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, 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)
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 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES X NO
---- ----
The number of shares outstanding of the registrant's Common Stock, as of
September 2, 2003, was 10,458,011 shares. The aggregate market value of shares
of Common Stock held by non-affiliates as of the last business day of the
registrant's most recently completed second fiscal quarter was $90,572,254.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
LECROY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
FORM 10-K ITEM NUMBER: Page No.
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PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 13
Item 3. Legal Proceedings.......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
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 7A. Quantitative and Qualitative Disclosure About Market Risk.................................. 31
Item 8. Financial Statements and Supplementary Data................................................ 32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....... 57
Item 9A. Controls and Procedures.................................................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 59
Item 11. Executive Compensation..................................................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 59
Item 13. Certain Relationships and Related Transactions............................................. 59
Item 14. Principal Accounting Fees and Services..................................................... 59
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 60
Signatures................................................................................. 64
Exhibit 21. Subsidiaries of LeCroy Corporation
Exhibit 31. Rule 13a-14(a) Certifications
Exhibit 32. Section 1350 Certifications
2
PART I
ITEM 1. BUSINESS.
LeCroy Corporation ("LeCroy," "Company," "we," "our" or "us") was founded
in 1964 and is incorporated in the State of Delaware. Our principal office and
manufacturing facility is located in Chestnut Ridge, New York. We sell our
products and provide service worldwide through wholly-owned subsidiaries and
representatives.
LeCroy currently operates as one business segment in the Test and
Measurement Instrument market. Using our core competency of WaveShape Analysis,
defined as the capture and analysis of complex electronic signals, we develop,
manufacture, sell and license signal acquisition and analysis products. Our
principal product line consists of a family of high-performance digital
oscilloscopes used primarily by electrical design engineers in various markets,
including computer / semiconductor, data storage, communications and power
measurement. We also produce modular digitizers and proprietary electronic
components. In addition, we generate revenue by providing service on all of our
products beyond the initial warranty period.
Prior to August 2000, LeCroy also operated an additional business segment,
the Vigilant Networks business ("Vigilant Networks"), which comprised our
Vigilant Networks, Inc. ("Vigilant") and Digitech Industries, Inc. ("Digitech")
subsidiaries. Vigilant was formed to pursue a strategy of using our core
competency to develop and market a Local Area Network ("LAN") analyzer.
Vigilant's principal product, the Big Tangerine network analyzer, was not only a
new product, it was also sold into a new market for LeCroy. We made substantial
investments in Vigilant Networks in terms of selling, marketing, research and
development and administrative expenses. While we believed that this product had
a unique technology, we decided that we could not continue to invest the
financial resources necessary to capitalize on its future growth potential. As a
result, in August 2000, we announced our intention to divest the Vigilant
Networks business segment and treat it as a discontinued operation.
We 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, in August
2000. The buyer also assumed certain liabilities of Vigilant. The remaining
business of Digitech has been discontinued (see Note 4 to the Consolidated
Financial Statements for further information). In December 2002, we sold the
residual assets and business of Digitech. The remaining discussion in this
document will relate primarily to the continuing Test and Measurement Instrument
market.
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 and to troubleshoot problems. 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 wave 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.
Wave shape analysis is becoming increasingly important as data rates in
applications such as computers, semiconductors and communications 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 change cleanly from a "zero" to a "one" or vice-versa. This distorts, or
changes the wave 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.
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MARKET OVERVIEW
Market Trends
Electronic signals continue to increase in complexity and speed as new
technologies are brought to market. The proliferation of complex electronics in
the computing, communications and semiconductor industries drives the demand for
analysis tools that allow designers and manufacturers of these devices to get
their products to market on a timely basis. Once the sole domain of computing
and communications, today's complex electronic signals are now embedded in a
variety of devices across many additional industries including semiconductors,
data storage, automotive, military, consumer electronics and industrial
equipment. The continued technology advancement in communications, driven in
part by the expansion of internet, broadband and wireless communication devices,
continues to result in the need for increasingly faster and more complex
electronic signals. With each advancement in technology, the engineer must deal
both with a reduced margin for error and a progressively more difficult task of
fully characterizing the design.
Thoroughly testing these electronic signals requires a measurement tool
capable of physically attaching to the signal of interest, capturing data with
high sample rates and long memories and supporting detailed wave shape analysis
and additional insight into data characteristics and signal trends over time.
The whole system must also maintain the correct shape of the signal, a concept
called signal integrity.
Signal Analyzer Market
Signal analyzers are a component of the overall Test and Measurement
Instrument market, in which we currently participate primarily in the
oscilloscope segment.
Oscilloscope Market. We believe 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 200 Megahertz ("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 such
signals. These instruments typically sell for under $5,000. The
mid-to-high performance market segment (bandwidth of 200 MHz to 3
Gigahertz ("GHz")) is characterized by real-time instruments with high
sample rates (from 500 mega samples per second ("MS/s") to 20 giga
samples per second ("GS/s")) and long record lengths (from 10,000 to 100
million sample points) and greater processing power to perform more
sophisticated analyses. These mid-to-high performance digital
oscilloscopes typically range in price from $9,000 to $40,000, although
certain higher bandwidth oscilloscopes for specialized applications are
priced well above $40,000. LeCroy's WavePro(TM) and Waverunner(R) digital
oscilloscope product families are all targeted at customers in the
mid-to-high performance market segment. The high-performance market
segment (bandwidth of 3 GHz to 10 GHz) is also characterized by real-time
instruments with high sample rates (from 4 GS/s to 20 GS/s) and long
record lengths (from 125,000 to 100 million sample points). These
oscilloscopes possess even greater capacity to conduct sophisticated
WaveShape Analysis on the faster, longer and more complex signals that
are prevalent in the current and expected future state of the market.
These high-performance instruments range in price from $43,000 to $95,000
or higher for oscilloscopes targeted to specific applications. Our
WaveMaster(TM), DDA Disk Drive Analyzer and SDA Serial Data Analyzer
digital oscilloscope product families are targeted at customers in this
high-end of the market.
For certain very high signal speed applications, such as optical
communication, instruments with bandwidths of up to 50 GHz or more are
required. At these speeds, real-time oscilloscopes do not have the
ability to track the signal shape in real-time and take samples quickly
enough to be effective. In these applications, a sampling oscilloscope,
which takes one sample per occurrence of the signal on a time delayed
basis, is used to reconstruct the signal shape. Sampling oscilloscopes
have several disadvantages compared to real-time oscilloscopes. One of
the most limiting is the fact that the input signal must be repetitive.
Any non-repetitive elements in the signal are "averaged out" and are not
seen. These instruments can range in price from $50,000 to $100,000.
Within the oscilloscope market, we have targeted several specific
application segments. These application segments include
computer/semiconductor, data storage, communications and power
measurement.
4
o Computer/Semiconductor. These markets include companies providing
components, interfaces, subsystems and complete products for high
speed and general purpose computing, network servers and related
devices and systems. The semiconductor industry "feeds" the
computer industry with enabling components and devices. Over the
past several years, these devices have grown in capability and
complexity to provide a higher level of integration and
functionality. The explosion of high speed serial data
communications interfaces is a common theme in both the computer
and semiconductor industries. Interface standards such as PCI
Express, Serial ATA, USB 2.0, XAUI and Firewire have become
ubiquitous in product designs. We believe that the combination of
accurate acquisition with high signal integrity, long memory with
detailed wave shape and data analysis features provide the unique
solution to testing these high speed, complex signals. Our SDA
Serial Data Analyzer digital oscilloscope product family addresses
the needs of these measurement applications.
o 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 (CDs) and digital
video disks (DVDs). The increasing need to store more information
requires the encoding of signals to achieve higher density on the
recording media. We believe that the high sample rates, long
memory and special signal triggering features of our
oscilloscopes, along with their specialized processing software
that incorporates advanced algorithms designed specifically for
the measurement and analysis requirements of the data storage
market, provide the best solution to our customers' testing
requirements. Our DDA series Disk Drive Analyzer digital
oscilloscope products are aimed at these important customer
applications.
o Communications. The communications market 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 broadband transmission of data connected 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-markets, the need for instant access and
uniform service has required the encoding of data and more complex
electronic signals. We believe that the accurate acquisition, long
memory and rapid analysis features of our oscilloscopes provide
the unique solution to testing these high speed, complex signals.
Our SDA Serial Data Analyzer digital oscilloscope product family
addresses the needs of these measurement applications.
o Power Measurement. The power measurement market touches virtually
all industries. Circuit boards and devices within all electronic
products require varying levels of alternating and direct voltages
and currents. Converting these sources of power has been
predominantly accomplished through the use of switch mode power
circuits. We believe that the long memory and advanced analysis
capabilities of our oscilloscopes, along with their 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. A variety of application-specific capabilities are
available for our oscilloscopes enabling these important
measurements.
STRATEGY
LeCroy's primary objectives are to increase the growth rate of our
oscilloscope business, and to leverage our WaveShape Analysis capabilities and
our key resources to expand into new markets and application areas. The
following is a summary of the strategies that will be used to accomplish these
objectives:
o Increase the Growth Rate of the Oscilloscope Business. In order to increase
the growth rate of our oscilloscope business, we must:
o Gain market share by continuing to improve the "price to performance"
ratio of our products. Through our research and development ("R&D")
efforts, we have been successful in reducing the cost and size of our
custom integrated circuits, while delivering higher performance and
increased reliability. In addition, our proprietary software and
unique processor and display architecture have further enhanced the
"price to performance" ratio of our products. The success of this
strategy was first illustrated in fiscal 2001 with the successful
introductions of the WavePro and Waverunner-2 product lines. Further
success was achieved in fiscal 2002, with the launch of WaveMaster,
our first silicon germanium-based family of oscilloscopes powered by
our proprietary X-Stream(TM) technology as well as a powerful
Windows-based operating system. In fiscal 2003, we added the silicon
germanium-based WavePro 7000 Series instruments.
5
o Expand our share of targeted application segments where signal complexity
is high, such as serial data communications, data storage and power
measurement. To accomplish this strategy, we 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
us include:
- Serial Data Communications Test:
o Serial Data Analyzers
o WaveLink High Bandwidth Probing Solutions
o Digital Filter Package
o Jitter and Timing Analysis Software
o M1 Analysis Software
o PolyMask(TM)Communications Test
o X-MAP Custom WaveShape Analysis Software
- Data Storage:
o Disk Drive Analyzers
o Disk Drive Parameter Package
o Disk Drive Noise Analysis
o Optical Recording Measurement Package
o Surface Map Software
- Power Measurement:
o Current Probes
o Differential Amplifiers
o PMA2 Power Measure Analysis Software
o Power Measurement Systems
o Leverage our WaveShape Analysis Competency and Key Resources to Expand into
New Markets.
o As noted earlier in the "Market Trends" section, the proliferation of
electronics in general and digital electronics in particular is
increasing. In addition, the need for the analysis of increasingly
faster and more complex signals has placed limitations on certain
existing test and measurement equipment. Given these trends and
LeCroy's core competency, the opportunities to expand our WaveShape
Analysis capabilities into new markets and applications are
increasing. We expect to capitalize on this opportunity through
internal R&D efforts as well as through pursuing strategic
acquisitions.
o As noted later in the "Sales, Marketing and Distribution" section, we
maintain a direct sales force of highly trained, technically
sophisticated sales engineers. We believe that this key resource can
be leveraged over a higher sales volume by selling complementary
products to the same customer base we currently address. Adding such
products to LeCroy's existing solutions could be accomplished through
license agreements or acquisitions.
There can be no assurance that we will be successful in implementing our
strategies.
PRODUCTS AND SERVICES
Overview
Our products capture and analyze complex electronic signals by applying our
hardware and software technology to digitize signals and analyze them using a
variety of different application packages and configurations. The digital
oscilloscope product family includes three form factors in instrument size and
capabilities to address varying customer requirements. These products include
the WaveMaster, WavePro and Waverunner families of digital oscilloscopes. The
Waverunner products are manufactured for us by our strategic partner, Iwatsu
Electric Co, Ltd. ("Iwatsu"). Our products also include modular digitizers,
probing and accessory products, and other electronic components. In addition, we
offer a full range of aftermarket service and support for all of our products.
The following sections provide additional information on our more significant
products.
6
WaveMaster Digital Oscilloscopes
The WaveMaster series of oscilloscopes was introduced in fiscal 2002 with
the application-specific Disk Drive Analyzer version in December 2001. This was
followed by the general purpose models in March 2002, and the
applications-specific Serial Data Analyzer version in October 2002. These
products, which range in price from $43,000 to $67,000 plus the cost of options,
currently offer bandwidths of 3.0 GHz, 5.0 GHz or 6.0 GHz, sample rates of 20
GS/s and an acquisition memory from 1 mega points ("Mpts") to 100 Mpts.
Application segment-specific software solutions are available to interpret
signal information and enhance the utility of the product.
WavePro Digital Oscilloscopes
The WavePro 900 series of oscilloscopes was introduced in October 2000 to
address customer applications requiring high-performance and measurement
capabilities. In January 2003, we introduced the WavePro 7000 Series
oscilloscopes based on the same silicon germanium technology found in our
flagship WaveMaster series of oscilloscopes. These products, which range in
price from $18,500 to $40,000 plus the cost of options, currently offer
bandwidths from 1 GHz to 3 GHz, sample rates of 20 GS/s and an acquisition
memory from 1 Mpts to 48 Mpts. Application segment-specific software solutions
are available to interpret signal information and enhance the utility of the
product.
Waverunner Digital Oscilloscopes
The Waverunner series of oscilloscopes was first introduced in January
1999, followed by the Waverunner-2 series, which was introduced in January 2001.
Waverunner products, which range in price from $5,200 to $16,500 plus the cost
of options, provide high value and broad utility in the oscilloscope market and
are also the platform for our solution packages in the power measurement and
optical recording application segments. We believe that our ease of operation,
crisp display and application packages make the Waverunner one of the most
versatile oscilloscopes available on the market. The Waverunner products
currently offer bandwidths from 200 MHz to 1.0 GHz, sample rates from 200 MS/s
to 2 GS/s and an acquisition memory of 100 kilo points to 4 Mpts.
Modular Digitizers
We currently offer PXI Modular Digitizers to support applications in
production test that require the measuring and analysis of signals in a flexible
configuration and non-display format. The PXD-222 modular digitizer was
introduced in August 2001. This digitizer, which is priced at $2,900, offers a
bandwidth of 200 MHz and a sample rate of 2.5 GS/s. This is the fastest PXI
digitizer sample rate available in the market. In fiscal 2003, we introduced
eight additional digitizer modules with bandwidths up to 1 GHz and sample rates
of 2 GS/s.
Other Products
To provide customers with what we believe are total solutions to their
signal measurement analysis problems, we offer various complementary Probes and
Accessory Products. Probes provide the physical and electrical or optical
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. In fiscal
2003, we introduced the WaveLink family of high bandwidth differential probes
with bandwidths up to 7.5 GHz and prices up to $6,900 plus the cost of options.
Service and Aftermarket Products
We provide aftermarket support, repair, maintenance and recalibration of
our installed LeCroy products, as well as installation of a variety of post-sale
upgrades and optional features. We maintain major field service centers in
Chestnut Ridge, New York (located at our corporate headquarters); Geneva,
Switzerland; Tokyo, Japan; Seoul, South Korea and Beijing, China. Sophisticated
service on certain key components of our digital oscilloscope products,
including our printed circuit boards, is performed only at our facilities in
Geneva, Switzerland and Chestnut Ridge, New York. Service and aftermarket
products (including product upgrades) generated approximately 8%, 7% and 5% of
our total revenue in fiscal years ended June 30, 2003, 2002 and 2001,
respectively.
7
CUSTOMERS
The largest group of users of our 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 our digital oscilloscopes. Revenue derived from one customer, Iwatsu,
accounted for 11% of our consolidated revenues in fiscal 2002. No other customer
accounted for more than 10% of our consolidated revenues in any of the last
three fiscal years.
SALES, MARKETING AND DISTRIBUTION
We maintain 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 our products in
particular. In addition, particularly because of our focus on high-performance
digital oscilloscopes, our sales engineers are skilled in performing product
demonstrations for current and prospective customers. We believe we have a
competitive advantage in sales situations in which our sales engineers have the
opportunity to demonstrate the advantages of our digital oscilloscopes;
accordingly, such demonstrations are an integral part of our sales strategy.
We sell our digital oscilloscope products through our own direct sales
force in the United States, Europe, Japan, China, South Korea and Singapore,
with regional sales headquarters located in Chestnut Ridge, New York; Geneva,
Switzerland; and Tokyo, Japan. As of June 30, 2003, our direct digital
oscilloscope sales force consisted of approximately 80 sales engineers and
regional managers worldwide. We also use manufacturer's representatives and
distributors in support of our 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 we maintain a strategic alliance with Iwatsu, a
communications and test and measurement company, that sells and distributes some
of our products under the "Iwatsu/LeCroy" and "Iwatsu" labels.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, conduct marketing programs and
seminars, issue press releases regarding new products, publish technical
articles and participate in industry trade shows and conferences.
SEASONALITY
We have historically experienced somewhat lower activity during our first
fiscal quarter than in other fiscal quarters which, we believe, is due
principally to the lower level of orders and market activity during the summer
months, particularly in Europe. We believe this seasonal aspect of our business
is likely to continue in the future.
RESEARCH AND DEVELOPMENT
LeCroy believes there is a global trend resulting from the demand for
faster data rates that continues to expand the use of higher speed and
complexity of electrical and optical signals. The capture and analysis of these
signals requires higher bandwidths, faster sample rates, longer memories, better
signal integrity and more powerful, flexible processing capabilities. It is the
primary objective of our research and development strategy to meet these demands
by extending our capabilities in these areas while improving the
manufacturability, cost, reliability and time-to-market of our products. There
can be no assurance that we will meet this objective.
We are continuing to develop our signal conditioning, sampling, data
storage, and data movement and processing technologies using advanced integrated
circuit techniques and processes. In addition, we continue to develop innovative
electrical circuit probing technology that allows better waveform fidelity and
circuit connection capabilities. During fiscal 2002, we introduced our first
product incorporating innovative signal conditioning and sampling technologies
fabricated on an extremely high speed silicon germanium process developed by IBM
Corporation ("IBM"). In June 2002, LeCroy entered into an agreement with IBM in
which LeCroy committed to pay $4.0 million for access to IBM's next-generation
silicon germanium technology. LeCroy will use this technology to develop
components that are expected to deliver higher density, greater speed and
reduced power consumption than those currently available. Such components will
be used in future high-speed digital oscilloscopes.
8
We also maintain a software engineering group that recently completed
development of the Windows-based operating system employed in the new WaveMaster
digital oscilloscope family. These engineers are continuing to advance our
Windows-based WaveShape Analysis technology to keep pace with the advancements
occurring in hardware development. The group also develops application solutions
to perform specific analysis for data storage, power measurement, communications
and other markets.
We conduct research and development activities at our Geneva, Switzerland
and Chestnut Ridge, New York facilities. Research and development costs, which
are expensed as incurred, were approximately $18.2 million, $22.0 million and
$17.7 million in our fiscal years ended June 30, 2003, 2002 and 2001,
respectively, which expenses represented 16.9%, 19.7% and 12.5% of total
revenues, respectively, for such fiscal years. Research and development costs in
fiscal 2003, 2002 and 2001 include $0.7 million, $0.2 million and $0.1 million
(0.6%, 0.2% and 0.1% of total revenues), respectively, of severance charges and
in fiscal 2002 include the $4.0 million (3.6% of total revenues) technology
access fee to IBM. We intend to continue to invest a significant percentage of
our revenues in our research and development efforts.
MANUFACTURING AND SUPPLIERS
LeCroy's digital oscilloscopes and related products, other than the
Waverunner oscilloscopes, are manufactured at our facilities in Chestnut Ridge,
New York. The Waverunner products are manufactured by our strategic partner,
Iwatsu.
