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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26634
LECROY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-2507777
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
700 CHESTNUT RIDGE ROAD
CHESTNUT RIDGE, NEW YORK 10977
(Address of Principal Executive Office) (Zip Code)
(845) 425-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark ("X") whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark ("X") whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 29, 2003
------- -------------------------------
Common stock, par value $.01 share 10,477,032
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1
LECROY CORPORATION
FORM 10-Q
INDEX
Page
No.
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
as of September 30, 2003 (Unaudited) and June 30, 2003 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows (Unaudited) 5
for the Three Months ended September 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LeCROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
September 30, June 30,
In thousands, except par value and share data 2003 2003
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,221 $ 30,851
Accounts receivable, net 20,051 20,523
Inventories, net 23,968 24,720
Other current assets 10,740 10,012
--------- ---------
Total current assets 75,980 86,106
Property and equipment, net 19,471 20,021
Other assets 15,309 16,025
--------- ---------
TOTAL ASSETS $ 110,760 $ 122,152
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 10,000 $ -
Accounts payable 10,241 10,937
Accrued expenses and other liabilities 13,255 12,338
--------- ---------
Total current liabilities 33,496 23,275
Deferred revenue and other non-current liabilities 2,477 3,028
--------- ---------
Total liabilities 35,973 26,303
Redeemable convertible preferred stock, $.01 par value (authorized 5,000,000
shares of preferred stock; 0 and 500,000 shares issued and outstanding
designated as redeemable convertible preferred stock; liquidation value,
$0 and $15,735 at September 30, 2003 and June 30, 2003, respectively) - 15,335
Stockholders' equity:
Common stock, $.01 par value (authorized 45,000,000 shares; 10,450,279
and 10,412,562 shares issued and outstanding as of
September 30, 2003 and June 30, 2003, respectively) 104 104
Additional paid-in capital 73,647 79,864
Warrants to purchase common stock 2,165 2,165
Accumulated other comprehensive loss (1,129) (1,598)
Retained earnings (deficit) - (21)
--------- ---------
Total stockholders' equity 74,787 80,514
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,760 $ 122,152
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
LeCROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ----------------------------------------------------------------------------------------------
Three months ended
September 30,
In thousands, except per share data 2003 2002
- ----------------------------------------------------------------------------------------------
Revenues:
Digital oscilloscopes and related products $24,605 $22,473
Service and other 2,814 2,518
-------- --------
Total revenues 27,419 24,991
Cost of sales (see Note 3) 11,847 12,390
-------- --------
Gross profit 15,572 12,601
Operating expenses:
Selling, general and administrative (see Note 3) 9,873 10,690
Research and development (see Note 3) 3,684 4,512
-------- --------
Total operating expenses 13,557 15,202
Operating income (loss) 2,015 (2,601)
Other expense, net (322) (104)
-------- --------
Income (loss) before income taxes 1,693 (2,705)
Provision for (benefit from) income taxes 626 (1,001)
-------- --------
Net income (loss) 1,067 (1,704)
Charges related to convertible preferred stock - 515
Redemption of convertible preferred stock 7,665 -
-------- --------
Net loss applicable to common stockholders $ (6,598) $ (2,219)
======== ========
Loss per common share applicable to common stockholders:
Basic $ (0.63) $ (0.21)
Diluted $ (0.63) $ (0.21)
Weighted average number of common shares:
Basic 10,414 10,323
Diluted 10,414 10,323
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
LeCROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ----------------------------------------------------------------------------------------------
Three months ended
September 30,
In thousands 2003 2002
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,067 $ (1,704)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,560 1,798
Deferred income taxes 514 (1,058)
Recognition of deferred license revenue (324) (324)
Loss on disposal of property and equipment 23 -
Change in operating assets and liabilities:
Accounts receivable 736 2,682
Inventories 951 3,122
Other current and non-current assets (635) (529)
Accounts payable, accrued expenses and other liabilities (88) (1,967)
-------- --------
Net cash provided by operating activities 3,804 2,020
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (631) (520)
Purchase of intangible assets (150) (510)
-------- --------
Net cash used in investing activities (781) (1,030)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings (24) (20)
Borrowings under line of credit 10,000 -
