.
The Company has operating leases covering plant, certain office facilities
and equipment that expire at various dates through 2012. Future minimum annual
lease payments required during the years ending in fiscal 2004 through 2008 and
later years, under noncancelable operating leases having an original term of
more than one year, are $1.6 million, $1.1 million, $0.9 million, $0.6 million
and $1.6 million, respectively. Future minimum lease payments of $0.5 million
are required for the fourth quarter of fiscal 2003.
As of March 31, 2003, the Company has two technology license agreements,
under which it is unconditionally committed to pay $1.0 million, $0.5 million
and $0.3 million in fiscal 2003, 2004 and 2005, respectively.
16
In April 2003, the Company adopted a plan to consolidate its probe
development activities into its Chestnut Ridge, New York facility. In connection
with this plan, the Company closed its Beaverton, Oregon facility. The Company
estimates that the adoption of this plan will result in charges of approximately
$0.4 million in the fourth fiscal quarter of 2003 comprising severance and lease
termination costs. Management believes that this plan will not materially impact
the Company's results of operations or liquidity.
The Company believes that its cash on hand, its ability to generate cash
from continuing operations and availability under its revolving credit agreement
will be sufficient to fund working capital and capital expenditure requirements
for at least the next twelve months and provide funds for potential acquisition
opportunities.
CRITICAL ACCOUNTING POLICIES
The preparation of these condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and accompanying
notes. These estimates and assumptions are based on management's judgment and
available information and, consequently, actual results could be different from
these estimates.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002
which includes a description of the Company's critical accounting policies
involving significant judgment by the Company's management. In particular,
judgment is used in areas such as revenue recognition, the allowance for
doubtful accounts, allowance for excess and obsolete inventory, valuation of
long-lived and intangible assets, valuation of deferred tax assets and
estimation of warranty. Except for the adoption of new revenue recognition
policies for the sale and license of software as described below and in Note 15
there have been no changes in the Company's critical accounting policies since
June 30, 2002.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which summarizes certain of the SEC Staff's views in applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. Under SAB 101, which the Company adopted in
fiscal 2001, certain previously recognized license fee revenue was deferred and
recognized in future periods over the terms of the agreements. The adoption of
SAB 101 was recorded as of the beginning of fiscal 2001 and resulted in a
non-cash charge for the cumulative effect of an accounting change of $4.4
million, net of a tax benefit of $2.7 million. The deferred revenue will be
amortized into revenue over 5.5 years, the remaining terms of the license
agreements. The Company recognized pre-tax deferred license fee revenue of $0.3
million and $1.0 million for the three and nine months ended March 31, 2003 and
2002, respectively. Such license fees were included in Service and other revenue
in the Condensed Consolidated Statements of Operations. As of March 31, 2003,
the remaining balance of pre-tax deferred license fee revenue was $3.6 million.
The Company recognizes software license revenue in accordance with American
Institute of Certified Public Accountants ("AICPA") Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position
98-9 ("SOP 98-9"). Revenue from perpetual software license agreements are
recognized upon shipment of the software if evidence of an arrangement exists,
pricing is fixed and determinable, and collectibility is probable. If an
acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. The Company
allocates revenue on software arrangements involving multiple elements to each
element based on the relative fair values of the elements. The Company's
determination of fair value of each element in multiple element-arrangements is
based on vendor specific objective evidence ("VSOE"). The Company has analyzed
all of the elements and determined that it has sufficient VSOE to allocate
revenue to maintenance included in multiple element-arrangements. Accordingly,
assuming all other revenue recognition criteria are met, revenue is recognized
upon delivery using the residual method in accordance with SOP 98-9, where the
fair value of the undelivered elements is deferred and the remaining portion of
the arrangement fee is recognized as revenue. The revenue allocated to licenses
generally is recognized upon delivery of the products. The revenue allocated to
maintenance is generally recognized ratably over the term of the support. In
accordance with SOP 97-2, the Company recognized $3.0 million of revenue for the
perpetual license of the Company's MAUI Instrument Operating System
technology in the third quarter of fiscal 2003. Maintenance fees included in the
license agreement will be recognized as services are performed beginning the
fourth quarter of fiscal 2003.
17
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred, whereas EITF Issue No. 94-3 had recognized the
liability at the commitment date to an exit plan. The Company adopted the
provisions of SFAS No. 146 effective for exit or disposal activities initiated
after December 31, 2002. SFAS No. 146 changes the timing of liability and
expense recognition related to exit or disposal activities, but not the ultimate
amount of such expenses.
In October 2002, the EITF issued EITF Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." This issue addresses revenue
recognition accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. This issue is to be effective for the
Company's fiscal year 2004. Management believes the adoption of EITF Issue No.