We obtain certain parts, components and sub-assemblies from single
sources. This particularly has been the case with several key integrated
circuits made by certain single source suppliers. Although we have not
experienced significant production delays attributable to supply changes, we
believe 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 our parts, components and
sub-assemblies would have a material adverse affect on our business, results of
operations and financial condition.
As of June 30, 2003, we employed 56 manufacturing employees at our Chestnut
Ridge facility 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 handheld instruments, grew from $638
million in 1994 to a high of $1,051 million in calendar 2000. The market in
calendar 2002 was estimated to be $808 million. Prime Data estimates that the
three largest suppliers of digital oscilloscopes, exclusive of handheld models,
and their approximate respective market shares for calendar 2002 were Tektronix,
Inc. ("Tektronix") with 51.4%, LeCroy with 14.4% and Agilent Technologies, Inc.
with 14.2%. Many of our principal competitors have substantially greater sales,
marketing, development and financial resources than we do. We believe that each
of these companies offers a wide range of products that attempt to address most
segments of the digital oscilloscope market.
We believe 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 and
reputation, product availability and the quality of post-sale support. We also
believe that our success will depend in part on our ability to maintain and
develop the advanced technology used in our signal analyzer products and our
ability to offer high-performance products at a favorable "price-to-performance"
ratio. We believe that we currently compete effectively with respect to each of
the principal bases of competition in the signal analyzer market in the general
price range ($5,000 to $70,000) in which our digital oscilloscopes are focused
and that we 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, we intend to expand our addressable market into higher
performance applications that tend to sell at a higher price level.
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BACKLOG
LeCroy's backlog of unshipped customer orders was approximately $8.6
million and $7.2 million as of June 30, 2003 and 2002, respectively. Customers
may cancel orders at any time. Backlog at June 30, 2003 excludes $3.3 million of
deferred revenue established in connection with the adoption of a new accounting
pronouncement in fiscal 2001 (see Note 1 "Revenue Recognition" to the
Consolidated Financial Statements for further information). We believe that our
level of backlog at any particular time is not necessarily indicative of our
future operating performance.
PATENTS, TRADEMARKS AND LICENSES
LeCroy 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. We believe, 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 our success
than our core competency of WaveShape Analysis and the experience and expertise
of our personnel.
We protect significant technologies, products and processes that we
consider important to our business by, among other things, filing applications
for patent protection. As of June 30, 2003, we held a total of thirty United
States patents expiring in the years from 2006 to 2020 and fourteen foreign
patents expiring in the years from 2009 to 2016. We also have 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 our pending or future applications will
result in issued patents or that any issued patents will provide us with
adequate protection of the covered technologies, products or processes.
Moreover, the laws of foreign countries in which our products are or may be
developed or sold may not protect our intellectual property and other
proprietary rights to the same extent as the laws of the United States.
Although we believe that our 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 us 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 we 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. For a
description of litigation involving our patents, see Item 3 entitled "Legal
Proceedings."
In February 1994, we settled litigation with Tektronix involving
allegations that our digital oscilloscope products infringed certain patents
held by Tektronix. As part of the settlement, we entered into a license
agreement with respect to such patents. Pursuant to the license agreement we
made royalty payments to Tektronix totaling $8.5 million and received a
worldwide, nonexclusive license under the applicable patents. Royalty expense,
which approximated $0.5 million for the year ended June 30, 2001, is included in
Cost of sales in the Consolidated Statements of Operations. As of June 30, 2001,
we have expensed the maximum royalty payments due under the Tektronix license
agreement.
The license agreement provides that Tektronix may terminate the license in
the event that: we acquire 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"); any Restricted Company acquires 20% or more of the stock of, or a
controlling interest in, us or an affiliate of ours; or we attempt to transfer
the Tektronix license to a Restricted Company, and do not first obtain
Tektronix's prior written consent. This provision of the license agreement could
preclude us from making an investment in or acquisition of such companies. It
could also discourage such companies or other third parties from attempting to
acquire control of us or limit the price that such parties might be willing to
pay for our Common Stock. In addition, this provision could limit the price that
investors might be willing to pay in the future for our Common Stock.
The license agreement provides that the license will automatically
terminate when all of the applicable patents expire, which is September 4, 2004.
Once the license terminates, LeCroy will not suffer any negative consequences
under the terms of the license agreement as a result of any of the
above-mentioned investments or acquisitions.
10
EMPLOYEES
As of June 30, 2003, LeCroy had 368 full-time employees, of whom 226 work
in our Chestnut Ridge facility. Our employees are not represented by a labor
union and we have not experienced any work stoppages. We believe that our
employee relations are generally satisfactory.
REGULATION
As we manufacture our products in the United States and sell our products
and purchase parts, components and sub-assemblies in a number of countries, we
are 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.
Our former subsidiary Digitech Industries, Inc., has been involved in
environmental remediation activities, the liability for which has been retained
by us after the sale of the Vigilant Networks segment and the residual assets of
Digitech (see Note 20 to Consolidated Financial Statements). We do not foresee
that the ultimate resolution of this environmental matter will have a material
adverse effect on our results of future operations, financial position or our
competitive position.
INVESTOR INFORMATION
Our Internet website address is www.lecroy.com. We make available, free of
charge on our website, by clicking on "About LeCroy" and then selecting the
"Investor Relations" link and the "SEC Filings" link, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as soon as reasonably practicable after electronically filing such material
with, or furnishing it to, the Securities and Exchange Commission (the "SEC").
11
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
NAME AGE POSITION
- ---- --- --------
Thomas H. Reslewic 44 President, Chief Executive Officer
R. Scott Bausback 42 Executive Vice President, Chief Operating
Officer
Conrad J. Fernandes 42 Vice President, Worldwide Sales
David C. Graef 46 Vice President, Chief Technology Officer
Scott D. Kantor 40 Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer
THOMAS H. RESLEWIC was named to LeCroy's Board of Directors in January
2002. He joined LeCroy in 1990 and has served as President and Chief Executive
Officer since January 2002. Mr. Reslewic previously served LeCroy as President
from October 2000 until December 2001, and Executive Vice President and Chief
Operating Officer from February 1998 until October 2000. 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.
R. SCOTT BAUSBACK has served as Vice President - Chief Operating Officer
since joining LeCroy in September 2001. Previously, he held a variety of sales
and marketing management positions during an 18-year tenure at Tektronix,
culminating in his role as the Vice President and General Manager for the
Communications Business Unit from September 1998 until June 2001. Mr. Bausback
has a Bachelor of Science degree in electrical engineering from Rutgers College
of Engineering and completed the YEI Executive Education program at
Kenan-Flagler Business School at the University of North Carolina at Chapel
Hill.
CONRAD J. FERNANDES has served as Vice President - Worldwide Sales since
July 2001. Previously, Mr. Fernandes served as Vice President - International
Sales from 1999 until 2000, as Director of Asia-Pacific Sales from 1994 until
1999 and as Product Marketing Manager from 1990 until 1994. Mr. Fernandes has a
Bachelor of Electronic Engineering degree and a Master of Business
Administration degree from City University of London.
DAVID C. GRAEF has served as Vice President - Chief Technology Officer
since April 2003. Previously, he served as Vice President - Research and
Development from January 1999 through March 2003, as Engineering Manager from
June 1996 through December 1998 and as Senior Engineer from January 1989 through
May 1996. Mr. Graef has a Bachelor of Science degree in Electrical Engineering
from the University of Bridgeport.
SCOTT D. KANTOR has served as Vice President - Finance and Chief Financial
Officer since February 2003. Previously, he served as LeCroy's Vice President
and Corporate Controller since 1999. Before joining LeCroy, Mr. Kantor was with
Sappi Fine Paper N.A., since 1997, where he served as Assistant Financial
Controller and led a business process reengineering project that resulted in the
redesign of the company's financial processes in connection with a large-scale
ERP implementation. Mr. Kantor previously held accounting and financial
reporting positions at Genzyme Corporation and Costar Corporation and was a
Senior Accountant with Deloitte & Touche, LLP. Mr. Kantor has a Bachelor of
Science degree from California State University and a Master of Business
Administration degree from Boston University.
Our executive officers are appointed by the Board of Directors and serve
until their successors have been duly elected and qualified. There are no family
relationships among any of our executive officers or directors.
We have entered into indemnification agreements with our executive officers
and directors, pursuant to which we have agreed to indemnify such persons to the
fullest extent permitted by law, and providing for certain other protections.
12
ITEM 2. PROPERTIES.
LeCroy's executive offices and manufacturing facility are located in a
two-story, approximately 88,000 square foot, building in Chestnut Ridge, New
York that is owned by LeCroy. In addition, we lease other office space around
the world to support our local sales and service operations.
We believe that our facilities are in good condition and are suitable and
sufficient for our current operations.
ITEM 3. LEGAL PROCEEDINGS.
On August 5, 2003, LeCroy filed a complaint in the United States District
Court for the District of Oregon claiming that Tektronix has infringed on four
of LeCroy's patents. On April 28, 2003, Tektronix had filed a complaint against
LeCroy in the United States District Court for the District of Oregon claiming
that LeCroy infringed eight of its U.S. patents. Four of these patents concern
software user interface features for oscilloscopes, two concern circuitry, and
two concern probes. LeCroy denies that it has infringed, or is infringing, any
of these patents, and contends that the patents are invalid. We believe we have
meritorious defenses and we intend to vigorously defend this action.
On January 15, 2003, LeCroy 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.
We are involved in lawsuits, claims, investigations and proceedings,
including patent and environmental matters that arise in the ordinary course of
business. There are no matters pending, including those described above, that we
expect to be material in relation to our business, consolidated financial
condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 2003, there were no matters submitted
to a vote of securities holders, through the solicitation of proxies or
otherwise.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
LeCroy's Common Stock is traded on The Nasdaq National Market(R) under the
symbol LCRY. As of September 2, 2003, we had 285 registered holders of record of
our Common Stock, excluding stockholders whose shares were held by brokerage
firms, depositories and other institutional firms in "street name" for their
customers. The following table sets forth, for the periods indicated, the range
of high and low sales prices for the Common Stock as reported by The Nasdaq
National Market.
HIGH LOW
---- ----
FISCAL YEAR 2003
First Quarter................................ $11.95 $7.93
Second Quarter............................... 11.70 7.42
Third Quarter................................ 13.25 7.93
Fourth Quarter............................... 11.06 7.84
FISCAL YEAR 2002
First Quarter................................ $26.00 $13.52
Second Quarter............................... 20.00 13.75
Third Quarter................................ 19.97 16.16
Fourth Quarter............................... 17.65 10.05
We have never declared nor paid cash dividends on our Common Stock and we
intend to retain all available funds for use in the operation and expansion of
our business. We therefore do not anticipate that any cash dividends will be
declared or paid in the foreseeable future.
On June 30, 1999, we issued and sold an aggregate of 500,000 shares of our
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 our Common Stock for an aggregate purchase price of $0.01.
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 our Certificate of Incorporation, the Series A Preferred Stock is
automatically convertible into shares of Common Stock (see Note 17 to the
Consolidated Financial Statements for further information). The warrants are
exercisable, at an exercise price of $20 per share of Common Stock, at any time
until June 30, 2006. Each share of Series A Preferred Stock is entitled to one
vote on all matters presented to holders of record of our Common Stock.
In August 2000, we sold 517,520 shares of our Common Stock for gross
proceeds of $5.2 million in a private equity placement. Proceeds from this sale
of securities were used to repay existing indebtedness and fund working capital
requirements and for other general corporate purposes.
In August 2001, we sold 1,428,572 shares of our Common Stock for gross
proceeds of $25.0 million. We intend to use the proceeds for operating needs and
to fund growth through acquisitions and other transactions.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected Consolidated Statements of Operations Data for the
five years ended June 30, 2003 and the Consolidated Balance Sheet data at June
30, 2003, 2002, 2001, 2000 and 1999 are derived from our Consolidated Financial
Statements and have been adjusted to reflect the discontinuance of the Vigilant
Networks business segment. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our Consolidated Financial Statements and related Notes thereto
included elsewhere in this Form 10-K.
14
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
YEARS ENDED JUNE 30,
----------------------------------------------------------
In thousands, except per share amounts 2003 2002 2001 2000 1999
----- ----- ----- ----- -----
Revenues:
Digital oscilloscopes and related products............ $ 95,008 $ 101,077 $ 129,425 $ 110,237 $ 100,366
High-energy physics products.......................... - 1,419 3,757 4,132 7,362
Service and other (1)................................. 12,851 8,960 8,206 7,031 11,763
-------- --------- --------- --------- ---------
Total revenues...................................... 107,859 111,456 141,388 121,400 119,491
Cost of sales (2)........................................ 51,471 59,982 67,838 61,706 60,298
-------- --------- --------- --------- ---------
Gross profit.......................................... 56,388 51,474 73,550 59,694 59,193
Operating expenses:
Selling, general and administrative (3)(5)............ 40,940 40,212 44,459 35,644 42,305
Research and development (4)(5)....................... 18,226 22,006 17,682 15,165 15,861
-------- --------- --------- --------- ---------
Total operating expenses............................ 59,166 62,218 62,141 50,809 58,166
-------- --------- --------- --------- ---------
Operating (loss) income.................................. (2,778) (10,744) 11,409 8,885 1,027
(Loss) gain from sale of marketable securities........ - (122) - 2,460 -
Other (expense) income, net........................... (84) 310 (471) (276) 158
-------- --------- --------- --------- ---------
(Loss) income from continuing operations before
income taxes and the cumulative
effect of an accounting change ...................... (2,862) (10,556) 10,938 11,069 1,185
Benefit from (provision for) income taxes............. 1,059 4,307 897 (3,498) (2,499)
-------- --------- --------- --------- ---------
(Loss) income from continuing operations before the
cumulative effect of an accounting change............ (1,803) (6,249) 11,835 7,571 (1,314)
Gain (loss) from discontinued operations, net of tax.. 129 - (1,994) (11,009) (5,474)
-------- --------- --------- --------- ---------
(Loss) income before the cumulative effect of an
accounting change..................................... (1,674) (6,249) 9,841 (3,438) (6,788)
Cumulative effect of an accounting change for
revenue recognition, net of tax....................... - - 4,417 - -
-------- --------- --------- --------- ---------
Net (loss) income........................................ (1,674) (6,249) 5,424 (3,438) (6,788)
Charges related to convertible preferred stock........... 2,069 1,876 1,700 1,540 1,844
Cumulative effect of an accounting change for
preferred stock....................................... - - 1,848 - -
-------- --------- --------- --------- ---------
Net (loss) income applicable to common stockholders.... $ (3,743) $ (8,125) $ 1,876 $ (4,978) $ (8,632)
======== ========= ========= ========= =========
(Loss) income per common share-basic:
(Loss) income from continuing operations before the
cumulative effect of an accounting change
applicable to common stockholders.................. $ (0.37) $ (0.81) $ 1.20 $ 0.78 $ (0.41)
Gain (loss) from discontinued operations............. 0.01 - (0.24) (1.42) (0.72)
Cumulative effect of an accounting change............ - - (0.74) - -
-------- --------- --------- --------- ---------
Net (loss) income applicable to common stockholders.. $ (0.36) $ (0.81) $ 0.22 $ (0.64) $ (1.13)
======== ========= ========= ========= =========
(Loss) income per common share-diluted:
(Loss) income from continuing operations
before the cumulative effect of an accounting
change applicable to common stockholders........... $ (0.37) $ (0.81) $ 1.15 $ 0.76 $ (0.41)
Gain (loss) from discontinued operations............. 0.01 - (0.23) (1.38) (0.72)
Cumulative effect of an accounting change............ - - (0.71) - -
-------- --------- --------- --------- ---------
Net (loss) income applicable to common stockholders.. $ (0.36) $ (0.81) $ 0.21 $ (0.62) $ (1.13)
======== ========= ========= ========= =========
Weighted average number of common shares:
Basic .............................................. 10,364 10,052 8,476 7,749 7,621
Diluted ............................................ 10,364 10,052 8,847 7,977 7,621
(See legend on following page)
15
(1) Service and other revenue in each of fiscal 2003, 2002 and 2001
includes the recognition of $1.3 million of revenue that was deferred
with the adoption of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" as of the beginning of fiscal 2001 (see Note 1 to the
Consolidated Financial Statements). Included in Service and other
revenue in fiscal 2003 and 1999 are technology license fees of $3.0
million and $4.9 million, respectively.
(2) Included in Cost of sales in fiscal 2003 is $2.3 million of asset
impairment charges and a $0.2 million charge for severance. In fiscal
2002, we recorded a $1.0 million charge for severance and $3.6 million
of excess and obsolete inventory charges related to the cost of
inventory associated with discontinued product lines and inventory
levels that had been deemed to be in excess of forecasted
requirements. In fiscal 2001, Cost of sales includes $0.1 million in
severance-related charges. Included in Cost of sales in fiscal 1999
are inventory write-downs of $2.2 million pursuant to restructuring of
our business. (See Note 3 to the Consolidated Financial Statements for
a detailed discussion of our restructuring plans).
(3) Included in Selling, general and administrative expense in fiscal 2003
is a $0.3 million charge related to the cost of closing our Beaverton,
Oregon facility and a $2.4 million charge for severance partially
offset by the reversal of an unused 2002 restructuring reserve of $0.1
million. In fiscal 2002, we recorded $3.0 million in severance-related
charges. In fiscal 2001, we recorded a charge for severance of $0.7
million, partially offset by the reversal of an unused 1999
restructuring reserve of $0.2 million. In fiscal 2000, we reversed
$2.0 million of a restructuring reserve established in fiscal 1999. In
fiscal 1999, we recorded charges of $6.8 million related to the
consolidation of our oscilloscope operations. (See Note 3 to the
Consolidated Financial Statements for a detailed discussion of our
restructuring plans).
(4) Research and development in each of fiscal 2003, 2002 and 2001
includes severance-related charges of $0.7 million, $0.2 million and
$0.1 million, respectively, and in fiscal 2002 a $4.0 million
technology access fee to IBM.
(5) Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no impact on
previously reported net loss (income).
YEARS ENDED JUNE 30,
----------------------- -----------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (6)..................... $ 62,831 $ 63,265 $ 41,610 $ 24,129 $ 31,516
Total assets ........................... 122,152 126,991 122,160 100,849 99,685
Total debt and capitalized leases....... 291 375 456 11,000 8,200
Redeemable convertible preferred stock.. 15,335 13,266 11,390 9,692 8,152
Total stockholders' equity.............. 80,514 81,505 60,480 47,109 51,855
(6) At June 30, 2000, all of our outstanding debt of $11.0 million under
our bank credit facility was classified as current and was 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 our Consolidated Financial Statements and related
Notes thereto included elsewhere in this Form 10-K. The information contained
below includes statements regarding the intent, belief or current expectations
of LeCroy or our officers or directors that, if not historical, are
forward-looking statements subject to certain risks and uncertainties that could
cause actual performance and results of operations to differ materially from
those projected or suggested in the forward-looking statements. For a discussion
on forward-looking statements, see the information set forth at the end of this
Item 7. under the heading "Forward-Looking Statements."
LeCroy currently operates as one business segment in the Test and
Measurement Instrument market. Using our core competency of WaveShape Analysis,
defined as the capture and analysis of complex electronic signals, we develop,
manufacture, sell and license signal acquisition and analysis products. Our
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 power
measurement. We also produce modular digitizers and proprietary electronic
components. In addition, we generate revenue by providing service on all of our
products beyond the initial warranty period.
CONSOLIDATED RESULTS OF OPERATIONS
The following table indicates the percentage of total revenues represented
by each item in our Consolidated Statements of Operations for the fiscal years
ended June 30, 2003, 2002 and 2001. On August 25, 2000, we sold substantially
all of the assets and business of our Vigilant Networks business segment.
Accordingly, the results of operations of this business segment have been
reflected as discontinued operations.