Redemption of convertible preferred stock (23,000) -
Proceeds from employee stock purchase and option plans 395 -
-------- --------
Net cash used in financing activities (12,629) (20)
-------- --------
Effect of exchange rate changes on cash (24) 171
-------- --------
Net (decrease) increase in cash and cash equivalents (9,630) 1,141
Cash and cash equivalents at beginning of the period 30,851 27,322
-------- --------
Cash and cash equivalents at end of the period $ 21,221 $ 28,463
========= =========
Supplemental Cash Flow Disclosure
Cash paid during the period for:
Interest $ 25 $ 26
Income taxes 30 37
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements
include all the accounts of LeCroy Corporation (the "Company" or "LeCroy") and
its wholly-owned subsidiaries. These condensed consolidated financial statements
are unaudited and should be read in conjunction with the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2003. The condensed consolidated balance sheet as
of June 30, 2003 has been derived from these audited consolidated financial
statements. Certain reclassifications have been made to prior-year amounts to
conform to the current-year presentation. All material inter-company
transactions and balances have been eliminated.
The Company's condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States, which require management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the condensed
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 if and
when impairments have occurred, 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.
These unaudited condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, that are, in the
opinion of management, necessary for a fair presentation of the financial
position and the results of operations for the interim periods. Interim period
operating results may not be indicative of the operating results for a full
year. The operations of the U.S. parent company, LeCroy Corporation, have a
period ending on the Saturday closest to September 30 (September 27, 2003 and
September 28, 2002). Each of these fiscal periods represented a 13-week period.
The condensed consolidated financial statement period-end references are stated
as September 30.
2. STOCK PLANS AND AWARDS
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 and director compensation cost for the
stock option plans is reflected in the Company's Condensed Consolidated
Statements of Operations, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. Compensation cost for restricted stock is recorded based on the
market value on the date of grant. The fair value of restricted stock is charged
to Stockholders' Equity and amortized to expense over the requisite vesting
periods.
The following table illustrates the effect on net income (loss) and net
income (loss) per common share applicable to common stockholders as if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation.
6
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In thousands THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
Net income (loss), as reported....................... $ 1,067 $ (1,704)
Add: stock-based compensation expense included in
reported net income (loss), net of income taxes..... 4 4
Deduct: stock-based compensation expense determined
under fair value based method for all awards, net
of income taxes ................................... (628) (119)
-------- --------
Pro forma net income (loss).......................... 443 (1,819)
Charges related to convertible preferred stock....... 7,665 515
-------- --------
Pro forma net loss applicable to common stockholders. $ (7,222) $ (2,334)
======== ========
Loss per common share applicable to common
stockholders:
Basic, as reported.............................. $(0.63) $ (0.21)
Diluted, as reported............................ $(0.63) $ (0.21)
Basic, pro forma................................ $(0.69) $ (0.23)
Diluted, pro forma.............................. $(0.69) $ (0.23)
3. RESTRUCTURING
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 Condensed Consolidated
Statement of Operations in the fourth quarter of fiscal 2003). As of September
30, 2003, $0.5 million of the total $0.9 million has been paid and $0.4 million
remains in Accrued expenses and other liabilities in the Condensed 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 Condensed
Consolidated Statement of Operations). As of September 30, 2003, $2.1 million of
the total $2.7 million has been paid and $0.6 million remains in Accrued
expenses and other liabilities in the Condensed Consolidated Balance Sheet.
Severance and other related amounts under this plan will be paid by the end of
first quarter of fiscal 2005.
The Company took steps during fiscal 2002 to reduce its expenses in
response to the continued weakness in the technology sector of the economy. 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
Condensed 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
September 30, 2003, $3.8 million of the total $4.0 million has been paid, $0.1
million remains accrued in Accrued expenses and other liabilities in the
Condensed 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.