00-21 will not have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("Fin 45"). Fin 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee and does not apply to product
warranties or to guarantees accounted for as derivatives. Fin 45 also requires
enhanced disclosures of product warranties (see note 12). The recognition
provisions of Fin 45 apply to guarantees issued or modified after December 31,
2002 and will not have a material effect on the Company's consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." This Statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to the fair value method of accounting for stock-based
employee compensation set forth in SFAS No. 123. This Statement also amends the
disclosure provisions of SFAS No. 123 and APB No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. The Company adopted the interim
disclosure provisions in the current period (see note 2). The FASB recently
indicated that they will require stock-based employee compensation to be
recorded as a charge to earnings pursuant to standards they are currently
deliberating. Management continues to closely monitor the issuance of this
standard as well as evaluate the Company's position with respect to current
guidance.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
the Company's actual results or activities to differ materially from these
forward-looking statements include but are not limited to: the effect of
economic conditions, including the effect on purchases by the Company's
customers; competitive factors, including pricing pressures, technological
developments and products offered by competitors; changes in product sales and
mix; the Company's ability to deliver a timely flow of competitive new products
and market acceptance of these products; inventory risks due to changes in
market demand or the Company's business strategies; currency fluctuations; risks
due to an interruption in supply or an increase in price for the Company's
parts, components and subassemblies; and 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 Form S-3 Registration Statement No. 333-64848.
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
Included in this Form 10-Q are a number of important risk factors and
uncertainties that should be considered by stockholders and by potential
investors in the Company. Also, readers should carefully review the Company's
reports filed with the Securities and Exchange Commission and press releases,
specifically, those sections entitled "Risk Factors" in the Form S-3
Registration Statement No. 333-64848.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company purchases materials from suppliers and sells its products
around the world and maintains investments in foreign subsidiaries, 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, the European monetary
unit, Swiss franc, British pound, Japanese yen, Korean won and Singapore dollar.
During the third quarter of fiscal 2001, the Company began a program of
entering into foreign exchange forward contracts to minimize the risks
associated with currency fluctuations on assets or liabilities denominated in
other than the functional currency of LeCroy or its subsidiaries. It cannot be
assured, however, that this program will effectively offset all of the Company's
foreign currency risk related to these assets or liabilities. Other than this
program, the Company does not attempt to reduce its foreign currency exchange
risks by entering into foreign currency management programs. As a consequence,
there can be no assurance that 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 U.S. dollar, the
Company's financial reporting currency, or otherwise, will not adversely affect
the Company's results of operations. Moreover, fluctuations in exchange rates
could affect the demand for our products. During the nine months ended March 31,
2003 and 2002, the Company reported foreign currency exchange (losses) gains on
assets or liabilities denominated in other than their functional currencies and
related foreign exchange forward contracts of ($0.4) million and $42,000,
respectively. At March 31, 2003 and June 30, 2002, the Company had approximately
$4.5 million and $12.8 million, respectively, of open foreign exchange forward
contracts all with maturities of less than three months.
The Company performed a sensitivity analysis assuming a hypothetical 10%
adverse change in foreign currency exchange rates on its foreign exchange
forward contracts and its assets or liabilities denominated in other than their
functional currencies. In management's opinion, a 10% adverse change in foreign
currency exchange rates would not have a material effect on these instruments or
the Company's results of operations, financial position or cash flows.
The Company is exposed to adverse changes in interest rates primarily due
to its investment in cash and cash equivalents. Market risk is estimated as the
potential change in fair value resulting from a hypothetical ten percent adverse
change in interest rates, which would not have been significant to the Company's
results of operations during the third quarter of fiscal 2003.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Chief Executive Officer (the "CEO") and
Chief Financial Officer (the "CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on that
evaluation, the CEO and the CFO have concluded that the Company's disclosure
controls and procedures are effective to ensure that all material information
relating to the Company and its consolidated subsidiaries is made known to them,
particularly during the period when our periodic reports are being prepared.
Subsequent to the date of management's evaluation, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of certain events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
19
LECROY CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 15, 2003, LeCroy Corporation was sued by Sicom Systems
("Sicom") in the United States District Court for the District of Delaware for
patent infringement of United States patent number 5,333,147 (the "147 patent")
entitled Automatic Monitoring of Digital Communication Channel Conditions Using
Eye Patterns. LeCroy answered the complaint denying infringement and asserted a
counterclaim alleging the invalidity of the 147 patent and that Sicom had abused
the judicial process by bringing a baseless patent infringement claim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6(A) EXHIBITS
10.43 Amendment Number One to Employment Agreement, dated December 16,
2002, between the Registrant and Thomas H. Reslewic.
99.1 Chief Executive Officer certification pursuant to 18
U.S.C.ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer certification pursuant to 18
U.S.C.ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
ITEM 6(B) REPORTS ON FORM 8-K DURING THE QUARTER ENDED MARCH 31, 2003
The Company filed a Form 8-K, dated January 6, 2003, to report
that Scott D. Kantor has been named Vice President, Finance and
Chief Financial Officer effective February 1, 2003. Mr. Kantor
succeeds Raymond F. Kunzmann, who will remain as a consultant to
the Company.
The Company filed a Form 8-K, dated January 16, 2003, reporting
under Item 5 "Other Events" and under Item 7 "Financial Statements
and Exhibits" the Company's earnings for the three and six months
ended December 31, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LECROY CORPORATION
Date: May 9, 2003
/s/ Scott D. Kantor
-------------------
Scott D. Kantor
Vice President and Chief Financial Officer,
Secretary and Treasurer
20
CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas H. Reslewic, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LeCroy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Thomas H. Reslewic
----------------------
Thomas H. Reslewic
Chief Executive Officer
May 9, 2003
CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott D. Kantor, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LeCroy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Scott D. Kantor
-------------------
Scott D. Kantor
Chief Financial Officer
May 9, 2003