YEARS ENDED JUNE 30,
2003 2002 2001
---- ---- ----
Revenues:
Digital oscilloscopes and related products................................... 88.1% 90.7% 91.5%
High-energy physics products................................................. - 1.3 2.7
Service and other............................................................ 11.9 8.0 5.8
------- ------- -------
Total revenues............................................................ 100.0 100.0 100.0
Cost of sales (included in fiscal 2003 is $2.3 million of asset impairment
charges (2.1% of total revenues) and $0.2 million of severance charges
(0.2% of total revenues); included in fiscal 2002 is $3.6 million of
inventory charges (3.2% of total revenues) and $1.0 million of severance
charges (0.9% of total revenues); included in fiscal 2001 is $0.1
million of severance charges (0.1% of total revenues)).................... 47.7 53.8 48.0
------- ------- -------
Gross profit........................................................... 52.3 46.2 52.0
Operating expenses:
Selling, general and administrative (included in fiscal 2003 is $0.3
million of plant closing costs (0.3% of total revenues) and $2.4 million
of severance charges (2.2% of total revenues), partially offset by the
reversal of an unused 2002 restructuring reserve of $0.1 million (0.1%
of total revenues); included in fiscal 2002 is $3.0 of million of
severance charges (2.7% of total revenues); included in fiscal 2001 is
$0.7 million of severance charges (0.5% of total revenues), partially
offset by the reversal of an unused 1999 restructuring reserve of $0.2
million (0.2% of total revenues))......................................... 38.0 36.1 31.5
Research and development (included in fiscal 2003, 2002 and 2001 were
severance charges of $0.7 million, $0.2 million and $0.1 million (0.6%,
0.2% and 0.1% of total revenues), respectively; included in fiscal 2002
is a $4.0 million technology access fee (3.6% of total revenues))......... 16.9 19.7 12.5
------- ------- -------
Total operating expenses.................................................. 54.9 55.8 44.0
Operating (loss) income........................................................... (2.6) (9.6) 8.0
Other (expense) income, net................................................. (0.1) 0.1 (0.3)
------- ------- -------
(Loss) income from continuing operations before income taxes and
the cumulative effect of an accounting change ............................ (2.7) (9.5) 7.7
Benefit from income taxes................................................... 1.0 3.9 0.6
------- ------- -------
(Loss) income from continuing operations before the cumulative
effect of an accounting change ........................................... (1.7) (5.6) 8.3
Gain (loss) from discontinued operations, net of tax........................ 0.1 - (1.4)
------- ------- -------
Net (loss) income before the cumulative effect of an accounting change............ (1.6) (5.6) 6.9
Cumulative effect of an accounting change for revenue
recognition, net of tax.................................................... - - 3.1
------- ------- -------
Net (loss) income................................................................. (1.6)% (5.6)% 3.8%
======= ======= =======
17
COMPARISON OF FISCAL YEARS 2003 AND 2002
Total revenues were $107.9 million in fiscal 2003 compared to $111.5
million in fiscal 2002, a decrease of 3.2%, or $3.6 million. Revenues from
digital oscilloscopes and related products decreased 6.0%, or $6.1 million, in
fiscal 2003. Lower sales from discontinued product lines, OEM/distributed
products and components were partially offset by sales of our
application-specific Serial Data Analyzer and Disk Drive Analyzer versions of
our high-end WaveMaster(TM) product line of digital oscilloscopes and increased
sales of probes and accessory products.
Revenues from high-energy physics products declined by $1.4 million, or
100%, in fiscal 2003 as a result of our decision in December 2001 to discontinue
this product line. Revenues from Service and other revenue increased 43.4%, or
$3.9 million, in fiscal 2003 primarily due to a $3.0 million agreement to
license our MAUI(TM) Instrument Operating System technology. Service and other
revenue in each of fiscal 2003, 2002 and 2001 includes the recognition of $1.3
million of revenue that was deferred with the adoption of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue
Recognition in Financial Statements" as of the beginning of fiscal 2001 (see
Note 1 to the Consolidated Financial Statements).
On a geographical basis, the Americas comprised $32.4 million, or 30%, of
fiscal 2003 revenues compared to $33.1 million, or 30%, of fiscal 2002, Europe
and the Middle East comprised $31.2 million, or 29%, of fiscal 2003 revenues
compared to $33.1 million, or 30%, of fiscal 2002 and the Asia/Pacific region
accounted for $44.3 million, or 41%, of fiscal 2003 revenues compared to $45.3
million, or 40%, of fiscal 2002.
Gross margin was 52.3% in fiscal 2003 compared to 46.2% in fiscal 2002.
Included in Cost of sales in fiscal 2003 is a $2.3 million (2.1% of total
revenues) charge for the write-off of impaired intangible assets resulting from
our decision to exit certain product lines and to make a significant change in
our manufacturing strategy and $0.2 million (0.2% of total revenues) of
severance charges. Included in Cost of sales in fiscal 2002 is a $1.0 million
(0.9% of total revenues) charge for severance and a charge of $3.6 million (3.2%
of total revenues) to increase our allowance for excess and obsolete inventory.
This inventory charge relates to the cost of inventory associated with
discontinued product lines and inventory levels that had been deemed to be in
excess of forecasted requirements. The increase in gross margin in fiscal 2003
resulted from the $3.0 million technology license included in Service and other
revenue, favorable margins on our high-end WaveMaster product line of digital
oscilloscopes, more favorable product margins on the existing base of products
due to higher average selling prices of our high-end products, increased
operational efficiency and improved cost structure.
Selling, general and administrative expense increased by 1.8%, or $0.7
million, from $40.2 million in fiscal 2002 to $40.9 million in fiscal 2003.
Selling, general and administrative expense in fiscal 2003 includes $2.4 million
of severance (2.2% of total revenues) charges and $0.3 million (0.3% of total
revenues) of plant closing costs partially offset by the reversal of an unused
2002 restructuring reserve of $0.1 million (0.1% of total revenues) and in
fiscal 2002 includes $3.0 of million of severance (2.7% of total revenues)
charges. This increase in Selling, general and administrative expense is
attributable to 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 our direct sales force,
establishing a direct presence in Singapore, the opening of two new offices in
China partially offset by lower restructuring charges in fiscal 2003. As a
percentage of total revenues, Selling, general and administrative expense was
38.0% in fiscal 2003, compared with 36.1% in fiscal 2002. This increase as a
percentage of total revenues was primarily due to our inability to leverage
higher costs of fixed infrastructure over the lower sales base.
Research and development expense decreased by 17.2%, or $3.8 million, from
$22.0 million in fiscal 2002 to $18.2 million in fiscal 2003. Included in
Research and development in fiscal 2003 and 2002 are severance charges of $0.7
million and $0.2 million (0.6% and 0.2% of total revenues), respectively, and in
fiscal 2002 a $4.0 million (3.6% of total revenues) technology access fee to IBM
Corporation ("IBM"). We will use the access to this next-generation silicon
germanium technology acquired from IBM to develop components that are expected
to deliver higher density, greater speed and reduced power consumption than
those currently available. Such components will be used in future high-speed
digital oscilloscopes. As a percentage of sales, Research and development
expense decreased from 19.7% in fiscal 2002 to 16.9% in fiscal 2003. This
decrease as a percentage of total revenues was primarily due the technology
access fee purchased in fiscal 2002 partially offset by increased severance
charges and the inability to fully leverage expenses over the lower sales base
in fiscal 2003. Despite the effects of the difficult economy, we maintained our
commitment to product development in fiscal 2003 as evidenced by the successful
execution of our product strategy of leveraging our high-end silicon germanium
18
acquisition technology and MAUI Instrument Operating System deployed in
WaveMaster into our WavePro product line of digital oscilloscopes. We intend to
continue to invest a significant percentage of our revenues in our research and
development efforts.
Other (expense) income, net, which consists primarily of net interest
income and foreign exchange gains or losses, was an expense of ($0.1) million in
fiscal 2003, compared to income of $0.3 million in fiscal 2002. The decrease in
income in fiscal 2003 was primarily due to a $0.3 million increase in foreign
exchange losses on transactions denominated in other than the functional
currency of LeCroy or our subsidiaries and lower net interest income earned on
our cash balances due to lower interest rates.
In fiscal 2003, we recorded a tax benefit of $1.1 million, or an effective
tax rate of (37.0%), compared to a tax benefit of $4.3 million, or an effective
tax rate of (40.8)%, in fiscal 2002. The effective tax rate in fiscal 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, comprising 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, were
$2.1 million and $1.9 million in fiscal 2003 and 2002, respectively.
See "Discontinued Operations" for a discussion and analysis of such
amounts.
COMPARISON OF FISCAL YEARS 2002 AND 2001
Total revenues were $111.5 million in fiscal 2002 compared to $141.4
million in fiscal 2001, a decrease of 21.2%, or $29.9 million. Revenues from
digital oscilloscopes and related products decreased 21.9%, or $28.3 million, in
fiscal 2002 primarily due to the impact of the difficult economic environment on
our higher end products and execution issues in our U.S. sales channel. Revenues
from high-energy physics products declined by $2.3 million, or 62.2%, in fiscal
2002 as a result of our decision in December 2001 to discontinue this product
line. Service and other revenue in both fiscal 2002 and 2001 includes the
recognition of $1.3 million of revenue that was deferred with the adoption of
the Securities and Exchange Commission's SAB 101 "Revenue Recognition in
Financial Statements" as of the beginning of fiscal 2001 (see Note 1 to the
Consolidated Financial Statements).
On a geographical basis, the Americas comprised $33.1 million, or 30%, of
fiscal 2002 revenues compared to $48.7 million, or 34%, of fiscal 2001, Europe
and the Middle East comprised $33.1 million, or 30%, of fiscal 2002 revenues
compared to $40.0 million, or 28%, of fiscal 2001 and the Asia/Pacific region
accounted for $45.3 million, or 40%, of fiscal 2002 revenues compared to $52.7
million, or 38%, of fiscal 2001. The decline in revenues from the Americas in
fiscal 2002 was primarily due to the impact of the difficult economic
environment in the U.S. and execution issues in our U.S. sales channel. We
addressed these execution issues in the fourth quarter of fiscal 2002 by hiring
new sales management and converting the U.S. sales channel from partial coverage
by manufacturers' sales representatives to full coverage by our direct sales
force.
Gross margin was 46.2% in fiscal 2002 compared to 52.0% in fiscal 2001.
Included in Cost of sales in fiscal 2002 was $1.0 million (0.9% of total
revenues) of severance charges and a $3.6 million (3.2% of total revenues)
charge for excess and obsolete inventory. This inventory charge relates to the
cost of inventory associated with discontinued product lines and inventory
levels that had been deemed to be in excess of forecasted requirements. Included
in Cost of sales in fiscal 2001 was $0.1 million (0.1% of total revenues) of
severance charges. The decrease in gross margin from the prior year was due to
the unfavorable absorption of costs resulting from lower sales volume, an
unfavorable sales mix of lower margin products and higher technology-related
royalties, in addition to the charges for severance and excess and obsolete
inventory in fiscal 2002. These negative impacts were partially offset by
favorable margins on our new high-end WaveMaster product line of digital
oscilloscopes released in the third quarter of fiscal 2002.
Selling, general and administrative expense decreased by 9.6%, or $4.2
million, from $44.5 million in fiscal 2001 to $40.2 million in fiscal 2002.
Included in Selling, general and administrative expense in fiscal 2002 is $3.0
million (2.7% of total revenues) of severance charges and in fiscal 2001 is $0.7
million (0.5% of total revenues) of severance charges partially offset by the
reversal of an unused 1999 restructuring reserve of $0.2 million (0.2% of total
revenues). The decrease in Selling, general and administrative expense is
attributable to the cost reduction initiatives taken in light of the poor
economic environment including headcount reductions, salary freezes,
19
reduced incentive payments and controls on discretionary spending, as well as
lower variable selling costs partially offset by the increase in severance
charges in fiscal 2002. As a percentage of total revenues, Selling, general and
administrative expense was 36.1% in fiscal 2002, compared with 31.5% in fiscal
2001. This increase as a percentage of total revenues was primarily due to the
inability to leverage the costs of fixed infrastructure over the lower sales
base and the increase in severance charges in fiscal 2002. These fixed costs
increased in fiscal 2002 as a result of the conversion, in the fourth quarter,
of the U.S. sales force from partial coverage by manufacturers' representatives
to full coverage by the our direct sales force.
Research and development expense increased by 24.5%, or $4.3 million,
from $17.7 million in fiscal 2001 to $22.0 million in fiscal 2002. Included in
Research and development in fiscal 2002 and 2001 are severance-related charges
of $0.2 million and $0.1 million (0.2% and 0.1% of total revenues),
respectively, and in fiscal 2002 a $4.0 million (3.6% of total revenues)
technology access fee to IBM. Despite the effects of the difficult economy, we
maintained our commitment to product development in fiscal 2002 as evidenced by
the successful launch of WaveMaster, our first silicon germanium-based family of
oscilloscopes. As a percentage of total revenues, Research and development
expense increased from 12.5% in fiscal 2001 to 19.7% in fiscal 2002. This
increase as a percentage of total revenues was primarily due to the inability to
leverage expenses fully over the lower sales base, the purchased technology and
the release of our high-end WaveMaster product line of digital oscilloscopes in
the third quarter of fiscal 2002. We intend to continue to invest a significant
percentage of our revenues in our research and development efforts.
Other (expense) income, net, which consists of net interest income and
foreign exchange gains or losses, was income of $0.3 million in fiscal 2002,
compared to an expense of ($0.5) million in fiscal 2001. The increase in income
was due to a $0.7 million reduction of foreign exchange losses as a result of
our hedging program initiated in the third quarter of fiscal 2001. In addition,
there was a $0.1 million improvement in net interest income due to higher
average cash balances from the net proceeds of $23.2 million raised from a
private equity placement in August 2001 and no significant bank borrowings
during fiscal 2002. During the fourth quarter of fiscal 2002, we sold the
remaining 1.0 million shares of our equity investment in Iwatsu. This
transaction generated $1.8 million of cash and resulted in a pre-tax loss of
($0.1) million. No shares of Iwatsu stock were sold during fiscal 2001.
In fiscal 2002, we recorded a tax benefit of $4.3 million, or an effective
tax rate of (40.8)%, compared to a tax benefit of $0.9 million, or an effective
tax rate of (8.2)%, in fiscal 2001. The (40.8)% effective tax rate consists of
our (37.0)% annual effective tax rate increased by the release of a $0.4 million
tax reserve related to a favorable audit settlement. During fiscal 2001, we used
$8.2 million of net operating losses ($3.2 million of tax benefit) to offset
taxable income from continuing operations and reversed, during the fourth
quarter of fiscal 2001, $4.1 million of our valuation allowance into income.
Partially offsetting these items, we recorded a tax expense of $1.6 million for
the projected repatriation of cash from one of our foreign subsidiaries. Our tax
provision in fiscal 2001 before the tax benefit from net operating losses and
the reversal of our valuation allowance, partially offset by the tax expense for
the projected cash repatriation from one of our foreign subsidiaries, would have
been $4.7 million, or an effective tax rate of 43.3%.
Charges related to convertible preferred stock, comprising 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, were
$1.9 million and $1.7 million in fiscal 2002 and 2001, respectively. See Note 17
to the Consolidated Financial Statements for a discussion on the cumulative
effect of an accounting change for Preferred Stock.
See "Revenue Recognition" for a discussion and analysis of the cumulative
effect of an accounting change for revenue recognition.
See "Discontinued Operations" for a discussion and analysis of such
amounts.
RESTRUCTURING AND OTHER CHARGES (CREDITS), NET
During the fourth quarter of fiscal 2003, we adopted a plan to consolidate
our probe development activities into our Chestnut Ridge, New York facility. In
connection with this plan, we closed our Beaverton, Oregon facility and recorded
lease termination costs of $0.3 million and a charge for severance of $0.6
million; $0.1 million of which was recorded in Cost of sales, $0.6 million
recorded in Selling, general and administrative expense and $0.2 million
recorded in Research and development in the Consolidated Statement of
Operations. The implementation of this plan resulted in headcount reductions of
27 employees or approximately 7% of the workforce as compared to June 30, 2002.
As of June 30, 2003, $0.3 million of the total $0.9 million has been paid and
$0.6 million remains in Accrued expenses and other liabilities in the
Consolidated Balance Sheet. Lease termination costs under this plan will be paid
by the end of the third quarter of fiscal 2006 and severance will be paid by the
end of the fourth quarter of fiscal 2004.
20
During the first quarter of fiscal 2003, we 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, we recorded a charge
for severance and other related expenses in the first quarter of fiscal 2003 of
$2.7 million; $0.1 million of which was recorded in Cost of sales, $2.1 million
recorded in Selling, general and administrative expense and $0.5 million
recorded in Research and development in the Consolidated Statement of
Operations. The plan implemented during fiscal 2003 resulted in improved
operating efficiencies and reduced our headcount by 38 employees or
approximately 9% of the workforce as compared to June 30, 2002. As of June 30,
2003, $2.0 million of the total $2.7 million has been paid and $0.7 million
remains in Accrued expenses and other liabilities in the Consolidated Balance
Sheet. Severance and other related amounts under this plan will be paid by the
end of fiscal 2004.
We took steps during fiscal 2002 to reduce our 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, we
recorded a $4.2 million charge ($1.0 million recorded in Cost of sales, $3.0
million in Selling, general and administrative expense and $0.2 million in
Research and development in the Consolidated Statement of Operations) for
severance and related expenses, including costs associated with the succession
of our Chief Executive Officer during the second quarter of fiscal 2002. Of the
$4.2 million total charge, $4.0 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 June 30, 2003, $3.7 million of the total $4.0 million has been
paid, $0.2 million remains accrued in Accrued expenses and other liabilities in
the Consolidated Balance Sheet and $0.1 million of unused restructuring reserve
was credited to Selling, general and administrative expense in the fourth
quarter of fiscal 2003. Severance and other related amounts, including costs
associated with the succession of our Chief Executive Officer, will be paid by
the end of the second quarter of fiscal 2004.
During the fourth quarter of fiscal 2001, in anticipation of continued
weakness of the economy, we reduced our workforce by 25 employees or
approximately 5% as compared to June 30, 2000. As a result of this workforce
reduction, we recorded a severance charge of $0.9 million ($0.1 million recorded
in Cost of sales, $0.7 million in Selling, general and administrative expense
and $0.1 million in Research and development in the Consolidated Statement of
Operations). The 2001 restructuring plan was completed as of June 30, 2002.
During fiscal 1999, we adopted a restructuring plan, the objectives of
which were to consolidate our oscilloscope operations in order to enhance
operating efficiencies and to dedicate resources to the development of advanced
technologies. The 1999 restructuring plan was completed in fiscal 2001.
Cumulative through fiscal 2001, $8.2 million of the initial restructuring
reserve established had been paid or used to reduce asset balances. Of this $8.2
million, $2.1 million related to inventories, $3.0 million related to severance
and other employee benefit costs, $1.3 million related to the Geneva facility
lease and $1.8 million related to the write-down of plant assets, capitalized
management information system software and other costs. In addition, during
fiscal 2000, we negotiated the assignment of the remaining lease payments on the
Geneva facility to a third party as of August 1, 2000. As a result, 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.
The residual balance of $0.2 million was credited to Selling, general and
administrative expense in fiscal 2001.
DISCONTINUED OPERATIONS
In August 2000, LeCroy divested its Vigilant Networks business segment,
which comprised its Vigilant Networks, Inc. ("Vigilant") and Digitech
Industries, Inc. ("Digitech") subsidiaries. Vigilant Networks' principal
product, the Big Tangerine network analyzer, was a new product which was also
being sold into a new market for LeCroy. Since this product's inception, we had
made substantial investments in the Vigilant Networks business segment in terms
of selling, marketing, research and development and administrative expenses.
While the network analyzer had a unique technology, we decided that we could not
continue to invest the financial resources necessary to capitalize on its future
growth potential.