7
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. DERIVATIVES
The Company enters into foreign exchange forward contracts to minimize the
risks associated with foreign currency fluctuations on assets or liabilities
denominated in other than the functional currency of the Company or its
subsidiaries. These foreign exchange forward contracts, which are not accounted
for as hedges, 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 transactions denominated in other than their
functional currencies were $20,000 and ($0.2) million for the three months ended
September 30, 2003 and 2002, respectively, and are included in Other expense,
net in the Condensed Consolidated Statements of Operations. These net gains or
(losses) include gross gains of $0.1 million for the three months ended
September 30, 2003. At September 30, 2003 and June 30, 2003, the Company had
approximately $6.9 million and $6.7 million, respectively, of open foreign
exchange forward contracts all with short-term maturities of less than three
months.
5. COMPREHENSIVE INCOME (LOSS)
The following table presents the components of comprehensive income (loss):
THREE MONTHS ENDED
In thousands SEPTEMBER 30,
2003 2002
---- ----
Net income (loss)........................................ $ 1,067 $ (1,704)
Cumulative unrealized foreign currency translation
gains (losses)................................... 469 (281)
--------- ---------
Comprehensive income (loss).............................. $ 1,536 $ (1,985)
========= =========
6. 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
September 30, 2003 and 2002, the Company netted approximately $1.3 million and
$1.7 million, respectively, of accounts receivable against accounts payable on
the Condensed Consolidated Balance Sheets.
7. INVENTORIES, NET
Inventories, including demonstration units in finished goods, are stated at
the lower of cost (first-in, first-out method) or market. Inventories consist
of the following:
SEPTEMBER 30, JUNE 30,
2003 2003
---- ----
IN THOUSANDS
Raw materials....................................... $ 6,731 $ 6,372
Work in process..................................... 4,942 5,696
Finished goods...................................... 12,295 12,652
--------- ---------
$ 23,968 $ 24,720
========= =========
The value of demonstration units included in finished goods was $9.1
million at September 30, 2003 and June 30, 2003.
8. OTHER CURRENT ASSETS
Other current assets consist of the following:
SEPTEMBER 30, JUNE 30,
2003 2003
---- ----
IN THOUSANDS
Deferred tax assets, net............................ $ 7,200 $ 7,200
Other............................................... 3,540 2,812
--------- ---------
$ 10,740 $ 10,012
========= =========
8
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
9. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
SEPTEMBER 30, JUNE 30,
2003 2003
---- ----
IN THOUSANDS
Land and building................................... $ 13,307 $ 13,288
Furniture, machinery and equipment.................. 34,699 34,427
Computer software................................... 6,190 6,190
--------- ---------
54,196 53,905
Less: Accumulated depreciation and amortization.... (34,725) (33,884)
--------- ---------
$ 19,471 $ 20,021
========= =========
Depreciation and amortization expense for the three month periods ended
September 30, 2003 and 2002 was $1.2 million and $1.1 million, respectively.
10. OTHER ASSETS
Other assets consist of the following:
SEPTEMBER 30, JUNE 30,
2003 2003
---- ----
IN THOUSANDS
Intangibles, net.................................... $ 5,050 $ 5,232
Deferred tax assets, net............................ 7,420 7,934
Goodwill............................................ 1,874 1,874
Other............................................... 965 985
--------- ---------
$ 15,309 $ 16,025
========= =========
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.
The following table reflects the gross carrying amount and accumulated
amortization of the Company's goodwill and intangible assets included in Other
assets on the Condensed Consolidated Balance Sheets as of the dates indicated:
SEPTEMBER 30, JUNE 30,
2003 2003
---- ----
IN THOUSANDS
Intangible assets:
Amortizable intangible assets:
Technology, manufacturing and distribution rights..... $ 7,160 $ 7,010
Patents and other intangible assets................... 661 661
Effect of currency translation on intangible assets... 104 105
Accumulated amortization.............................. (2,875) (2,544)
-------- ---------
Net carrying amount..................................... $ 5,050 $ 5,232
======== =========
Non-Amortizable intangible assets:
Goodwill............................................. $ 1,874 $ 1,874
======== =========
Amortization e xpense for those intangible assets with finite lives was
$0.3 million and $0 .7 million for the three months ended September 30, 2003 and
2002, respectively. The cost of technology, manufacturing and distribution
rights acquired is amortized primarily on the basis of the higher of units
shipped over the contract periods through June 2008 or on a straight-line basis.
Management estimates intangible assets amortization expense on a straight-line
basis in fiscal 2004 through 2008 will approximate $1.3 million, $2.0 million,
$0.7 million, $0.7 million and $0.6 million, respectively.
9
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
11. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
SEPTEMBER 30, JUNE 30,
2003 2003
----- ----
IN THOUSANDS
Compensation and benefits........................... $ 4,145 $ 4,489
Income taxes........................................ 2,631 2,595
Deferred license fee revenue........................ 1,296 1,296
Warranty............................................ 1,241 1,235
Retained liabilities from discontinued operations... 389 456
Other............................................... 3,553 2,267
----------- ---------
$ 13,255 $ 12,338
=========== =========
12. WARRANTIES
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.
The following table is a reconciliation of the changes in the Company's
aggregate product warranty during the three month periods ended September 30,
2003 and 2002.
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
---- ----
IN THOUSANDS
Balance at beginning of period...................... $ 1,235 $ 1,247
Accruals for warranties issued during the period.. 273 291
Warranty costs incurred during the period......... (267) (301)
--------- ---------
Balance at end of period............................ $ 1,241 $ 1,237
========= =========
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 September 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, there have been no claims
under such indemnification provisions.
13. DEBT
As of September 30, 2003 and 2002, the Company had a $15.0 million
revolving line of credit with a commercial bank expiring on November 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. The interest rate on
outstanding borrowings as of September 30, 2003 is 2.7%. 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 September 30, 2003, the Company borrowed $10.0 million under this
line of credit and has met its financial covenant requirements. The Company
plans to complete its negotiations and have a new revolving line of credit in
place before this revolving line of credit expires.
10
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
14. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 27, 2003, the Company purchased from the holders of its Series
A Redeemable Convertible Preferred Stock (the "Preferred Stock") all 500,000
issued and outstanding shares of the Preferred Stock for $23.0 million in cash.
The shares of Preferred Stock were entitled to a 12% cumulative dividend on the
original purchase price of $10.0 million, with redemption rights beginning on
June 30, 2004 at the sole discretion of the holders of such shares. At June 30,
2004, the redemption value of the Preferred Stock would have been approximately
$17.6 million.
In connection with the purchase of Preferred Stock, the Company recorded a
charge of approximately $7.7 million to stockholders' equity representing the
premium paid to the holders of its Preferred Stock ($1.0 million charged to
Retained earnings (deficit) and $6.7 million charged to Additional paid-in
capital) and recognized transaction costs of $0.4 million included in Other
expense, net in the Condensed Consolidated Statements of Operations. In
accordance with the Security and Exchange Commission's position published in an
Emerging Issues Task Force ("EITF") Topic No. D-42 relating to induced
conversions of preferred stock, the Company recorded the $7.7 million premium
paid to purchase the Preferred Stock as a charge to arrive at net loss
applicable to common stockholders in the first quarter of fiscal 2004.
15. COMMITMENTS AND CONTINGENCIES
On August 5, 2003, LeCroy filed a complaint in the United States District
Court for the District of Oregon claiming that Tektronix, Inc. ("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 on 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
defend vigorously 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. LeCroy
has filed a Motion to Dismiss Sicom's case, contending that Sicom does not have
standing to sue LeCroy for patent infringement. Sicom has opposed the Motion.
The Court has stayed discovery until it rules on LeCroy's Motion to Dismiss.
The Company is involved in lawsuits, claims, investigations and
proceedings, including patent and environmental matters that arise in the
ordinary course of business. Management believes the resolution of these matters
pending, including those described above, will not have a material effect on the
Company's business, consolidated financial condition, results of operations or
cash flows.
16. REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which summarizes certain of the SEC Staff's views in applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. Under SAB 101, which the Company adopted in
fiscal 2001, certain previously recognized license fee revenue was deferred and
recognized in future periods over the terms of the agreements. The adoption of
SAB 101 was recorded as of the beginning of fiscal 2001 and resulted in a
non-cash charge for the cumulative effect of an accounting change of $4.4
million, net of a tax benefit of $2.7 million. The deferred revenue will be
amortized into revenue over 5.5 years, the remaining terms of the license
agreements. The Company recognized pre-tax deferred license fee revenue of $0.3
million during the three months ended September 30, 2003 and 2002, respectively.
Such license fees were included in Service and other revenue in the Condensed
Consolidated Statements of Operations. As of September 30, 2003, the remaining
balance of pre-tax deferred license fee revenue was $2.9 million.
11
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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, "Modifications of SOP 97-2 with Respect to Certain Transactions" ("SOP
98-9"). 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. The Company did not recognize any
software license revenue in the three month periods ended September 30, 2003 and
2002, respectively.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our Condensed Consolidated Financial Statements and related Notes thereto
included elsewhere in this Form 10-Q. 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 2 under the
heading "Forward-Looking Statements."
OVERVIEW
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 the Company's Condensed Consolidated Statements of Operations
for the three month periods ended September 30, 2003 and 2002.
- ----------------------------------------------------------------------------------------------
Three months ended
September 30,
2003 2002
- ----------------------------------------------------------------------------------------------
Revenues:
Digital oscilloscopes and related products 89.7% 89.9%
Service and other 10.3 10.1
------- -------
Total revenues 100.0 100.0
Cost of sales 43.2 49.6
------- -------
Gross profit 56.8 50.4
Operating expenses:
Selling, general and administrative 36.0 42.8
Research and development 13.4 18.0
------- -------
Total operating expenses 49.4 60.8
Operating income (loss) 7.4 (10.4)
Other expense, net (1.2) (0.4)
------- -------
Income (loss) before income taxes 6.2 (10.8)
Provision for (benefit from) income taxes 2.3 (4.0)
------- -------
Net income (loss) 3.9% (6.8)%
======= =======
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Total revenues were $27.4 million in the first quarter of fiscal 2004,
compared to $25.0 million in the first quarter of fiscal 2003, an increase of
9.7%, or $2.4 million. The increase was primarily due to higher average selling
prices in our high-end WaveMaster(TM) digital oscilloscopes, fueled by increased
demand for our application-specific Serial Data Analyzer version of WaveMaster
and increased demand for our WavePro digital oscilloscopes resulting from the
launch of the WavePro 7000(TM) series in the third quarter of fiscal 2003.
13
Gross margin was 56.8% in the first quarter of fiscal 2004 compared to
50.4% in the same period in fiscal 2003. Included in Cost of sales in the first
quarter of fiscal 2003 was a $0.1 million charge for severance expense. The
increase in gross margin in the first quarter of fiscal 2004 was primarily due
to more favorable product margins due to higher average selling prices in our
high-end products, improved product mix of sales resulting from the launch of
the WavePro 7000 series in the third quarter of fiscal 2003 and continued
improvements in operational efficiency lowering manufacturing costs.
Selling, general and administrative expense was $9.9 million in the first
quarter of fiscal 2004 compared to $10.7 million in the first quarter of fiscal
2003, a decrease of 7.6% or $0.8 million. Included in Selling, general and
administrative expense in the first quarter of fiscal 2003 was a $2.1 million
charge for severance expense. As a percentage of sales, Selling general and
administrative expense decreased from 42.8% in the first quarter of fiscal 2003
to 36.0% in the first quarter of fiscal 2004. This decrease as a percentage of
sales was primarily due to the ability to leverage expenses over the higher
sales base in the first quarter of fiscal 2004 and the $2.1 million charge for
severance expense in the comparable period in the prior year. This decrease was
partially offset by increased variable selling costs related to higher revenues,
higher direct selling expenses resulting from our direct presence in Asia and
Europe, increased legal expenses and the payment of performance bonuses
suspended in the first three quarters in fiscal 2003 due to the weakness in the
technology sector of the economy.