21
In August 2000, we closed the sale of the assets and business of Vigilant
and a portion of the assets and business of Digitech for gross proceeds of $12.0
million. The remaining business of Digitech was classified as discontinued
operations. The buyer also assumed certain liabilities of Vigilant. In
connection with the sale, we 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.
After deducting the value of these warrants, along with fees and certain
retained liabilities, we recorded a loss of ($0.6) million, net of a $0.3
million tax benefit, on the sale and discontinuance of the Vigilant Networks
business segment. This includes a $1.4 million adjustment to the loss recorded
in the fourth quarter of fiscal 2001 due to changes in estimates. Fiscal 2001
revenues from discontinued operations were $0.4 million (through the measurement
date) and losses from discontinued operations, net of tax, were ($1.4) million
(through the measurement date).
In fiscal 2003, we recorded a $0.1 million Gain on sale of discontinued
operations in the Consolidated Statement of Operations, net of a $0.1 million
tax provision, for the sale of the residual assets and business of Digitech and
the reversal of unused accrued discontinued operations reserves.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $62.8 million at June 30, 2003, which represented a
working capital ratio of 3.7 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 fiscal years
ended June 30, 2003, 2002 and 2001 was $6.7 million, ($6.9) million and $0.6
million, respectively. The increase in net cash provided by operating activities
in fiscal 2003 versus 2002 was primarily due to the $4.6 million decrease in net
loss, the $3.0 million reduction in inventory due to increased operating
efficiencies, increased accounts receivable collections activity of $1.5 million
and reduced cash payments of $3.8 million for accounts payable, accrued expenses
and other liabilities. The increase in cash used in operating activities in
fiscal 2002 versus 2001 was primarily due to a decrease in accounts payable,
accrued expenses and other liabilities, partially offset by a decrease in
accounts receivable balances related to lower revenue and improved collections
experience on past due balances. The reduction in accounts payable, accrued
expenses and other liabilities in fiscal 2002 reflects $3.1 million of payments
on retained discontinued operations liabilities, severance payments and a
reduction in accounts payable levels.
Net cash (used in) provided by investing activities for the fiscal years
ended June 30, 2003, 2002 and 2001 was ($3.9) million, ($2.2) million and $5.0
million, respectively. This increase in net cash used in investing activities in
fiscal 2003 versus 2002 was primarily due to a $1.3 million acquisition of a
technology license partially offset by a $1.5 million reduction in capital
expenditures in fiscal 2003 and proceeds from the sale of marketable securities
of $1.8 million in fiscal 2002. The decrease in cash provided by investing
activities in fiscal 2002 versus 2001 was primarily due to the gross proceeds of
$12.0 million received from the sale of the assets and business of the Vigilant
Networks business segment in fiscal 2001, which effect was partially offset by
the proceeds from the sale of marketable securities of $1.8 million in fiscal
2002 and the investment of ($2.1) million in computer software in fiscal 2001.
Net cash provided by (used in) financing activities for the fiscal years
ended June 30, 2003, 2002 and 2001 was $0.5 million, $24.8 million and ($3.3)
million, respectively. The decrease in cash provided by financing activities in
fiscal 2003 versus 2002 was primarily due to the private equity placement in
fiscal 2002 raising net proceeds of $23.2 million. Additionally, fewer stock
options were exercised during fiscal 2003 due to a lower average stock price as
compared to fiscal 2002. The increase in cash provided by financing activities
in fiscal 2002 versus 2001 was primarily due to the net proceeds of $23.2
million raised from the private equity placement in fiscal 2002.
We have 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 our Leverage Ratio. This revolving line of credit is
secured by a lien on substantially all of our domestic assets. As of June 30,
2003, we have met our financial covenant requirements and there were no
borrowings outstanding under this line of credit. The credit agreement was
amended on September 2, 2003 to extend the expiration date of the revolving line
of credit to November 30, 2003. Management plans to complete its negotiations
and have a new revolving line of credit in place before this amendment expires.
22
On June 12, 2000, we secured a $2.0 million capital lease line of credit to
fund certain capital expenditures. As of June 30, 2003, we 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 of which
was included in Deferred Revenue and other non-current liabilities on the
Consolidated Balance Sheet. Outstanding borrowings under this line bear interest
at 12.2%.
In addition to the above U.S.-based facilities, we maintain certain
short-term foreign credit facilities, principally facilities with two Japanese
banks totaling 150 million yen ($1.3 million as of June 30, 2003). No amounts
were outstanding under these facilities as of June 30, 2003.
Our contractual obligations and commitments include obligations associated
with our capital and operating leases and a technology license agreement as set
forth in the table below:
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
--------- -------- --------- --------- ---------
(IN THOUSANDS)
Capital lease obligations................. $ 291 $ 95 $ 196 $ - $ -
Employee severance agreement.............. 348 321 27 - -
Operating lease obligations............... 4,442 1,467 1,916 1,059 -
Other contractual commitments to purchase
information technology (1)............. 750 500 250 - -
--------- -------- --------- --------- ---------
Total....................... $ 5,831 $ 2,383 $ 2,389 $ 1,059 $ -
========= ======== ========= ========= =========
(1) As of June 30, 2003, we had a technology license agreement, under which
we are unconditionally committed to pay $0.5 million and $0.3 million in fiscal
2003 and 2004, respectively.
We believe that our cash on hand and cash flow generated by our continuing
operations 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.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Notes 1 and 2 to the
Consolidated Financial Statements. The preparation of consolidated financial
statements in accordance with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the consolidated financial statements and related disclosures. These estimates
and assumptions are based on management's judgment and available information
and, consequently, actual results could be different from these estimates.
LeCroy believes that the critical accounting policies discussed below
involve significant management judgment due to the sensitivity of the methods,
assumptions and estimates necessary in determining the related assets,
liability, revenue and expense amounts.
Allowance for Doubtful Accounts - We maintain an allowance for doubtful
accounts relating to the portion of the accounts receivable which we estimate is
non-collectable. We analyze historical bad debts, customer concentrations,
customer creditworthiness, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. The allowance for doubtful accounts, which includes the allowance for
anticipated returns, was $0.4 million at June 30, 2003 and 2002. Changes in the
overall economic environment or in the financial condition of our customers may
require adjustments to the allowance for doubtful accounts which could have a
material adverse effect on our financial condition, results of operations and
cash flows.
Allowance for Excess and Obsolete Inventory - LeCroy provides an allowance
for estimated excess and obsolete levels of inventory equal to the lower of the
cost of inventory and its estimated market value based on assumptions relating
to future demand and market conditions. The allowance for excess and obsolete
inventory was $2.1 million and $1.5 million at June 30, 2003 and June 30, 2002,
respectively. If actual market conditions prove less favorable than those
projected by management, additional inventory write downs may be required which
could have a material adverse effect on our financial condition, results of
operations and cash flows.
23
Valuation of Long-Lived and Intangible Assets - The carrying values of
long-lived assets and identifiable amortizable intangibles (including
technology, manufacturing and distribution rights) are assessed for impairment
whenever events or changes in circumstances indicate that the carrying values
may not be recoverable. When such events or changes in circumstances occur, we
assess the recoverability of long-lived assets by determining whether the
carrying values of such assets will be recovered through undiscounted expected
future cash flows. If the undiscounted cash flows are less than the carrying
amounts, an impairment loss is recorded to the extent that the carrying amounts
exceed the fair value. Factors which could trigger an impairment review include
the following: significant underperformance of LeCroy relative to historical or
projected operating results; significant changes in the manner of our use of the
assets or the strategy for the overall business; and significant negative
industry or economic trends.
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 or on a straight-line basis. Management assesses the
recoverability of these rights on the basis of actual and forecasted production
units as well as the average selling price and standard costs of the related
products after the amortization of the rights to determine profitability. If
required, an impairment charge is recorded.
Goodwill - Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," requires goodwill to be tested for
impairment annually under a two-step approach, or more frequently, if events or
changes in circumstances indicate that the asset might be impaired. Impairment
is assessed at the "reporting unit" level by applying a fair value-based test.
A reporting unit is defined as the same as or one level below the operating
segment level as described in SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
The first step is to identify if an impairment of goodwill has occurred by
comparing the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered impaired. If the carrying
amount of the reporting unit exceeds its fair value, the second step of the
goodwill test is performed to measure the amount of the impairment loss, if any.
In this second step, the "implied" fair value (as defined in SFAS No. 142) of
the reporting unit's goodwill is compared with the carrying amount of the
goodwill. If the carrying amount of the reporting unit's goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess, not to exceed the carrying amount of the goodwill.
We completed the annual impairment test required under SFAS No. 142 during the
fourth quarter of fiscal 2003 and determined that there was no impairment to our
recorded goodwill balance of $1.9 million at June 30, 2003.
Deferred Tax Assets - We have recorded $15.1 million of net deferred tax
assets on our Consolidated Balance Sheet as of June 30, 2003 for the future tax
benefit of certain expenses reported for financial statement purposes that have
not yet been deducted on our tax returns. Significant components of our deferred
tax assets are Federal, state and foreign loss and credit carryforwards,
inventory reserves and other reserves. The recognition of this deferred tax
asset is based on the assessment that it is more likely than not that we will be
able to generate sufficient future taxable income within statutory carryforward
periods to realize the benefit of these tax deductions. The factors that
management considers in assessing the likelihood of realization include the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets. Based on this
information, we have recorded a valuation allowance of $5.1 million as of June
30, 2003 to reserve for those tax assets we believe are not likely to be
realized in future periods. Adjustments to the valuation allowance may be made
in the future if it is determined that the realized amount of net operating
losses and other deferred tax assets is greater or less than the amount
recorded.
Warranty - Provisions for estimated expenses related to product warranties
are made at the time products are sold. 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 to which an average
fully burdened cost per hour is applied to derive the amount of accrued warranty
required. On a quarterly basis, we study trends of warranty claims and take
action to improve the quality of our products and minimize our warranty
exposure. The warranty reserve was $1.2 million at June 30, 2003 and 2002.
Management believes that the warranty reserve is appropriate; however, actual
claims incurred could differ from the original estimates, requiring adjustments
to the reserve which would be charged or credited to the Consolidated Statement
of Operations.
24
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission ("SEC") issued
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 we 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. We recognized pre-tax deferred license fee
revenue of $1.3 million during fiscal years 2003, 2002 and 2001. Such license
fees were included in Service and other revenue in the Consolidated Statements
of Operations. As of June 30, 2003, the remaining balance of pre-tax deferred
license fee revenue was $3.3 million.
We recognize 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"), "Modifications of SOP 97-2 with Respect to Certain Transactions."
Revenues 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. We allocate revenue on software
arrangements involving multiple elements to each element based on the relative
fair values of the elements. Our determination of fair value of each element in
multiple element-arrangements is based on vendor specific objective evidence
("VSOE"). We analyze all of the elements and determine if there is 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, we recognized $3.0 million of revenue for the
perpetual license of our MAUI Instrument Operating System technology in fiscal
2003. Maintenance fees included in the license agreement will be recognized pro
rata for each year of maintenance purchased.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal
years beginning after June 15, 2002. SFAS No. 143 addresses the accounting and
reporting requirements for legal obligations associated with the retirement of
tangible long-lived assets. In general, SFAS No. 143 requires entities to
capitalize asset retirement costs of related long-lived assets in the period in
which they meet the definition of a liability and to allocate those costs to
expense using a systematic and rational method. Our adoption of this Statement,
at the beginning of fiscal year 2003, did not have an impact on our consolidated
financial statements.
In July 2002, 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. 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. We adopted the provisions of SFAS No.
146 effective for exit or disposal activities initiated after December 31, 2002.
Our adoption of this Statement did not have an impact on our consolidated
financial statements.
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 effective for our fiscal
year 2004. Management believes the adoption of the provisions of EITF Issue No.
00-21 will not have a material effect on our consolidated financial statements.
25
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, though it does not apply to
product warranties or to guarantees accounted for as derivatives. FIN 45 also
requires enhanced disclosures of product warranties (see Note 11 to the
Consolidated Financial Statements). The recognition provisions of FIN 45 apply
to guarantees issued or modified after December 31, 2002 and will not have a
material effect on our 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. We adopted the disclosure provisions
of SFAS No. 148 in the third quarter of fiscal 2003. 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 our position with respect to current guidance.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
discussed in SFAS No. 133, clarifies when a derivative contains a financing
component, amends the definition of an underlying to conform it to language used
in FIN 45 and amends certain other existing pronouncements. These changes are
intended to result in more consistent reporting of contracts as either
derivatives or hybrid instruments. The Statement is generally effective for
contracts entered into or modified after, and for hedging relationships
designated after, June 30, 2003. We do not expect SFAS No. 149 to have a
material effect on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying certain financial instruments that
represent obligations, yet also have characteristics similar to equity
instruments. Specifically, SFAS No. 150 addresses the accounting for instruments
such as mandatory redeemable securities, certain option contracts and
obligations to be settled in shares. SFAS No. 150 is effective for interim
periods beginning after June 15, 2003. We do not expect SFAS No. 150 to have a
material effect on our consolidated financial statements.
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 LeCroy or its
directors or officers with respect to, among other things, (i) market trends in
our industries and the projected impact on LeCroy, (ii) the increasing
importance of signal shape analysis; (iii) our ability to meet our customers'
evolving needs; (iv) our position within our industries and our ability to
compete effectively; (v) our ability to expand into new markets; (vi) the
success of our new product introductions; (vii) trends in the seasonality of our
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) the sufficiency
of our cash balances, cash flow and the availability of external financing
sources to fund working capital, capital expenditure requirements and business
or technology acquisitions; (xii) trends affecting our financial condition and
results of operations; (xiii) our business and growth strategies; (xiv) the
impact of adoption of accounting pronouncements; (xv) the Tektronix, Inc.,
litigation including the potential costs and outcome of that litigation, as well
as other estimates relating to future operations; and (xvi) certain other
statements identified or qualified by words such as "likely," "will,"
"suggests," "may," "would," "could," "should," "expects," "intends,"
"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 our best judgment as of
the date of this Form 10-K, and we caution readers not to place
26
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 our 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; our ability to deliver a timely flow of competitive new products
and market acceptance of these products; our ability to anticipate changes in
the market; our ability to negotiate or maintain financing arrangements with
lenders on terms that are acceptable; our ability to attract and retain
qualified personnel, including our management; changes in the global economy and
fluctuations in foreign currency rates; inventory risks due to changes in market
demand or our business strategies; risks due to an interruption in supply or an
increase in price for our parts, components and sub-assemblies; our ability to
realize sufficient margins on the sales of our products; the development of
future products and our ability to use intellectual property and protect our
patent portfolio; those risks listed under the heading "Risk Factors That May
Impact Future Results" and in other cautionary statements in this document, as
well as other risk factors listed from time to time in our reports filed with
the Securities and Exchange Commission and press releases. The Company
undertakes no obligation to update any forward-looking statements whether as a
result of new information or future events.
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
In addition to other information in this Form 10-K and any information
incorporated by reference in this Form 10-K, the following risk factors should
be carefully considered when evaluating LeCroy and our business. Also, readers
should carefully review our reports filed with the Securities and Exchange
Commission and press releases. Investing in our securities involves a degree of
risk. The risks and uncertainties described below are not the only ones facing
us. Additional risks and uncertainties that we do not presently know about or
that we currently believe are immaterial may also adversely impact our business.
If any of the risks described actually occur, our business, financial condition,
results of operations and liquidity would likely suffer and the price of our
securities could fall.
OUR OPERATING RESULTS AND FINANCIAL CONDITION COULD CONTINUE TO BE HARMED IF THE
INDUSTRIES INTO WHICH WE SELL PRODUCTS REMAIN DEPRESSED.
The economic downturn has resulted in reduced purchasing and capital
spending in many of the markets that we serve worldwide. In particular, the
computer / semi-conductor, data storage, communications and power measurements
markets have been in a downward cycle characterized by diminished product
demand, excess manufacturing capacity and the increasing erosion of average
selling prices. Although some segments of these industries have shown recent
signs of stabilization, others, especially communications, continue to exhibit a
downward cycle. Demand in these markets remains volatile so the underlying trend
is uncertain.
We are uncertain how long the current downturn will last and when a
sustained recovery in these markets may occur, if ever. Any further decline in
customers' markets or in the general economic conditions would likely result in
a further reduction in demand for our products and would have a material adverse
effect on our results of operations, financial condition and liquidity. In
addition, if customers' markets continue to decline, we may not be able to
collect on outstanding amounts due to us. Such further decline could harm our
consolidated financial position, results of operations, cash flows and stock
price, and could limit our ability to reach goals for restoring profitability.
Finally, we may be required to secure additional debt or equity financing at
some time in the future, and cannot be assured that such financing will be
available on acceptable terms when required.
IF DEMAND FOR OUR PRODUCTS DOES NOT MATCH MANUFACTURING CAPACITY, EARNINGS MAY
CONTINUE TO SUFFER.
We cannot immediately adapt production capacity and related cost structures
to rapidly changing market conditions. When demand does not meet expectations,
manufacturing capacity will likely exceed production requirements. The fixed
costs associated with excess manufacturing capacity may adversely affect our
earnings. Conversely, if during a market upturn we cannot increase manufacturing
capacity to meet product demand, we will not be able to fulfill orders in a
timely manner, which in turn may have a negative effect on earnings and our
overall business.
27
THE ACTIONS WE TOOK IN RESPONSE TO THE REDUCED DEMAND FOR OUR PRODUCTS AND
SERVICES COULD HAVE LONG-TERM ADVERSE EFFECTS ON OUR BUSINESS.
There are several risks inherent in our cost-cutting initiatives to
transition to a reduced cost structure. These include the risk that we will not
be able to reduce expenditures quickly enough and sustain them at a level
necessary to restore profitability, and that we may have to undertake further
restructuring initiatives that would entail additional charges. In addition,
there is the risk that cost-cutting initiatives will impair our ability to
develop and market products effectively and remain competitive in the industries
in which we compete. Cost reduction measures could have long-term effects on our
business by reducing our pool of technical talent, decreasing or slowing
improvements in our products, making it more difficult for us to respond to
customers, limiting our ability to increase production quickly if and when the
demand for our products increases and limiting our ability to hire and retain
key personnel. These circumstances could cause our earnings to be lower than
they otherwise might be.
WE RELY ON SEVERAL SINGLE-SOURCE SUPPLIERS.
We obtain 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. Alternative sources of supply for integrated
circuits would be particularly difficult to develop over a short period of time.
An interruption in supply or an increase in price for our parts, components and
sub-assemblies could have a material adverse effect on our business, results of
operations and financial condition.
COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS.
The market for signal acquisition and analysis products such as our
high-performance digital oscilloscopes is highly competitive. Our principal
competitors in this market are Tektronix, Inc. ("Tektronix") and Agilent
Technologies. Some of our principal competitors have substantially greater sales
and marketing, development and financial resources than we do. We believe that
each of these companies offers a wide range of products that attempt to address
most segments of the digital oscilloscope market.
We believe that the principal factors of competition in the signal
acquisition and analysis market are: a product's performance, including its
bandwidth, sample rate, record length, and processing power; a product's price
and quality; the vendor's name recognition; reputation; product availability;
and availability and quality of post-sale support. If any of our competitors
surpass us or are perceived to have surpassed us with respect to one or more of
these factors, we may lose customers. Our success will depend in part on our
ability to maintain and develop the advanced technology used in our signal
acquisition and analysis products, as well as our ability to offer
high-performance products at a favorable price-to-performance ratio. Although we
believe that we currently compete effectively with respect to each of the
principal bases of competition in the signal acquisition and analysis market in
the $5,000 to $70,000 general price range in which our high-performance digital
oscilloscopes are focused, we cannot assure you that we will continue to compete
effectively.
WITHOUT THE TIMELY INTRODUCTION OF COMPETITIVE PRODUCTS, OUR PRODUCTS WILL
BECOME TECHNOLOGICALLY OBSOLETE OVER TIME.
We generally sell our products in industries that are characterized by
rapid technological changes, frequent new product introductions and changing
industry standards. Without the timely introduction of new products, services
and enhancements, our products will become technologically obsolete over time,
in which case our revenue and operating results could suffer. The success of new
product offerings will depend on several factors, including our ability to
identify customer needs properly, innovate and develop new technologies,
manufacture and deliver products in sufficient volumes on time, differentiate
offerings from competitors' offerings, price products competitively and
anticipate competitors' development of new products or technological
innovations.
WE DEPEND UPON KEY PERSONNEL AND QUALIFIED FUTURE HIRES TO IMPLEMENT OUR
EXPANSION STRATEGY.
Our success depends on the efforts and abilities of senior management and
key employees in the sales, marketing, research and development, and
manufacturing areas. Many of these employees would be difficult to replace. We
do not have employment contracts with most of our key personnel and our
continued low stock price means that many of our outstanding employee stock
options are "under water" or have an exercise price above the current market
price of our common stock. In addition, LeCroy's stock option plan expired on
January 4, 2003. This means we are currently unable to grant any stock options
to employees, which historically was a way for us to compensate and provide
28
incentives to our employees. If we cannot retain existing key managers and
employ additional qualified senior employees, our business, financial condition,
and results of operations could be materially and adversely affected. Future
expansion of operations will require us to attract, train, and retain new
personnel. These factors could increase our operating expenses. If we are unable
to recruit or retain a sufficient number of qualified employees, or the costs of
compensation or employee benefits increase substantially, our business,
financial condition, and results of operations could be materially and adversely
affected.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL AND PROPRIETARY RIGHTS.
Our success substantially depends upon our technology and products. We rely
on patent and trade secret laws to protect our proprietary rights. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our proprietary rights is difficult.
In addition, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Litigation might result
in substantial costs and diversion of resources and management attention. Any
infringement or misappropriation of our proprietary rights and the related costs
of enforcing those rights could have a material adverse effect on our business.
WE MAY INFRINGE UPON OTHER PARTIES' PROPRIETARY RIGHTS.
Our business activities may infringe upon the proprietary rights of others,
who may assert infringement claims against us. Such claims and any resultant
litigation could subject us to significant liability for damages, might result
in invalidation of our proprietary rights and, even if not meritorious, could
result in substantial costs and diversion of resources and management attention.
WE COULD BE AFFECTED BY GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES.
We manufacture our products in the United States, and sell our products and
purchase parts, components and sub-assemblies in a number of countries. We are
therefore 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 high-performance digital oscilloscopes from the
United States is subject to regulation under the Treaty for Nuclear
Non-Proliferation.
OUR STOCK PRICE MAY BE VOLATILE IN THE FUTURE.
The market price of our common stock fluctuates significantly. The stock
price could fluctuate in the future due to a number of factors, some of which
are beyond our control. These factors include: announcements of developments
related to our business; announcements of technological innovations or new
products or enhancements by us or our competitors; sales by competitors,
including sales to our customers; sales of common stock into the public market,
including by directors and members of management; developments in our
relationship with our customers, partners, distributors, and suppliers;
shortfalls or changes in revenue, gross margins, earnings or losses, or other
financial results from analysts' expectations; regulatory developments;
fluctuations in results of operations; trends in the seasonality of our sales;
and general conditions in our market or the markets served by our customers.
In addition, in recent years the stock market in general and the market for
shares of technology stocks in particular have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
the affected companies. We cannot ensure that the market price of our common
stock will not decline substantially, or otherwise continue to experience
significant fluctuations in the future, including fluctuations that are
unrelated to our operating performance.
IF OUR OPERATING RESULTS DO NOT IMPROVE IN THE LONG-TERM WE MAY BE REQUIRED TO
ESTABLISH A VALUATION ALLOWANCE AGAINST OUR NET DEFERRED TAX ASSETS.
We evaluate whether our deferred tax assets can be realized and assess the
need for a valuation allowance on an ongoing basis. Realization of our net
deferred tax assets is dependent on our ability to generate future taxable
income. An additional valuation allowance would be recorded if it were more
likely than not that some or all of our net deferred tax assets would not be
realized before they expire. If we establish additional valuation allowances we
might record a tax expense in our Consolidated Statement of Operations which
would have an adverse impact on our operating performance.
29
IF WE ARE REQUIRED TO ACCOUNT FOR OPTIONS UNDER OUR EMPLOYEE STOCK PLANS AS A
COMPENSATION EXPENSE, OUR NET INCOME AND EARNINGS PER SHARE WOULD BE
SIGNIFICANTLY REDUCED.
There has been an increasing public debate about the proper accounting
treatment for employee stock options. Currently we record compensation expense
only in connection with option grants that have an exercise price below fair
value. It is possible that future laws and regulations will require us to record
the fair value of all stock options as compensation expense in our consolidated
statement of operations which would have an adverse impact on our operating
performance.
WE ARE PARTY TO A LICENSE AGREEMENT WITH PUNITIVE CHANGE OF CONTROL PROVISIONS.
In February 1994, we settled litigation with Tektronix involving
allegations that our digital oscilloscope products infringed certain patents
held by Tektronix. As part of the settlement, we entered into a license
agreement with respect to such patents. Pursuant to the license agreement we
made royalty payments to Tektronix totaling $8.5 million and received a
worldwide, nonexclusive license under the applicable patents. The license
agreement provides that Tektronix may terminate the license in the event that:
we acquire 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"); any Restricted
Company acquires 20% or more of the stock of, or a controlling interest in, us
or an affiliate of ours; or we attempt to transfer the Tektronix license to a
Restricted Company, and do not first obtain Tektronix's prior written consent.
This provision of the license agreement could preclude us from making an
investment in or acquisition of such companies. It could also discourage such
companies or other third parties from attempting to acquire control of us or
limit the price that such parties might be willing to pay for our Common Stock.
In addition, this provision could limit the price that investors might be
willing to pay in the future for our Common Stock.
The license agreement provides that the license will automatically
terminate when all of the applicable patents expire on September 4, 2004. Once
the license terminates, LeCroy will not suffer any negative consequences under
the terms of the license agreement as a result of any of the above-mentioned
investments or acquisitions.
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD AFFECT THE MARKET PRICE OF
OUR STOCK OR OUR ABILITY TO SELL OUR BUSINESS.
Our certificate of incorporation, by-laws, and stockholders rights plan, as
well as the provisions of the Tektronix license agreement described above,
contain anti-takeover provisions that could make it difficult for a third party
to acquire control of us. Pursuant to the provisions contained in our bylaws,
certificate of incorporation and stockholder rights plan, we can issue preferred
stock with rights senior to those of our common stock without any further vote
or action by our stockholders. Our board of directors can eliminate the right of
our stockholders to act by written consent and our board of directors can impose
various procedural and other requirements that could make it more difficult for
our stockholders to effect certain corporate actions.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We purchase materials from suppliers and sell our products around the world
and maintain investments in foreign subsidiaries, all denominated in a variety
of currencies. As a consequence, we are 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 LeCroy 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, we 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 our foreign currency
risk related to these assets or liabilities. Other than this program, we do not
attempt to reduce our 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, our financial reporting currency, or
otherwise, will not adversely affect our results of operations. Moreover,
fluctuations in exchange rates could affect the demand for our products. During
fiscal 2003, 2002 and 2001, foreign currency exchange losses on assets or
liabilities denominated in other than their functional currencies, net of gains
or (losses) on related foreign exchange forward contracts, approximated ($0.4)
million, ($0.1) million, and ($0.8) million, respectively. These net losses in
fiscal 2003, 2002 and 2001 include gross gains of $0.1 million, $0.2 million and
$0.3 million. At June 30, 2003 and 2002, we had approximately $6.7 million and
$12.8 million, respectively, of open foreign exchange forward contracts all with
maturities of three months or less.
We performed a sensitivity analysis assuming a hypothetical 10% adverse
change in foreign currency exchange rates on our foreign exchange forward
contracts and our 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, therefore, our results of operations, financial position or cash flows.
We are exposed to adverse changes in interest rates primarily due to our
investment in cash and cash equivalents. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 1% adverse change
in interest rates, which would not have been significant to our results of
operations, financial position or cash flows.
31
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
LECROY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report............................................................................ 33
Consolidated Balance Sheets as of June 30, 2003 and 2002................................................ 35
Consolidated Statements of Operations for the years ended June 30, 2003, 2002 and 2001.................. 36
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2003, 2002 and 2001........ 37
Consolidated Statements of Cash Flows for the years ended June 30, 2003, 2002 and 2001.................. 38
Notes to Consolidated Financial Statements.............................................................. 39
32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
LeCroy Corporation:
We have audited the accompanying consolidated balance sheet of LeCroy
Corporation and subsidiaries as of June 30, 2003, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. In connection with our audit of the 2003 consolidated financial
statements, we also audited the 2003 financial statement schedule as listed in
Item 15 of the Company's Form 10-K. These consolidated financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedule
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides 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 and subsidiaries as of June 30, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related 2003 consolidated 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/ KPMG LLP
Short Hills, New Jersey
August 5, 2003
33
INDEPENDENT AUDITOR' REPORT
The Board of Directors and Stockholders
LeCroy Corporation:
We have audited the accompanying consolidated balance sheet of LeCroy
Corporation and subsidiaries as of June 30, 2002 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended June 30, 2002 and 2001. Our audits also included the financial statement
schedule as listed in Item 15 of the Company's Form 10-K for the years ended
June 30, 2002 and 2001. These consolidated financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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 and subsidiaries as of June 30, 2002, and the consolidated results
of its operations and its cash flows for the years ended June 30, 2002 and 2001,
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related consolidated financial statement
schedule for the years ended June 30, 2002 and 2001, 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
July 31, 2002
34
LECROY CORPORATION
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
June 30,
In thousands, except par value and share data 2003 2002
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents......................................................... $ 30,851 $ 27,322
Accounts receivable, net of reserves of $394 and $422
at June 30, 2003 and 2002, respectively......................................... 20,523 23,880
Inventories, net.................................................................. 24,720 28,108
Other current assets.............................................................. 10,012 11,873
-------- --------
Total current assets......................................................... 86,106 91,183
Property and equipment, net............................................................ 20,021 21,354
Other assets........................................................................... 16,025 14,454
-------- --------
Total assets................................................................. $122,152 $126,991
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................. $ 10,937 $ 12,971
Accrued expenses and other liabilities............................................ 12,338 14,947
-------- --------
Total current liabilities.................................................... 23,275 27,918
Deferred revenue and other non-current liabilities..................................... 3,028 4,302
-------- --------
Total liabilities............................................................ 26,303 32,220
Commitments and contingencies
Redeemable convertible preferred stock, $.01 par value (authorized 5,000,000
shares of preferred stock; 500,000 shares issued and outstanding
designated as redeemable convertible preferred stock; liquidation value,
$15,735 and $14,049 at June 30, 2003 and 2002, respectively)................... 15,335 13,266
-------- --------
Stockholders' Equity:
Common stock, $.01 par value (authorized 45,000,000 shares; 10,412,562 and
10,323,071 issued and outstanding at June 30, 2003 and 2002, respectively)..... 104 103
Additional paid-in capital........................................................ 79,864 81,279
Warrants to purchase common stock................................................. 2,165 2,165
Accumulated other comprehensive loss.............................................. (1,598) (3,695)
Retained earnings (deficit)....................................................... (21) 1,653
--------- --------
Total stockholders' equity................................................... 80,514 81,505
-------- --------
Total liabilities and stockholders' equity................................... $122,152 $126,991
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
35
LECROY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
Years Ended June 30,
In thousands, except per share data 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Revenues:
Digital oscilloscopes and related products.............................. $ 95,008 $ 101,077 $ 129,425
High-energy physics products............................................ - 1,419 3,757
Service and other....................................................... 12,851 8,960 8,206
--------- --------- ---------
Total revenues....................................................... 107,859 111,456 141,388
Cost of sales (included in fiscal 2003 is $2,280 of asset impairment charges and
$163 of severance charges; included in fiscal 2002 is $3,601 of inventory
charges and $1,035 of severance charges; included in fiscal 2001
is $70 of severance charges)............................................ 51,471 59,982 67,838
--------- --------- ---------
Gross profit......................................................... 56,388 51,474 73,550
--------- --------- ---------
Operating expenses:
Selling, general and administrative (included in fiscal 2003 is $286 of
plant closing costs and $2,382 of severance charges, partially offset by
the reversal of an unused 2002 restructuring reserve of $78; included in
fiscal 2002 is $3,020 of severance charges; included in fiscal 2001 is
$724 of severance charges, partially offset by the reversal of an unused
1999 restructuring reserve of $243)................................... 40,940 40,212 44,459
Research and development (included in fiscal 2003, 2002 and 2001 is $670,
$185 and $117 of severance charges, respectively; included in fiscal
2002 is a $4,000 technology access fee)............................... 18,226 22,006 17,682
--------- --------- ---------
Total operating expenses............................................. 59,166 62,218 62,141
--------- --------- ---------
Operating (loss) income...................................................... (2,778) (10,744) 11,409
Other (expense) income, net............................................. (84) 188 (471)
---------- --------- ----------
(Loss) income from continuing operations before income taxes and the
cumulative effect of an accounting change............................ (2,862) (10,556) 10,938
Benefit from income taxes............................................... 1,059 4,307 897
--------- --------- ---------
(Loss) income from continuing operations before the cumulative effect
of an accounting change.............................................. (1,803) (6,249) 11,835
Discontinued operations:
Loss from discontinued operations, net of tax benefit of $957 in
fiscal 2001 .......................................................... - - (1,442)
Gain (loss) on sale, net of tax (provision) benefit of ($75) and $314 in
2003 and 2001, respectively........................................... 129 - (552)
--------- --------- ---------
(Loss) income before the cumulative effect of an accounting change........... (1,674) (6,249) 9,841
Cumulative effect of an accounting change for revenue recognition,
net of tax benefit of $2,728........................................ - - 4,417
--------- --------- ---------
Net (loss) income............................................................ (1,674) (6,249) 5,424
Charges related to convertible preferred stock............................... 2,069 1,876 1,700
Cumulative effect of an accounting change for preferred stock................ - - 1,848
--------- --------- ---------
Net (loss) income applicable to common stockholders.......................... $ (3,743) $ (8,125) $ 1,876
========= ========= =========
(Loss) income per common share-basic:
(Loss) income from continuing operations before the cumulative effect
of an accounting change applicable to common stockholders............. $ (0.37) $ (0.81) $ 1.20
Gain (loss) from discontinued operations................................ 0.01 - (0.24)
Cumulative effect of an accounting change.............................. - - (0.74)
--------- --------- ---------
Net (loss) income applicable to common stockholders.................... $ (0.36) $ (0.81) $ 0.22
========= ========= =========
(Loss) income per common share-diluted:
(Loss) income from continuing operations before the cumulative effect
of an accounting change applicable to common stockholders............ $ (0.37) $ (0.81) $ 1.15
Gain (loss) from discontinued operations................................ 0.01 - (0.23)
Cumulative effect of an accounting change.............................. - - (0.71)
--------- --------- ---------
Net (loss) income applicable to common stockholders.................... $ (0.36) $ (0.81) $ 0.21
========= ========= =========
Weighted average number of common shares:
Basic.................................................................. 10,364 10,052 8,476
Diluted................................................................ 10,364 10,052 8,847
The accompanying notes are an integral part of these
consolidated financial statements.
36
LECROY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Common Additional Other Retained
-------------- Stock Paid-in Comprehensive Earnings
Shares Amount Warrants Capital Income (Loss) (Deficit) Total
In thousands ------ ------ -------- --------- ------------- --------- -----
- ------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000................... 7,803 $ 78 $ 1,848 $41,911 $ (4,629) $ 7,901 $47,109
-------
Comprehensive income:
Net income............................. 5,424 5,424
Foreign currency translation........... (2,412) (2,412)
Unrealized loss on marketable securities (507) (507)
-------
Total comprehensive income................. 2,505
-------
Stock option and stock purchase plans...... 188 2 2,427 2,429
Tax benefit from exercise of stock options. 3,135 3,135
Charges related to convertible preferred stock 1,847 (3,547) (1,700)
Issuance of shares in private placements... 517 5 5,191 5,196
Issuance of shares for acquisition......... 100 1 974 975
Issuance of stock warrants................. 1,366 (106) 1,260
Exercise of stock warrants................. 126 1 (1,366) 1,366 1
Securities offering costs.................. (430) (430)
------ ----- ------ -------- ------- ------ -------
Balance at June 30, 2001................... 8,734 87 1,848 56,315 (7,548) 9,778 60,480
-------
Comprehensive loss:
Net loss............................... (6,249) (6,249)
Foreign currency translation........... 4,213 4,213
Reversal of cumulative unrealized gain
on sale of marketable securities.... (360) (360)
-------
Total comprehensive loss................... (2,396)
-------
Stock option and stock purchase plans...... 160 2 2,031 2,033
Tax benefit from exercise of stock options. 82 82
Charges related to convertible preferred stock (1,876) (1,876)
Issuance of shares in private placement.... 1,429 14 24,986 25,000
Issuance of stock warrants................. 317 (317) -
Securities offering costs.................. (1,818) (1,818)
------ ----- ------ -------- ------- ------ -------
Balance at June 30, 2002................... 10,323 103 2,165 81,279 (3,695) 1,653 81,505
-------
Comprehensive loss:
Net loss............................... (1,674) (1,674)
Foreign currency translation........... 2,097 2,097
-------
Total comprehensive income................. 423
-------
Stock option and stock purchase plans...... 90 1 654 655
Charges related to convertible preferred stock (2,069) (2,069)
------ ----- ------ -------- ------- ------ -------
Balance at June 30, 2003................... 10,413 $ 104 $ 2,165 $ 79,864 $(1,598) $ (21) $80,514
------ ----- ------ -------- ------- ------ -------
The accompanying notes are an integral part of these
consolidated financialstatements.
37
LECROY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------
Years Ended June 30,
In thousands 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................................................ $ (1,674) $ (6,249) $ 5,424
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization.............................................. 6,752 6,215 5,231
Deferred income taxes...................................................... (1,674) (4,466) (3,957)
Impairment of intangible assets............................................ 2,030 - -
Recognition of deferred revenue............................................ (1,419) (1,560) (1,106)
Loss on disposal of property and equipment................................. 52 - -
Inventory and severance charges............................................ - 3,772 -
Loss on sale of marketable securities...................................... - 122 -
Tax benefit from exercise of stock options................................. - 82 537
Cumulative effect of an accounting change, net of taxes.................... - - 4,417
(Gain) loss on sale of discontinued operations, net of taxes............... (129) - 552
Change in operating asset and liabilities:
Accounts receivable......................................................... 4,082 2,573 (8,130)
Inventories................................................................. 3,582 630 (7,661)
Other current and non-current assets........................................ 415 1,117 (1,978)
Accounts payable, accrued expenses and other liabilities.................... (5,334) (9,099) 7,257
-------- -------- --------
Net cash provided by (used in) operating activities.............................. 6,683 (6,863) 586
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (2,633) (4,095) (4,858)
Investment in computer software............................................. - - (2,097)
Purchase of intangible assets............................................... (1,260) - -
Proceeds from the sale of marketable securities............................. - 1,849 -
Proceeds from the sale of business segment.................................. - - 12,000
-------- -------- --------
Net cash (used in) provided by investing activities.............................. (3,893) (2,246) 5,045
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and capital leases ......................... - - 458
Repayment of borrowings under line of credit and capital leases............. (85) (81) (11,000)
Proceeds from issuance of common stock...................................... - 23,182 4,766
Proceeds from employee stock purchase and option plans...................... 619 1,722 2,429
-------- -------- --------
Net cash provided by (used in) financing activities.............................. 534 24,823 (3,347)
-------- -------- --------
Effect of exchange rate changes on cash.......................................... 205 159 114
-------- -------- --------
Net increase in cash and cash equivalents................................... 3,529 15,873 2,398
Cash and cash equivalents, beginning of the year............................ 27,322 11,449 9,051
-------- -------- --------
Cash and cash equivalents, end of the year.................................. $ 30,851 $ 27,322 $ 11,449
========= ========= ========
Supplemental Cash Flow Disclosure
Cash paid during the year for:
Interest.............................................................. $ 104 $ 119 $ 462
Income taxes.......................................................... 816 716 590
Non-cash investing and financing activities:
Acquisition of distributor in exchange for amounts due to the Company...... 300 - -
Issuance of shares for acquisition......................................... - - 1,000
The accompanying notes are an integral part of these
consolidated financial statements.