Research and development expense was $3.7 million in the first quarter of
fiscal 2004, compared to $4.5 million in the first quarter of fiscal 2003, a
decrease of 18.4% or $0.8 million. The decrease was primarily due to the
consolidation of our probe development activities into our Chestnut Ridge, New
York facility in the fourth quarter of fiscal 2003, the benefit of cost
reduction initiatives taken in fiscal 2003 and a $0.5 million charge for
severance expense included in Research and development expense in the first
quarter of fiscal 2003. As a percentage of sales, Research and development
expense decreased from 18.0% in the first quarter of fiscal 2003 to 13.4% in the
first quarter of fiscal 2004. This decrease as a percentage of sales was
primarily due to the ability to leverage expenses over the higher sales base in
first quarter of fiscal 2004, cost reduction initiatives taken in the fourth
quarter of fiscal 2003 and the severance charge in the first quarter of fiscal
2003. We intend to continue to invest a substantial percentage of our revenues
in our research and development efforts.
Other expense, net, was ($0.3) million in the first quarter of fiscal 2004,
compared to ($0.1) million in the first quarter of fiscal 2003. The increase in
the net expense in the first quarter of fiscal 2004 was primarily due to $0.4
million in transaction costs related to the redemption of our Series A
Redeemable Convertible Preferred Stock (the "Preferred Stock") and lower net
interest income earned on our cash balances, partially offset by net foreign
exchange gains of $20,000 compared to net foreign exchange losses of ($0.2)
million for the comparable period in the prior year.
Our effective tax rate was 37.0% in the first quarter of fiscal 2004 and
2003.
On September 27, 2003, we purchased from the holders of our Preferred Stock
all 500,000 issued and outstanding shares of the Preferred Stock for $23.0
million in cash. In accordance with the Security and Exchange Commission's
position published in Emerging Issues Task Force ("EITF") Topic No. D-42
relating to induced conversions of preferred stock, we recorded a charge of
approximately $7.7 million representing the premium paid to the holders of our
Preferred Stock as a charge to arrive at net loss applicable to common
stockholders in the first quarter of fiscal 2004. In the first quarter of fiscal
2003, charges related to Preferred Stock, the Preferred Stock dividend and the
accretion for the value of fully exercisable warrants granted in connection with
the private placement of the Preferred Stock, was $0.5 million.
RESTRUCTURING
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 Condensed Consolidated Statement of
Operations in the fourth quarter of fiscal 2003). As of September 30, 2003, $0.5
million of the total $0.9 million has been paid and $0.4 million remains in
Accrued expenses and other liabilities in the Condensed 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, 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 Condensed Consolidated Statement of
Operations). As of September 30, 2003, $2.1 million of the total $2.7 million
has been paid and $0.6 million remains in Accrued expenses and other liabilities
in the Condensed Consolidated Balance Sheet. Severance and other related amounts
under this plan will be paid by the end of first quarter of fiscal 2005.
14
We took steps during fiscal 2002 to reduce our expenses in response to the
continued weakness in the technology sector of the economy. 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 Condensed
Consolidated Statement of Operations) for severance and related expenses,
including costs associated with the succession of the 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
September 30, 2003, $3.8 million of the total $4.0 million has been paid, $0.1
million remains accrued in Accrued expenses and other liabilities in the
Condensed 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.
LIQUIDITY AND CAPITAL COMMITMENTS
Working capital was $42.5 million at September 30, 2003, which represented
a working capital ratio of 2.3 to 1, compared to $62.8 million, or 3.7 to 1 at
June 30, 2003. The reduction of our current ratio was primarily due to the
redemption of our Preferred Stock for $23.0 million, which was funded by $13.0
million of cash and $10.0 million of borrowings under our revolving line of
credit.