38
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The LeCroy Corporation (the "Company" or "LeCroy"), was founded and
incorporated in the State of New York in 1964 and reincorporated in the State of
Delaware in 1995. Using the Company's core competency of WaveShape Analysis,
defined as the capture and analysis of complex electronic signals, the Company
develops, manufactures, sells and licenses signal acquisition and analysis
products. The Company's principal product line consists of a family of
high-performance digital oscilloscopes used primarily by electrical design
engineers in various markets, including computer / semiconductor, data storage,
communications and power measurement. The Company also produces modular
digitizers and various electronic components. In addition, the Company generates
revenue by providing service on all of its products beyond the normal warranty
period.
Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of LeCroy
Corporation and its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to prior-year amounts to conform to the current-year
presentation. The Company's 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. These
estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the revenues and expenses reported during
the period. Examples include the allowance for doubtful accounts; allowance for
excess and obsolete inventory; intangible asset valuation; determining when
impairments are other-than-temporary; and the assessment of the valuation of
deferred income taxes and income tax reserves. These estimates and assumptions
are based on management's judgment and available information and, consequently,
actual results could differ from these 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 28, 2003, June 29,
2002 and June 30, 2001). Each of these fiscal years represented a 52-week
period. The majority of the foreign subsidiaries have a June 30 fiscal year-end.
The consolidated financial statement year-end references are stated as June 30.
Revenue Recognition
Revenue is recognized when products are shipped or services are rendered
to customers, net of allowances for anticipated returns. The Company's
revenue-earning activities generally involve delivering or producing goods, and
revenues are considered to be earned when the Company has completed the process
by which it is entitled to such revenues. The following criteria are used for
revenue recognition; pervasive evidence of an arrangement exists, delivery has
occurred, selling price is fixed or determinable and collection is reasonably
assured. 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 and accordingly, recognized as contract elements are completed.
Beginning in fiscal 2001 with the adoption of the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition
in Financial Statements," revenue from license fees under agreements that have
exclusivity clauses and, from the licensee's perspective, have ongoing
requirements or expectations that are more than perfunctory, are recognized over
the term of the related agreements. An on-going requirement or expectation would
be considered more than perfunctory if any party to the contract considers it to
be "essential to the functionality" of the delivered product or service or
failure to complete the activities would result in the customer receiving a full
or partial refund or rejecting the products delivered or services performed to
date.
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 $1.3 million during fiscal years 2003, 2002 and
2001. Such license fees were included in Service and other revenue in the
Consolidated Statements of Operations. As of June 30, 2003, the remaining
balance of pre-tax deferred license fee revenue was $3.3 million.
39
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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"), "Modifications of SOP 97-2 with Respect to Certain
Transactions." Revenues 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 determination of
fair value of each element in multiple element-arrangements is based on vendor
specific objective evidence ("VSOE"). The Company analyzes all of the elements
and determines if there is 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 its MAUI Instrument Operating System technology in
fiscal 2003. This perpetual license was included in Service and other revenue in
the Consolidated Statements of Operations. Maintenance fees included in the
license agreement will be recognized pro rata for each year of maintenance
purchased.
Stock-Based Compensation
The Company 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," ("APB No. 25") and related
interpretations. No stock-based employee compensation cost for the stock option
plans is reflected in the Company's 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. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
established accounting and disclosure requirements using a fair value method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to adopt the disclosure requirements of SFAS No.
123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," an amendment to Financial Accounting Standards Board ("FASB")
Statement No. 123.
The following table illustrates the effect on net (loss) income and net
(loss) income per common share applicable to common stockholders as if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation.
YEARS ENDED
JUNE 30,
-----------
2003 2002 2001
---- ---- ----
Net (loss) income, as reported....................... $(1,674) $ (6,249) $ 5,424
Add: stock-based compensation expense included in
reported net (loss) income, net of income taxes..... 24 87 -
Deduct: stock-based compensation expense determined
under fair value based method for all awards, net
of income taxes ................................... (2,143) (3,373) (2,539)
------- -------- -------
Pro forma net (loss) income.......................... (3,793) (9,535) 2,885
Charges related to convertible preferred stock....... 2,069 1,876 3,548
------- -------- -------
Pro forma net (loss) income applicable to common
stockholders....................................... $(5,862) $(11,411) $ (663)
======= ======== =======
(Loss) income per common share applicable to
common stockholders:
Basic, as reported.............................. $ (0.36) $ (0.81) $ 0.22
Diluted, as reported............................ $ (0.36) $ (0.81) $ 0.21
Basic, pro forma................................ $ (0.57) $ (1.14) $ (0.08)
Diluted, pro forma.............................. $ (0.57) $ (1.14) $ (0.08)
40
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 2.84% for 2003, 4.09% for 2002 and 4.82% for
2001; no dividends; volatility factors of the expected market price of the
Company's Common Stock of 71.4% for 2003, 71.2% for 2002 and 72.4% for 2001 and
a weighted average expected life of the options of 4.7 years for 2003, 4.4 years
for 2002 and 4.4 years for 2001. For purposes of pro forma disclosures, the
estimated fair value of the options granted is amortized to expense over the
option vesting periods. The weighted average grant date fair value of options
granted during fiscal years 2003, 2002 and 2001 was $6.16, $9.93 and $11.18,
respectively.
Warranty
The Company provides a warranty on its products, typically extending three
years after delivery and accounted for in accordance with SFAS No. 5,
"Accounting for Contingencies." Estimated future warranty obligations related to
products are provided by charges to operations in the period that the related
revenue is recognized. These estimates are derived from historical data of
product reliability. The expected failure rate is arrived at in terms of units,
which are then converted into labor hours to which an average fully burdened
cost per hour is applied to derive the amount of accrued warranty required. On a
quarterly basis, the Company studies trends of warranty claims and performance
of specific products and adjusts its warranty obligation through charges or
credits to operations.
Research and Development
Research and development costs are expensed as incurred.
Cash and Cash Equivalents
Cash in excess of current operating requirements are invested in cash
equivalents, which are short-term, highly liquid interest bearing investments
with maturities of three months or less at the date of purchase and are stated
at cost, which approximates market value.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Replacements, maintenance and repairs which do not improve or extend the life of
the respective asset are expensed as incurred. Depreciation and amortization of
property and equipment is provided on a straight-line basis over the asset's
estimated useful life or related lease term as follows:
Building..................................................... 20-32 years
Furniture, machinery and equipment........................... 2-12 years
Computer software............................................ 5-7 years
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
Impairment of Long-Lived Assets and Acquired Intangible Assets
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company monitors events and changes in
circumstances that could indicate carrying amounts of long-lived assets,
including amortizable intangible assets, may not be recoverable. When such
events or changes in circumstances occur, the Company assesses the
recoverability of long-lived assets by determining whether the carrying value of
such assets will be recovered through undiscounted expected future cash flows.
If the undiscounted cash flows are less than the carrying amount, an impairment
loss is recorded to the extent that the carrying amount exceeds the fair value.
41
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Goodwill
The Company adopted 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 2003 and 2002 and determined that there was
no impairment to its recorded goodwill balances. Had the Company been accounting
for its goodwill under SFAS No. 142 for all fiscal years presented, the
Company's net (loss) income and net (loss) income per common share applicable to
common stockholders would have been as follows:
YEARS ENDED
JUNE 30,
-------------
2003 2002 2001
---- ---- ----
Net (loss) income, as reported.............................. $ (1,674) $ (6,249) $ 5,424
Add back goodwill amortization, net of income taxes......... - - 279
---------- ---------- ----------
Net (loss) income, pro forma................................ (1,674) (6,249) 5,703
Charges related to convertible preferred stock.............. 2,069 1,876 3,548
---------- ---------- ----------
Net (loss) income applicable to common stockholders, pro
forma..................................................... $ (3,743) $ (8,125) $ 2,155
========== ========== ==========
(Loss) income per common share applicable to
common stockholders:
Basic, as reported..................................... $ (0.36) $ (0.81) $ 0.22
Diluted, as reported................................... $ (0.36) $ (0.81) $ 0.21
Basic, pro forma....................................... $ (0.36) $ (0.81) $ 0.25
Diluted, pro forma..................................... $ (0.36) $ (0.81) $ 0.24
Concentration of Credit Risk
The Company develops and manufactures electronic equipment, principally
digital oscilloscopes, which it sells primarily to design engineers and
researchers in a broad range of industries, including computer / semiconductor,
data storage, communications and power measurement. Sales are to all regions of
the United States as well as to a multitude of foreign countries. Revenue
derived from one customer, Iwatsu Electric Co. ("Iwatsu"), accounted for 11% of
the Company's consolidated revenues in fiscal 2002. No other customer accounted
for more than 10% the Company's consolidated revenues in any of the last three
fiscal years. 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. Credit losses have been minimal and
within management's expectations.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of foreign exchange forward
contracts and 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.
Income Taxes
Deferred tax assets and liabilities are recognized under the asset and
liability method based upon the difference between the amounts reported for
financial reporting and tax purposes. These deferred taxes are measured by
applying current enacted tax rates. A valuation allowance is provided when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the period in which related
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. In general, 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.
42
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 with translation
adjustments recorded in Accumulated other comprehensive loss, which is a
separate component of Stockholders' equity in the Consolidated Balance Sheets.
Transaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency are
included in Other (expense) income, net in the Consolidated Statements of
Operations. Losses in fiscal 2003, 2002 and 2001 resulting from foreign currency
transactions, net of gains or losses on related foreign exchange forward
contracts, approximated ($0.4) million, ($0.1) million and ($0.8) million,
respectively. These net losses in fiscal 2003, 2002 and 2001 include gross gains
of $0.1 million, $0.2 million and $0.3 million.
Financial Instruments
Cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses and other current liabilities reported in the Consolidated Balance
Sheets equal or approximate their fair value due to their short term of
maturity.
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 underlying assets and liabilities. The net gains or losses
resulting from changes in the fair value of these derivatives and on assets or
liabilities denominated in other than their functional currencies are included
in Other income (expense), net in the Consolidated Statements of Operations. At
June 30, 2003 and 2002, the Company had approximately $6.7 million and $12.8
million, respectively, of open foreign exchange forward contracts all with
short-term maturities of less than three months.
The Company classified its equity investments as available for sale and
reported them at fair value. Unrealized gains or losses were reported net of
income taxes and foreign exchange effect in Accumulated other comprehensive loss
until disposition. During the fourth quarter of fiscal 2002, the Company sold
the remaining 1.0 million shares of its equity investment in Iwatsu and reversed
($0.4) million of unrealized gains previously recorded in Accumulated other
comprehensive loss and recorded a pre-tax loss of ($0.1) million in Other
(expense) income, net in the Consolidated Statement of Operations.
Per Share Information
Basic earnings per share ("EPS") excludes potential dilution and is
computed by dividing net (loss) income applicable 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 are comprised of
convertible preferred stock, employee stock options and warrants to purchase
common stock. Common stock equivalents related to employee stock options and
warrants to purchase common stock were 54,000, 333,000 and 371,000, in fiscal
2003, 2002 and 2001, respectively. In fiscal 2001, 500,000 of common stock
equivalents related to the Company's convertible preferred stock and, in fiscal
2003 and 2002, all common stock equivalents were excluded from the loss per
common share calculation because the effect would be anti-dilutive.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. SFAS No. 143 addresses the accounting and reporting requirements for legal
obligations associated with the retirement of tangible long-lived assets. In
general, SFAS No. 143 requires entities to capitalize asset retirement costs of
related long-lived assets in the period in which they meet the definition of a
liability and to allocate those costs to expense using a systematic and rational
method. The adoption of this Statement, at the beginning of fiscal year 2003,
did not have an impact on the Company's consolidated financial statements.
43
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In July 2002, 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. 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. The Company adopted the provisions of
SFAS No. 146 effective for exit or disposal activities initiated after December
31, 2002. The adoption of this Statement did not have an impact on the Company's
consolidated financial statements.
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 effective in fiscal year
2004. Management believes the adoption of the provisions of EITF Issue No. 00-21
will not have a material effect on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
discussed in SFAS No. 133, clarifies when a derivative contains a financing
component, amends the definition of an underlying to conform it to language used
in FIN 45 and amends certain other existing pronouncements. These changes are
intended to result in more consistent reporting of contracts as either
derivatives or hybrid instruments. The Statement is generally effective for
contracts entered into or modified after, and for hedging relationships
designated after, June 30, 2003. The Company does not expect SFAS No. 149 to
have a material effect on its consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for classifying certain financial instruments that
represent obligations, yet also have characteristics similar to equity
instruments. Specifically, SFAS No. 150 addresses the accounting for instruments
such as mandatory redeemable securities, certain option contracts and
obligations to be settled in shares. SFAS No. 150 is effective for interim
periods beginning after June 15, 2003. The Company does not expect SFAS No. 150
to have a material effect on its consolidated financial statements.
3. RESTRUCTURING AND OTHER CHARGES (CREDITS), NET
During the fourth quarter of fiscal 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 and recorded lease termination costs of $0.3 million and a charge for
severance of $0.6 million; $0.1 million of which was recorded in Cost of sales,
$0.6 million recorded in Selling, general and administrative expense and $0.2
million recorded in Research and development in the Consolidated Statement of
Operations. The implementation of this plan resulted in headcount reductions of
27 employees or approximately 7% of the workforce as compared to June 30, 2002.
As of June 30, 2003, $0.3 million of the total $0.9 million has been paid and
$0.6 million remains in Accrued expenses and other liabilities in the
Consolidated Balance Sheet. Lease termination costs under this plan will be paid
by the end of the third quarter of fiscal 2006 and severance will be paid by the
end of the fourth quarter of fiscal 2004.
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 $2.7 million; $0.1 million of which was recorded in
Cost of sales, $2.1 million recorded in Selling, general and administrative
expense and $0.5 million recorded in Research and development in the
Consolidated Statement of Operations. The plan implemented during fiscal 2003
resulted in improved operating efficiencies and headcount reductions of 38
employees or approximately 9% of the workforce as compared to June 30, 2002. As
of June 30, 2003, $2.0 million of the total $2.7 million has been paid and $0.7
44
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
million remains in Accrued expenses and other liabilities in the 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
recorded in Cost of sales, $3.0 million in Selling, general and administrative
expense and $0.2 million in Research and development in the Consolidated
Statement of Operations) 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 $4.2 million total charge, $4.0
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 June 30, 2003,
$3.7 million of the total $4.0 million has been paid, $0.2 million remains
accrued in Accrued expenses and other liabilities in the Consolidated Balance
Sheet and $0.1 million of unused restructuring reserve was credited to Selling,
general and administrative expense in the fourth quarter of fiscal 2003.
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.
During the fourth quarter of fiscal 2001, in anticipation of continued
weakness of the economy, the Company reduced its workforce by 25 employees or
approximately 5% as compared to June 30, 2000. As a result of this workforce
reduction, the Company recorded a severance charge of $0.9 million ($0.1 million
recorded in Cost of sales, $0.7 million in Selling, general and administrative
expense and $0.1 million in Research and development in the Consolidated
Statement of Operations). The 2001 restructuring plan was completed as of June
30, 2002.
During fiscal 1999, the Company adopted a restructuring plan, the
objectives of which were to consolidate its oscilloscope operations in order to
enhance operating efficiencies and to dedicate resources to the development of
advanced technologies. The 1999 restructuring plan was completed in fiscal 2001.
Cumulative through fiscal 2001, $8.2 million of the initial restructuring
reserve established had been paid or used to reduce asset balances. Of this $8.2
million, $2.1 million related to inventories, $3.0 million related to severance
and other employee benefit costs, $1.3 million related to the Geneva facility
lease and $1.8 million related to the write-down of 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 a
result, 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. The residual balance of $0.2 million was credited to Selling,
general and administrative expense in fiscal 2001.
4. DISCONTINUED OPERATIONS
In August 2000, the Company divested its Vigilant Networks business
segment, which comprised its Vigilant Networks, Inc. ("Vigilant") and Digitech
Industries, Inc. ("Digitech") 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,
the Company had made substantial investments in the Vigilant Networks business
segment in terms of selling, marketing, research and development and
administrative expenses. While the network analyzer had a unique technology, the
Company decided that it could not continue to invest the financial resources
necessary to capitalize on its future growth potential.
In August 2000, the Company closed the sale of the assets and business of
Vigilant and a portion of the assets and business of Digitech for gross proceeds
of $12.0 million. The remaining business of Digitech was classified as
discontinued operations. 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. After deducting the value of these warrants, along with fees and
certain retained liabilities, the Company recorded a loss of ($0.6) million, net
of a $0.3 million income tax benefit, on the sale and discontinuance of the
Vigilant Networks business segment. This includes a $1.4 million adjustment to
the loss recorded in the fourth quarter of fiscal 2001 due to changes in
estimates. Fiscal 2001 revenues from discontinued operations were $0.4 million
(through the measurement date) and losses from discontinued operations, net of
tax, were ($1.4) million (through the measurement date).
45
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In fiscal 2003, the Company recorded a $0.1 million Gain on sale of
discontinued operations in the Consolidated Statement of Operations, net of a
$0.1 million tax provision, for the sale of the residual assets and business of
Digitech and the reversal of unused accrued discontinued operations reserves.
5. ACCOUNTS RECEIVABLE, NET
The Company entered into an agreement with two of its customers, who are
also vendors, in which it was granted the legal right to offset outstanding
accounts receivable balances against outstanding accounts payable balances. At
June 30, 2003 and 2002, the Company netted approximately $1.7 million and $4.8
million, respectively, of accounts receivable against accounts payable on the
Consolidated Balance Sheets.
6. INVENTORIES
Inventories, including demonstration units in finished goods, are stated at
the lower of cost (first-in, first-out method) or market. Inventories consisted
of the following:
JUNE 30,
--------
2003 2002
---- ----
Raw materials.................. $ 6,372 $ 7,735
Work in process................ 5,696 5,571
Finished goods................. 12,652 14,802
----------- ---------
$ 24,720 $ 28,108
=========== =========
The allowance for excess and obsolete inventory included above amounted to
$2.1 million at June 30, 2003 and $1.5 million at June 30, 2002. The value of
demonstration units included in finished goods was $9.1 million and $7.5 million
at June 30, 2003 and 2002, respectively.
7. OTHER CURRENT ASSETS
Other current assets consist of the following:
JUNE 30,
--------
2003 2002
---- ----
Deferred tax assets, net....... $ 7,200 $ 8,700
Other.......................... 2,812 3,173
----------- -----------
$ 10,012 $ 11,873
=========== ===========
8. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30,
--------
2003 2002
---- ----
Land and building................. $ 13,288 $ 12,814
Furniture, machinery and equipment 34,427 31,556
Computer software................. 6,190 6,074
----------- -----------
53,905 50,444
Less: Accumulated depreciation and
amortization............... (33,884) (29,090)
----------- -----------
$ 20,021 $ 21,354
=========== ===========
Depreciation and amortization expense for the fiscal years ended June 30,
2003, 2002 and 2001 was $4.7 million, $4.3 million and $3.3 million,
respectively.
9. OTHER ASSETS
Other assets consist of the following:
JUNE 30,
--------
2003 2002
---- ----
Intangibles, net.................. $ 5,232 $ 7,217
Deferred tax assets, net.......... 7,934 4,760
Goodwill.......................... 1,874 1,574
Other............................. 985 903
----------- -----------
$ 16,025 $ 14,454
=========== ===========
46
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 Consolidated Balance Sheets as of the dates indicated:
JUNE 30,
WEIGHTED ----------
AVERAGE LIVES 2003 2002
------------- -------- ---------
Intangible assets:
Amortizable intangible assets:
Technology, manufacturing and distribution rights..... 4.7 years $ 7,010 $ 10,332
Patents and other intangible assets................... 4.4 years 661 661
Effect of currency translation on intangible assets... 105 212
Accumulated amortization.............................. (2,544) (3,988)
-------- ---------
Net carrying amount...................................... $ 5,232 $ 7,217
======== =========
Non-amortizable intangible assets:
Goodwill (see Note 21)................................ $ 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 related 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 the Company's 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 Consolidated Balance Sheet.
As of June 30, 2003, the Company paid $1.3 million for the technology license
with the remaining $0.5 million recorded in Accrued expenses and other
liabilities and $0.2 million in Deferred revenue and other non-current
liabilities in the Consolidated Balance Sheet.
Amortization expense for those intangible assets with finite lives was $2.0
million, $1.7 million and $1.3 million for fiscal 2003, 2002 and 2001,
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. Management
estimates intangible assets amortization expense on a straight-line basis in
fiscal 2004 through 2008 will approximate $1.3 million, $1.9 million, $0.7
million, $0.7 million, and $0.6 million, respectively.
10. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
JUNE 30,
--------
2003 2002
---- ----
Compensation and benefits........................... $ 4,489 $ 5,348
Income taxes........................................ 2,595 2,634
Deferred license fee revenue........................ 1,296 1,296
Warranty............................................ 1,235 1,247
Retained liabilities from discontinued operations... 456 1,474
Other............................................... 2,267 2,948
----------- -----------
$ 12,338 $ 14,947
=========== ===========
11. WARRANTIES
The following table is a reconciliation of the changes in the Company's
aggregate product warranty during the period ending June 30, 2003 and 2002.
JUNE 30,
--------
2003 2002
---- ----
Balance at beginning of period...................... $ 1,247 $ 1,529
Accruals for warranties issued during the period.. 1,160 688
Warranty costs incurred during the period......... (1,172) (970)
----------- -----------
Balance at end of period............................ $ 1,235 $ 1,247
=========== ===========
47
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In connection with the agreement to license the Company's MAUI Instrument
Operating System technology during the third quarter of fiscal 2003, the Company
agreed to indemnify the purchaser for defense, settlement or payment of any
judgment for intellectual property claims related to the license agreement. As
of June 30, 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 its
products. Such indemnification provisions are accounted for in accordance with
SFAS No. 5, "Accounting for Contingencies." To date, claims under such
indemnification provisions have not been significant.
12. INCOME TAXES
The components of (loss) income from continuing operations before income
taxes are as follows:
YEARS ENDED
JUNE 30,
-----------
2003 2002 2001
---- ---- ----
Domestic................... $ (2,750) $(10,569) $ 10,032
Foreign.................... (112) 13 906
-------- -------- --------
$ (2,862) $(10,556) $ 10,938
======== ======== ========
The income tax benefit (provision) from continuing operations consists of
the following:
YEARS ENDED
JUNE 30,
-----------
2003 2002 2001
---- ---- ----
Current:
U.S. federal.......................................... $ - $ 325 $ (1,262)
U.S. state and local.................................. (93) (128) (410)
Foreign............................................... (596) (356) (646)
Deferred:
U.S. federal.......................................... 1,613 4,105 2,575
U.S. state and local.................................. 135 361 583
Foreign............................................... - - 57
-------- -------- --------
$ 1,059 $ 4,307 $ 897
======== ======== ========
The reconciliations between the benefit (provision) for income taxes at the
U.S. federal statutory rate and the Company's effective tax rate from continuing
operations is as follows:
YEARS ENDED
JUNE 30,
-----------
2003 2002 2001
---- ---- ----
Benefit (provision) at U.S. federal statutory rate....... $ 1,002 $ 3,695 $ (3,828)
(Increase) reduction to statutory tax from:
Difference between U.S. and foreign rates........... (336) (352) (305)
Use of net operating losses to offset taxable
income........................................... - - 3,159
Reversal of tax contingency reserve................. - 400 -
Adjustment of net tax assets........................ 524 644 4,096
Repatriation of foreign earnings.................... - - (1,622)
State income taxes, net of federal benefit.......... (61) (80) (627)
Other, net.......................................... (70) - 24
-------- -------- --------
Income tax benefit....................................... $ 1,059 $ 4,307 $ 897
======== ======== ========
48
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Significant components of the Company's net deferred tax assets as of June 30,
2003 and 2002 were as follows:
JUNE 30,
---------
2003 2002
-------- ----------
Federal and state loss and credit carryforwards......... $ 15,130 $ 12,568
Foreign loss and credit carryforwards................... 1,887 1,908
Inventory and other reserves............................ 3,203 3,924
-------- ---------
Deferred tax assets before valuation allowance.... 20,220 18,400
Valuation allowance..................................... (5,086) (4,940)
-------- ---------
Net deferred tax assets........................... $ 15,134 $ 13,460
======== =========
At June 30, 2003 and 2002, $7.2 million and $8.7 million, respectively, of
the Company's net deferred tax assets were included on the Consolidated Balance
Sheets in Other current assets, with the remaining $7.9 million and $4.8
million, respectively, included in Other assets.
Under SFAS No. 109, "Accounting for Income Taxes," 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 its net deferred tax assets will be realized. Management
assesses the realizability of the net deferred tax assets at each interim and
annual balance sheet date based on actual and forecasted operating results.
Based upon its assessment as of June 30, 2001, management concluded that it was
more likely than not that the Company would realize benefits from its net
deferred tax assets. The Company reduced its reserve against such assets by $6.7
million in the fourth quarter of fiscal 2001, $2.6 million of which related to
deductions from employee stock option exercises and was credited to Additional
paid-in-capital on the Consolidated Balance Sheet. In addition, during fiscal
2001, the Company utilized $8.2 million of net operating losses ($3.2 million
tax benefit) to offset taxable income from continuing operations. During fiscal
2003 and 2002, the Company adjusted the value of certain deferred tax assets by
$1.8 million and $1.2 million, respectively, and based upon its assessment of
all deferred tax assets, increased its valuation allowance by $0.1 million and
$0.6 million, respectively. The net impact of these adjustments was an increase
in deferred taxes of $1.7 million and $0.6 million for fiscal 2003 and 2002,
respectively. Management will continue to assess the realizability of the
deferred tax assets at each interim and annual balance sheet date based on
actual and forecasted operating results.
Historically, it has been the practice of the Company to reinvest
unremitted earnings of foreign subsidiaries. During the fourth quarter of fiscal
2001, however, the Company determined that it would repatriate approximately
$7.0 million in future periods from one of its foreign subsidiaries. The Company
believes repatriation of these earnings will result in additional taxes in the
amount of $1.6 million and has provided for that amount in that year's tax
provision. The cumulative amount of all other undistributed earnings of
consolidated foreign subsidiaries, for which U.S. federal income tax has not
been provided, was $22.1 million at June 30, 2003. These earnings, which reflect
full provision for non-U.S. income taxes, are anticipated to be reinvested
permanently outside the United States. Determining the U.S. income tax liability
that might result if these earnings were remitted is not practicable.
At June 30, 2003, the Company has U.S. federal income tax net operating
loss carryforwards of $28.1 million available to offset future taxable income.
The carryforwards begin to expire at various dates starting in 2012 through
2023. Foreign tax net operating losses of $1.5 million at June 30, 2003 are
available to offset future taxable income of certain foreign subsidiaries. Those
foreign losses that begin to expire at various dates starting in 2004 are $0.1
million and those that do not expire are $1.4 million. Federal, state and
foreign tax credits expire at various dates between 2004 and 2022.
13. DEBT
As of June 30, 2003 and 2002, the Company had 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 defined. A commitment fee of between .375% and .50%
per annum, depending on the Company's Leverage Ratio, as defined, is payable on
any unused amount under the line. This revolving line of credit is secured by a
lien on substantially all of the domestic assets of the Company. As of June 30,
2003, the Company has met its financial covenant requirements and there were no
borrowings outstanding under this line of credit. The credit agreement was
amended on September 2, 2003 to extend the expiration date of the revolving
49
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
line of credit to November 30, 2003. The Company plans to complete its
negotiations and have a new revolving line of credit in place before this
amendment expires.
On June 12, 2000, the Company secured a five year $2.0 million capital
lease line of credit, bearing interest at 12.2%, to fund certain capital
expenditures. As of June 30, 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 Deferred
Revenue and other non-current liabilities on the Consolidated Balance Sheet. The
outstanding borrowings under this line will be repaid by November 2005.
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 ($1.3 million as of June 30, 2003). No
amounts were outstanding under these facilities as of June 30, 2003.
Interest expense included in Other income (expense), net in the
Consolidated Statements of Operations was $0.1 million in fiscal 2003, $0.2
million in fiscal 2002 and $0.5 million in fiscal 2001.
14. STOCK COMPENSATION PLANS
Stock Option Plans
The Company maintains two stock option plans, the Amended and Restated 1993
Stock Incentive Plan ("1993 Plan") and the 1998 Non-Employee Director Stock
Option Plan ("1998 Plan"). The Company's shareholder proposal to approve the
amendment and restatement of the 1993 Plan, which would have extended the
termination date of the 1993 Plan from January 4, 2003 to January 4, 2008, was
withdrawn from consideration by the Board of Directors and not voted on by the
stockholders at the meeting. Accordingly, the 1993 Plan expired on January 4,
2003.
Under the 1993 Plan, options were issued to full-time employees, including
officers and non-employee consultants to purchase shares of Common Stock at an
exercise price not less than 100% of the fair market value on the date of grant.
For individuals who own more than 10% of the Common Stock of the Company, the
exercise price of incentive stock options was not less than 110% of the fair
value on the date of grant. No more than an aggregate of 2,608,696 shares of
Common Stock was allowed to be issued pursuant to the exercise of incentive
stock options granted under the 1993 Plan. This limitation did not apply to
non-qualified stock options or restricted stock awards that were granted under
the 1993 Plan. The vesting period and expiration of each grant was 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 lives of the options are generally
either ten or eleven years from the date of grant.
During fiscal 2002, 17,210 shares of restricted stock were granted to
certain key employees. The fair value of the restricted stock on the date of
grant is being amortized to expense ratably over three years, the period in
which restrictions are removed.
In October 1998, the Board of Directors and stockholders terminated the
1995 Non-Employee Director Stock Option Plan ("1995 Plan") and adopted the 1998
Plan. As of June 30, 2003, stock options issued pursuant to the 1995 Plan of
13,441 are outstanding and vested according to the provisions of the 1995 Plan
on the date the plan was terminated. Pursuant to the 1998 Plan, each
non-employee director received a stock option grant of 15,000 shares exercisable
at the market price on the date the plan was adopted or upon initial election to
the Board of Directors. These options vest ratably over a 36-month period.
Additionally, each non-employee director will receive an annual stock option
grant of 7,000 shares (5,000 shares prior to an amendment dated October 25,
2000) 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.
Stock option transactions for fiscal years 2003, 2002 and 2001 under all
plans are as follows:
50
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
SHARES PER SHARE PRICE
----------------------------------------------
Outstanding at June 30, 2000..................................... 2,438,681 $ 5.95 - $ 37.00 $ 16.85
Granted.......................................................... 222,929 13.88 - 25.00 19.20
Exercised........................................................ (144,438) 5.95 - 23.50 12.90
Cancelled........................................................ (245,389) 5.95 - 32.25 20.87
---------- ------------------ ---------
Outstanding at June 30, 2001..................................... 2,271,783 6.33 - 37.00 16.85
Granted.......................................................... 678,228 10.24 - 23.49 17.15
Exercised........................................................ (102,498) 6.33 - 17.50 11.67
Cancelled........................................................ (170,422) 6.33 - 23.50 17.56
---------- ------------------ ---------
Outstanding at June 30, 2002..................................... 2,677,091 6.33 - 37.00 17.15
Granted.......................................................... 440,250 9.10 - 11.70 10.51
Exercised........................................................ (17,057) 6.33 - 6.33 6.33
Cancelled........................................................ (311,340) 9.20 - 32.25 18.49
---------- ------------------ ---------
Outstanding at June 30, 2003..................................... 2,788,944 $ 6.33 - $ 37.00 $ 16.02
========== ================== =========
The following table summarizes information about stock options outstanding
at June 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT JUNE 30, 2003 AT JUNE 30, 2003
-------------------------------------- ---------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
RANGE SHARES PRICE LIFE (YEARS) SHARES PRICE
----- ------- ----- ------------ --------- -----
$ 6.33 - $ 12.00 697,192 $ 9.39 7.02 268,164 $ 7.70
$ 12.01 - $ 18.00 1,130,797 15.08 6.05 923,174 15.16
$ 18.01 - $ 24.00 900,054 21.44 5.94 679,622 21.76
$ 24.01 - $ 37.00 60,901 29.12 4.97 50,901 29.93
--------- ---------
Total 2,788,944 $ 16.02 6.23 1,921,861 $ 16.84
========= ======= ===== ========= =======
Of the total stock options outstanding, 1,921,861, 1,642,530 and 1,193,719
were exercisable at June 30, 2003, 2002 and 2001, respectively. Stock options
available for grant under the 1998 Plan were 266,000 at June 30, 2003 and under
the 1993 Plan and 1998 Plan were 955,114 and 963,983 at June 30, 2002 and 2001,
respectively.
Employee Stock Purchase Plan
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 the 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. Through June 30, 2003, 387,158 shares have
been issued under the Employee Stock Purchase Plan and 47,625 shares are
available for future issuance at June 30, 2003.
15. 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 the 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. This warrant to purchase
shares of Common Stock is outstanding at June 30, 2003.
51
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
During the third quarter of fiscal 2001, the holders of warrants to
purchase 220,701 shares of Common Stock at $10.05 per share exercised their
rights to a cashless conversion. As a result, 126,646 shares of Common Stock
were issued and $1.4 million, representing the fair value of the warrants at the
date of issue, was transferred from Warrants to purchase common stock to
Additional paid-in capital on the Consolidated Balance Sheet.
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 were used to repay existing indebtedness, fund working
capital requirements and other general corporate purposes.
16. 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 LeCroy'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% 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% 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.
The 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% or more of LeCroy's Common Stock. The rights will expire on
November 2, 2008, unless redeemed prior to that date.
17. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999 (the "Closing"), LeCroy 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 June 30, 2003 was
$15.7 million.
In connection with the private placement of Preferred Stock, the Company
issued 250,000 fully exercisable warrants to purchase shares of Common Stock at
an exercise price of $20. 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 $10.0 million proceeds was allocated to
Warrants to purchase common stock and the remaining $8.2 million was allocated
to redeemable Preferred Stock. The value assigned to the warrants of $1.8
million accretes to the value of the Preferred Stock over five years. The
Company currently records a non-cash charge to net income of approximately $0.4
million per year in arriving at net income available to common stockholders.
On the Closing, LeCroy's stock price was $23.69 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 $1.8
million. This $1.8 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 in arriving at net
income applicable to common stockholders in the calculation of earnings per
share for fiscal 1999.
52
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
During fiscal 2001, the Company adopted the provisions of the FASB's EITF
Issue No. 00-27 "Application of EITF Issue No. 95-5, `Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,' to Certain Convertible Instruments." EITF No. 00-27 adjusts
the calculation of the original conversion discount charge by requiring that the
fair value of the Preferred Stock be reduced by the value assigned to warrants
to buy common stock that were issued with the Preferred Stock. As a result, the
Company recorded an additional $1.8 million cash conversion discount charge in
fiscal 2001 that has been presented as the cumulative effect of a change in
accounting principle in determining net income applicable to common
stockholders.
18. EMPLOYEE BENEFIT PLANS
The Company has a trusteed employee 401(k) savings plan for eligible U.S.
employees under which it contributes an unconditional match up to 50% of
employee contributions up to a maximum employer contribution of 5% of the
employee's eligible compensation. Prior to July 1, 2001, such match was
discretionary. For fiscal 2003, 2002, and 2001, the Company has expensed $0.4
million, $0.3 million and $0.5 million, respectively, in contributions to this
plan.
The Company's subsidiary in Switzerland maintains a defined contribution
plan, which requires employee contributions based upon a percentage of the
employee's earnings, as defined, currently ranging from 2.0% to 6.5%. The
Company makes a matching contribution based also upon a percentage of the
employee's earnings currently ranging from 3.5% to 11.0%. The Company
contributions amounting to $0.3 million in each of fiscal 2003, 2002 and 2001
were charged to expense in each respective period.
The Company maintained a qualified Employee Stock Ownership Plan ("ESOP" or
the "Plan") which had been established in accordance with the requirements and
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") and
has been approved by the Internal Revenue Service ("IRS"). During fiscal 2002,
the Company decided to terminate the ESOP given the inactivity of the Plan and
the need to streamline the Company's benefits program. On June 11, 2002, the IRS
issued a favorable determination ruling allowing the Company to terminate the
ESOP and to distribute the funds contributed to participants. The ESOP was
terminated during the first quarter of fiscal 2003 with no financial impact to
the Company. The Company did not contribute to the Plan in fiscal 2002 and 2001.
19. 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 markets, including computer /
semiconductor, data storage, communications and power measurement.
Revenues are attributed to countries based on customer ship-to addresses.
Revenues by geographic area are as follows:
2003 2002 2001
---- ---- ----
North America.............................................. $ 32,394 $ 33,052 $ 48,706
Europe and Middle East..................................... 31,171 33,056 40,042
Asia and Pacific........................................... 44,294 45,348 52,640
--------- --------- ---------
$ 107,859 $ 111,456 $ 141,388
========= ========= =========
Total assets by geographic area are as follows:
2003 2002
---- ----
North America........................................................... $ 89,500 $ 91,599
Europe and Middle East.................................................. 23,648 25,585
Asia and Pacific........................................................ 9,004 9,807
--------- ---------
$ 122,152 $ 126,991
========= =========
Revenue derived from one customer, Iwatsu, accounted for 11% of the
Company's consolidated revenues in fiscal 2002. No other customer accounted for
more than 10% the Company's consolidated revenues in any of the last three
fiscal years. Revenues attributable to Canada and Mexico are included in North
America and represent less than 7% and 0.2%, respectively, of North American
revenues in all fiscal years presented.
53
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Revenue attributable to individual countries that account for 10% or more
of total revenues in fiscal 2003 include the United States ($29.0 million),
Japan ($17.4 million) and Germany ($11.0 million); in fiscal 2002 include the
United States ($31.2 million), Japan ($25.6 million) and Germany ($11.8
million); and in fiscal 2001 include the United States ($45.2 million), Japan
($18.2 million) and Germany ($14.3 million).
20. COMMITMENTS AND CONTINGENCIES
Leases
Operating leases covering plant, certain office facilities and equipment
expire at various dates through 2008. Future minimum annual lease payments
required during the years ending in fiscal 2004 through 2008, under
noncancelable operating leases having an original term of more than one year,
are $1.5 million, $1.1 million, $0.8 million, $0.7 million, and $0.4 million,
respectively. Aggregate rental expense on noncancelable operating leases for the
years ended June 30, 2003, 2002 and 2001 approximated $2.0 million, $1.9 million
and $1.7 million, respectively.
Environmental
The Company's former 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, LeCroy, 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 $2.0 million of coverage against certain environmental liabilities related
to the Ridgefield Site. This insurance policy names both LeCroy 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 LeCroy 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 agreed to pay the former
owners of the Ridgefield Site $0.2 million 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
and the residual assets of Digitech.
Technology
As of June 30, 2003, the Company has one technology license agreement under
which it is unconditionally committed to pay $0.5 million and $0.3 million in
fiscal 2004 and 2005, respectively.