Net cash provided by operating activities for the three months ended
September 30, 2003 was $3.8 million compared with $2.0 million for the
comparable period in the prior year. The increase in net cash provided by
operating activities was primarily due to the $2.8 million improvement in net
income, the consumption of $0.5 million of deferred tax assets and the decrease
in severance-related payments. For the corresponding period in the prior year,
net cash provided by operating activities reflects reductions in inventory of
$3.1 million and in accounts receivable of $2.7 million resulting from lower
sales volume. These benefits to operating cash flows during the first quarter of
fiscal 2003 were partially offset by a $2.0 million reduction in accounts
payable.
Net cash used in investing activities for the three months ended September
30, 2003 was ($0.8) million, substantially flat compared with ($1.0) million for
the comparable period for the prior year.
Net cash used in financing activities for the three months ended September
30, 2003 was ($12.6) million, compared with ($20,000) for the comparable period
for the prior year. This increase in cash used in financing activities was
primarily due to the redemption of our Preferred Stock for $23.0 million
partially offset by borrowings of $10.0 million under our revolving line of
credit and $0.4 million of proceeds from employee stock options.
We have a $15.0 million revolving line of credit with a commercial bank
expiring on November 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. The interest rate on outstanding
borrowings as of september 30, 2003 is 2.7%. This revolving line of credit is
secured by a lien on substantially all of our domestic assets. At September 30,
2003, we have borrowed $10.0 million under this line of credit and we have met
our financial covenant requirements. Management plans to complete its
negotiations and have a new revolving line of credit in place before this
revolving line of credit expires.
On June 12, 2000, we secured a $2.0 million capital lease line of credit to
fund certain capital expenditures. As of September 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
Condensed 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 September 30, 2003). No
amounts were outstanding under these facilities as of September 30, 2003.
15
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................. $ 268 $ 98 $ 170 $ - $ -
Employee severance agreement.............. 267 267 - - -
Operating lease obligations............... 3,580 978 1,676 926 -
Other contractual commitments to purchase
information technology (1)............. 500 500 - - -
--------- --------- --------- --------- ---------
Total....................... $ 4,615 $ 1,843 $ 1,846 $ 926 $ -
========= ========= ========= ========= =========
(1) As of September 30, 2003, we had a technology license agreement, under
which we are unconditionally committed to pay $0.5 million in fiscal 2004.
We believe that our cash on hand, cash flow generated by our continuing
operations and our availability under our revolving credit lines 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.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which summarizes certain of the SEC Staff's views in applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. Under SAB 101, which 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 $0.3 million
during the three months ended September 30, 2003 and 2002, respectively. Such
license fees were included in Service and other revenue in the Condensed
Consolidated Statements of Operations. As of September 30, 2003, the remaining
balance of pre-tax deferred license fee revenue was $2.9 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,
"Modifications of SOP 97-2 with Respect to Certain Transactions" ("SOP 98-9").
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. The 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 is generally recognized upon delivery
of the products. The revenue allocated to maintenance is generally recognized
ratably over the term of the support. We did not recognize any software license
revenue in the three month periods ended September 30, 2003 and 2002,
respectively.
CRITICAL ACCOUNTING POLICIES
The preparation of our Condensed Consolidated Financial Statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities in the Condensed Consolidated
Financial Statements and accompanying notes. These estimates and assumptions are
based on management's judgment and available information and, consequently,
actual results could be different from these estimates.
16
These Condensed Consolidated Financial Statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003
which includes a description of our critical accounting policies involving
significant judgment by LeCroy's management. In particular, judgment is used in
areas such as revenue recognition, the allowance for doubtful accounts,
allowance for excess and obsolete inventory, valuation of long-lived and
intangible assets, valuation of deferred tax assets and estimation of warranty.