Legal
On August 5, 2003, LeCroy filed a complaint in the United States District
Court for the District of Oregon claiming that Tektronix has infringed on four
of LeCroy's patents. On April 28, 2003, Tektronix had filed a complaint against
LeCroy in the United States District Court for the District of Oregon claiming
that LeCroy infringed eight of its U.S. patents. Four of these patents concern
software user interface features for oscilloscopes, two concern circuitry, and
two concern probes. LeCroy denies that it has infringed, or is infringing, any
of these patents, and contends that the patents are invalid. The Company
believes it has meritorious defenses and it intends to vigorously defend this
action.
On January 15, 2003, LeCroy 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.
54
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company is involved in lawsuits, claims, investigations and
proceedings, including patent and environmental matters that arise in the
ordinary course of business. There are no matters pending, including those
described above, that the Company expects to be material in relation to its
business, consolidated financial condition, results of operations or cash flows.
21. ACQUISITIONS
In July 2000, the Company issued 100,000 shares of its Common Stock to
acquire all of the outstanding common stock of Lightspeed Electronics
Corporation ("Lightspeed"). The acquisition of Lightspeed was recorded using the
purchase method of accounting. The excess of cost over net assets acquired of
$1.0 million was amortized over a five year period until June 30, 2001 when the
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
(see Note 1).
During the third quarter of fiscal 2003, the Company acquired a former
distributor in Singapore for $0.3 million in exchange for amounts due to the
Company. The purchase price allocation resulted in $0.3 million of goodwill.
22. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Summarized unaudited quarterly operating results for fiscal year 2003 and
2002 are as follows:
QUARTERS ENDED
-------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) FISCAL YEAR 2002 FISCAL YEAR 2003
----------------------------------------- -----------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
2001 2001 2002 2002 2002 2002 2003 2003
----- ----- ----- ----- ----- ------ ----- -----
-------------------------------------------------------------------------------------
Revenues (1)
Digital oscilloscopes and related
products ............................. $ 27,596 $ 25,884 $ 21,333 $ 26,264 $ 22,473 $ 24,382 $ 21,009 $ 27,144
High-energy physics products ........... 1,095 293 31 - - - - -
Service and other ...................... 2,074 2,196 2,244 2,446 2,518 2,255 5,527 2,551
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues ...................... 30,765 28,373 23,608 28,710 24,991 26,637 26,536 29,695
Cost of sales (2) ........................ 14,743 18,756 12,409 14,074 12,390 15,007 11,478 12,596
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ........................ 16,022 9,617 11,199 14,636 12,601 11,630 15,058 17,099
Selling, general and administrative
expenses (3) ........................... 9,505 10,823 9,609 10,275 10,690 9,363 9,552 11,335
Research and development expenses (4) .... 4,456 3,906 5,493 8,151 4,512 4,358 4,667 4,689
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ............. 2,061 (5,112) (3,903) (3,790) (2,601) (2,091) 839 1,075
Other income (expense), net .............. 271 (19) (397) 333 (104) (47) (10) 77
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before income taxes .... 2,332 (5,131) (4,300) (3,457) (2,705) (2,138) 829 1,152
Provision for (benefit from) income taxes 486 (1,921) (1,591) (1,281) (1,001) (791) 307 426
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations ........................ 1,846 (3,210) (2,709) (2,176) (1,704) (1,347) 522 726
Gain on sale from discontinued operations,
net of tax ............................. - - - - - - - 129
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ................... 1,846 (3,210) (2,709) (2,176) (1,704) (1,347) 522 855
Charges related to convertible preferred
stock .................................. 467 468 469 472 515 517 518 519
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) applicable to common
stockholders............................ $ 1,379 $ (3,678) $ (3,178) $ (2,648) $ (2,219) $ (1,864) $ 4 $ 336
======== ======== ======== ======== ======== ======== ======== ========
Income (loss) per common share-basic:
Income (loss) from continuing operations
applicable to common stockholders..... $ 0.15 $ (0.36) $ (0.31) $ (0.26) $ (0.21) $ (0.18) $ - $ 0.02
Gain from discontinued operations....... - - - - - - - 0.01
-------- -------- -------- -------- -------- -------- -------- --------
Net (loss) income applicable to common
stockholders ........................ $ 0.15 $ (0.36) $ (0.31) $ (0.26) $ (0.21) $ (0.18) $ - $ 0.03
======== ======== ======== ======== ======== ======== ======== ========
Income (loss) per common share-diluted:
Income (loss) from continuing operations
applicable to common stockholders..... $ 0.14 $ (0.36) $ (0.31) $ (0.26) $ (0.21) $ (0.18) $ - $ 0.02
Gain from discontinued operations....... - - - - - - - $ 0.01
-------- -------- -------- -------- -------- -------- -------- --------
Net (loss) income applicable to common
stockholders ......................... $ 0.14 $ (0.36) $ (0.31) $ (0.26) $ (0.21) $ (0.18) $ - $ 0.03
======== ======== ======== ======== ======== ======== ======== ========
Weighted average number of shares:
Basic.................................. 9,468 10,216 10,233 10,281 10,323 10,340 10,348 10,392
Diluted................................ 10,051 10,216 10,233 10,281 10,323 10,340 10,404 10,439
(See legend on following page)
55
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) Included in Service and other revenue for each of the four quarters in
fiscal 2003 and 2002, is $0.3 million related to the recognition of deferred
revenue associated with the adoption of SAB 101. In the quarter ended March
31, 2003, Service and other revenue includes a $3.0 million agreement to
license the Company's MAUI Instrument Operating System technology. Included
in Digital oscilloscopes and related products revenue in the quarter ended
June 30, 2002 is $0.5 million for the reversal of various accounts
receivable credits determined not to be owed to customers.
(2) Included in Cost of sales in the quarter ended December 31, 2001 is a $3.6
million charge for excess and obsolete inventory and in the quarter ended
December 31, 2002 is $2.3 million of asset impairment charges. Included in
Cost of sales in the quarters ended December 31, 2001, March 31, 2002, June
30, 2002, September 30, 2002 and June 30, 2003 are severance charges of $0.3
million, $0.6 million, $0.1 million, $0.1 million and $0.1 million,
respectively.
(3) Included in Selling, general and administrative expense are severance
charges of $1.5 million, $1.2 million, $0.3 million, $2.1 million and $0.3
million for the quarters ended December 31, 2001, March 31, 2002, June 30,
2002, September 30, 2002 and June 30, 2003, respectively. Severance charges
during the quarter ended June 30, 2003 were partially offset by the reversal
of an unused 2002 restructuring reserve of $0.1 million. During the quarter
ended June 30, 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
and recorded lease termination costs of $0.3 million
(4) Included in Research and development expense in the fourth quarter of fiscal
2002 is a $4.0 million charge for a technology access fee. The Company will
use the access to this next-generation silicon germanium technology to
develop components that are expected to deliver higher density, greater
speed and reduced power consumption than those currently available. Such
components will be used in future high-speed digital oscilloscopes. Included
in Research and development expense in the quarters ended December 31, 2001,
March 31, 2002, September 30, 2002 and June 30, 2003 are severance charges
of $0.1 million, $0.1 million, $0.5 million and $0.2 million, respectively.
-------------------------------
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 27, 2002, the Board of Directors of LeCroy, upon the
recommendation of its Audit Committee, approved the dismissal of Ernst & Young
LLP ("E&Y") as its independent public accountants, effective November 27, 2002,
and authorized the engagement of KPMG LLP ("KPMG"), to serve as its independent
public accountants for the fiscal year ending June 30, 2003.
E&Y's reports on our consolidated financial statements for the two years
ended June 30, 2002 did not contain an adverse opinion or a disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the two years ended June 30, 2002, and through the
effective date of E&Y's dismissal, there were no disagreements with E&Y on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to E&Y's
satisfaction, would have caused them to make reference to the subject matter of
the disagreement(s) in connection with their reports; and there were no
"reportable events" as defined in Item 304(a)(1)(v) of Regulation S-K.
We provided E&Y with a copy of the foregoing disclosures and requested that
E&Y provide a letter addressed to the SEC stating whether or not it agrees with
them. E&Y's letter to the SEC dated December 4, 2002 is filed as Exhibit 16
hereto.
During the two years ended June 30, 2002, and through the effective date of
E&Y's dismissal, we did not consult KPMG with respect to the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our consolidated
financial statements, or any other matters or reportable events required to be
disclosed under Items 304(a)(2)(i) and (ii) of Regulation S-K.
57
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Internal Controls
We evaluated the effectiveness of the design and operation of our
disclosure controls and procedures ("Disclosure Controls") as of the end of the
period covered by this Annual Report on Form 10-K. This evaluation, (the
"Controls Evaluation") was performed under the supervision and with the
participation of our Chief Executive Officer ("CEO") and our Chief Financial
Officer ("CFO").
CEO and CFO Certifications
Attached as Exhibit 31 to this Annual Report on Form 10-K, are
Certifications of the CEO and the CFO required by Rule 13a-14 of the Exchange
Act (the "Rule 13a-14 Certification"). This Controls and Procedures section of
this Annual Report on Form 10-K includes the information concerning the Controls
Evaluation referred to in the Rule 13a-14 Certifications and should be read in
conjunction with the Rule 13a-14 Certifications for a more complete
understanding of the topics presented.
Disclosure Controls and Internal Controls
Disclosure Controls are procedures designed to ensure that information
required to be disclosed in each of our reports filed under the Exchange Act,
such as this Annual Report on Form 10-K, is recorded, processed, summarized and
reported within the time periods specified in the U.S. Securities and Exchange
Commission's rules and forms.
Disclosure Controls are also designed to ensure that such information is
accumulated and communicated to our management, including the CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. Internal
controls are procedures designed to provide reasonable assurance that (1) our
transactions are properly authorized; (2) our assets are safeguarded against
unauthorized or improper use; and (3) our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.
Limitations on the Effectiveness of Controls
It should be noted that the design and operation of our Disclosure Controls
is based in part upon certain assumptions about the likelihood of future 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.
Conclusions
Based upon the Controls Evaluation, our CEO and CFO have concluded that,
subject to the limitation noted above, our Disclosure Controls are effective to
ensure that material information relating to LeCroy 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 the Controls
Evaluation, there were no significant changes in our 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.
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to our directors and with respect to Item 405
disclosure of delinquent Form 3, 4 or 5 filers will be contained in our
Definitive Proxy Statement relating to our 2003 Annual Meeting of Stockholders,
which is scheduled to be held October 29, 2003; said information is incorporated
herein by reference. The discussion of our executive officers is included in
Item 1, Part I of this report under "Executive Officers of the Registrant."
We have adopted a code of ethics entitled "Revised Principles of Business
Conduct Policy," which applies to our officers, directors and employees. A copy
is included as Exhibit 14.1 to this report.
ITEM 11. EXECUTIVE COMPENSATION.
A description of the compensation of our executive officers will be
contained in the section captioned "Executive Compensation" of the Definitive
Proxy Statement for our 2003 Annual Meeting of Stockholders, which is scheduled
to be held on October 29, 2003; 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 Definitive Proxy Statement for our 2003
Annual Meeting of Stockholders, which is scheduled to be held on October 29,
2003; 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 Definitive Proxy Statement for our 2003 Annual Meeting of
Stockholders, which is scheduled to be held on October 29, 2003; said
information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
A description of the principal accounting fees and services will be
contained in the Definitive Proxy Statement for our 2003 Annual Meeting of
Stockholders, which is scheduled to be held on October 29, 2003; said
information is incorporated herein by reference.
59
PART IV
ITEM 15. 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, not required or is included
elsewhere in the financial statements or notes thereto.
(a) (3) EXHIBITS
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.
3.3 Amendment to the By-Laws of the Registrant, dated August 16, 2000,
filed as Exhibit 3.3 to the quarterly report on Form 10-Q for the
quarter ended September 30, 2000, 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, and is
incorporated herein by reference.
4.2 Placement Agent Agreement, dated August 15, 2000, between the
Registrant and SG Cowen Securities Corporation, and is
incorporated herein by reference.
4.3 Warrant, dated August 16, 2000, issued to SG Cowen Securities
Corporation to purchase 20,701 shares of the Registrant's Common
Stock, and is incorporated herein by reference.
4.4 Warrant, dated August 25, 2000, issued to Big T-2 Company LLC to
purchase 200,000 shares of the Registrant's Common Stock, filed as
Exhibit 10.3 to Form 8-K dated August 31, 2000, and is
incorporated herein by reference.
4.5 Stock Purchase Agreement, dated August 15, 2001, between the
Registrant and ValueAct Capital Partners, L.P., ValueAct Capital
Partners II, L.P. and ValueAct Capital International, Ltd., and is
incorporated herein by reference.
4.6 Placement Agent Agreement, dated August 15, 2001, between the
Registrant and SG Cowen Securities Corporation, and is
incorporated herein by reference.
4.7 Warrant, dated August 15, 2001, issued to SG Cowen Securities
Corporation to purchase 28,571 shares of the Registrant's Common
Stock, 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.*
60
Exhibit
Number Description
- ------- -----------
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.
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 Purchase 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.
61
Exhibit
Number Description
- ------- -----------
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.
10.30 Executive Employment Agreement, dated 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.
10.33 Amendment to the LeCroy Corporation Amended and Restated 1993
Stock Incentive Plan, dated August 16, 2000, filed as Exhibit
10.33 to the quarterly report on Form 10-Q for the quarter ended
September 30, 2000, and is incorporated herein by reference.*
10.34 Amendment to the LeCroy Corporation 1998 Non-Employee Director
Stock Option Plan, dated August 16, 2000, filed as Exhibit 10.34
to the quarterly report on Form 10-Q for the quarter ended
September 30, 2000, and is incorporated herein by reference.*
10.35 Amendment to the LeCroy Corporation 1998 Non-Employee Director
Stock Option Plan, dated October 25, 2000, filed as Exhibit 10.35
to the quarterly report on Form 10-Q for the quarter ended
September 30, 2000, and is incorporated herein by reference.*
10.36 Credit Agreement, dated October 11, 2000, between the Registrant
and The Bank of New York, as Administrative Agent, filed as
Exhibit 10.36 to the quarterly report on Form 10-Q for the quarter
ended September 30, 2000, and is incorporated herein by reference.
10.37 Amendment to the Certificate of Designation of the Series A
Convertible Redeemable Preferred Stock as of April 9, 2001, filed
as Exhibit 10.37 to the quarterly report on Form 10-Q for the
quarter ended March 31, 2001, and is incorporated herein by
reference.
10.38 Employment Agreement, dated August 13, 2001, between the
Registrant and Scott Bausback, and is incorporated herein by
reference.*
10.39 Amended and Restated Employment Agreement, dated January 18, 2002,
between the Registrant and Lutz P. Henckels, and is incorporated
herein by reference.*
10.40 Employment Agreement, dated January 1, 2002, between the
Registrant and Thomas H. Reslewic, and is incorporated herein by
reference.*
10.41 Form of Restricted Stock Purchase Agreement, and is incorporated
herein by reference.*
10.42 Separation Agreement, dated January 6, 2003, between the
Registrant and Raymond F. Kunzmann, and is incorporated herein by
reference.*
10.43 Amendment Number One to Employment Agreement, dated December 16,
2002, between the Registrant and Thomas H. Reslewic, and is
incorporated herein by reference.*
10.44 Amendment, dated September 2, 2003, to the Credit Agreement,
between the Registrant and The Bank of New York, filed as Exhibit
10.36.
14.1 Revised Principles of Business Conduct Policy, dated December 18,
2002.
16 Letter from Ernst & Young LLP to the Securities and Exchange
Commission dated December 4, 2002.
21 Subsidiaries of LeCroy Corporation.
62
Exhibit
Number Description
- ------- -----------
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of KPMG LLP, Independent Auditors.
31. Rule 13a-14(a) Certifications.
32. Section 1350 Certifications.
* Indicates management contract or compensatory plan, contract or arrangement.
(b) REPORTS ON FORM 8-K
We filed a Form 8-K, dated November 27, 2002, to report the Board of
Directors decision to end the engagement of Ernst & Young LLP as our independent
public accountants, and authorized the engagement of KPMG LLP to serve us as
independent public accountants for the fiscal year ending June 30, 2003.
We 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 until July 31, 2004.
We filed a Form 8-K, dated January 16, 2003, reporting under Item 5 "Other
Events" and under Item 7 "Financial Statements and Exhibits" our earnings for
the three and six months ended December 31, 2002.
We filed a Form 8-K, dated April 16, 2003, reporting under Item 7
"Financial Statements and Exhibits" and under Item 9 "Regulation FD Disclosure"
our earnings for the three and nine months ended March 31, 2003.
63
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 17, 2003
By /s/ Scott D. Kantor
-------------------
Scott D. Kantor
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 of Directors September 17, 2003
- -----------------------------------
Charles A. Dickinson
/s/ THOMAS H. RESLEWIC President, Chief Executive Officer September 17, 2003
- ----------------------------------- and Director
Thomas H. Reslewic (Principal Executive Officer)
/s/ SCOTT D. KANTOR Vice President Finance, Chief September 17, 2003
- ----------------------------------- Financial Officer, Secretary
Scott D. Kantor and Treasurer
(Principal Accounting Officer)
/s/ ROBERT E. ANDERSON Director September 17, 2003
- -----------------------------------
Robert E. Anderson
/s/ LUTZ P. HENCKELS Director September 17, 2003
- -----------------------------------
Lutz P. Henckels
/s/ PETER H. KAMIN Director September 17, 2003
- -----------------------------------
Peter H. Kamin
/s/ DOUGLAS A. KINGSLEY Director September 17, 2003
- -----------------------------------
Douglas A. Kingsley
/s/ WALTER O. LECROY, JR. Director September 17, 2003
- -----------------------------------
Walter O. LeCroy, Jr.
/s/ WILLIAM G. SCHEERER Director September 17, 2003
- -----------------------------------
William G. Scheerer
/s/ ALLYN C. WOODWARD, JR. Director September 17, 2003
- -----------------------------------
Allyn C. Woodward, Jr.
64
Schedule II
LeCROY CORPORATION
Valuation and Qualifying Accounts
Years Ended June 30, 2003, 2002 and 2001
(in thousands)
Balance at Charged to Balance at
beginning costs and (1)(2) End
Description of period expenses Deductions/Other of period
----------- --------- ---------- ---------------- ----------
Against trade receivables--
Year ended June 30, 2001
Allowance for doubtful accounts........... $ 541 $ 108 $ (408) $ 241
Year ended June 30, 2002
Allowance for doubtful accounts.......... 241 301 (120) 422
Year ended June 30, 2003
Allowance for doubtful accounts.......... 422 177 (205) 394
Against inventories--
Year ended June 30, 2001
Allowance for excess and obsolete......... 2,643 (3) 1,000 (10) 3,633
Year ended June 30, 2002
Allowance for excess and obsolete......... 3,633 3,851 (4) (5,981) 1,503
Year ended June 30, 2003
Allowance for excess and obsolete......... 1,503 924 (320) 2,107
Against deferred tax assets--
Year ended June 30, 2001
Valuation allowance....................... 14,148 (7,255) (2,597) (5) 4,296
Year ended June 30, 2002
Valuation allowance....................... 4,296 644 -- 4,940
Year ended June 30, 2003
Valuation allowance....................... 4,940 146 -- 5,086
- ------------
(1) Accounts written-off.
(2) Merchandise disposals and/or impact of foreign currency.
(3) Inventory reserves include $0.2 million of restructuring reserves in fiscal
2000.
(4) Includes $3.6 million of excess and obsolete inventory charges related to
the cost of inventory associated with discontinued product lines and
inventory levels that had been deemed to be in excess of forecasted
requirements in fiscal 2002.
(5) Represents reduction of valuation allowance against the tax benefit of net
operating losses generated from employee stock option deductions.
Offsetting credit was recorded directly to equity rather than the current
year income statement.