There have been no changes in our critical accounting policies since June 30,
2003.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including without limitation,
statements regarding the intent, belief or current expectations of the Company
or its directors or officers with respect to, among other things, (i) market
trends in the Company's industries and the projected impact on the Company, (ii)
the increasing importance of signal shape analysis; (iii) the Company's ability
to meet its customers' evolving needs; (iv) the Company's position within its
industries and ability to effectively compete; (v) the Company's ability to
expand into new markets; (vi) the success of the Company's new product
introductions; (vii) trends in the seasonality of the Company's sales; (viii) a
shift in technology towards higher speed digital signals containing more complex
data and the demands of users of signal analyzer products; (ix) market
opportunities for dedicated signal analyzers; (x) the resolution of certain
environmental remediation activities; (xi) sufficiency of the Company's 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 the Company's financial condition and
results of operations; (xiii) the Company's business and growth strategies;
(xiv) the impact of adoption of accounting conventions; and (xv) certain other
statements identified or qualified by words such as "likely," "will,"
"suggests," "may," "would," "could," "should," "expects," "anticipates,"
"estimates," "plans," "projects," "believes," "is optimistic about," or similar
expressions (and variants of such words or expressions). Investors are cautioned
that forward-looking statements are inherently uncertain. These forward-looking
statements represent our best judgment as of the date of this Form 10-Q, and we
caution readers not to place undue reliance on such statements. Actual
performance and results of operations may differ materially from those projected
or suggested in the forward-looking statements due to certain risks and
uncertainties including, without limitation, risks associated with fluctuations
in 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. We undertake 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-Q and any information
incorporated by reference in this Form 10-Q, the following risk factors should
be carefully considered when evaluating the Company and our business. Also,
readers should carefully review the Company's reports filed with the Securities
and Exchange Commission and press releases. Any of these factors, or others,
many of which are beyond our control, could negatively affect our revenue,
profitability, and cash flow in the future. 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.
OUR OPERATING RESULTS AND FINANCIAL CONDITION MAY BE HARMED IF THE INDUSTRIES
INTO WHICH WE SELL PRODUCTS BECOME DEPRESSED OR SUBJECT TO VOLATILE DEMAND.
The economic downturn in fiscal 2003 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 experienced a downward cycle characterized by diminished
product demand, excess manufacturing capacity and a reduction of average selling
prices. Although some segments of these industries have shown recent signs of
stabilization, demand in these markets remains volatile so the underlying trend
while improving remains uncertain.
17
We are uncertain when a sustained recovery in these markets may occur, if
ever. Any return to a decline in customers' markets or in the general economic
conditions would likely result in a 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 decline, we may not
be able to collect on outstanding amounts due to us. Such declines could harm
our consolidated financial position, results of operations, cash flows and stock
price, and could limit our ability to maintain 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
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.
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 affect on our business, results of
operations and financial condition.
WE LICENSE CERTAIN SOFTWARE FROM THIRD PARTIES.
Some of our products contain software licensed from third parties. Some of
these licenses may not be available to us in the future on terms that are
acceptable or allow our products to remain competitive. The loss of these
licenses or the ability to maintain any of them on acceptable terms could delay
development of future products or enhancement of existing products. This could
adversely affect 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. and Agilent Technologies. Both 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 $90,000 general price range in which our high-performance digital
oscilloscopes are focused, we cannot assure you that we will continue to compete
effectively.
18
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. 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.
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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.
WE HAVE A SIGNIFICANT AMOUNT OF DEBT.
As of September 30, 2003, we had approximately $10.0 million of bank debt
outstanding. We expect that existing cash and cash equivalents, cash provided
from operations, and borrowings pursuant to our existing credit facility with
The Bank of New York will be sufficient to meet ongoing cash requirements.
Failure to generate sufficient cash or meet the financial covenants contained in
the documentation relating to our credit facility may adversely affect our
business, results of operations and financial condition.
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.
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 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
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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, Swedish krona, Japanese yen, Korean won, Singapore dollar and
Hong Kong 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. The net
gains or (losses) resulting from changes in the fair value of these derivatives
and on transactions denominated in other than their functional currencies were
$20,000 and ($0.2) million for the three months ended September 30, 2003 and
2002, respectively, and are included in Other expense, net in the Condensed
Consolidated Statements of Operations. These net gains or (losses) include gross
gains of $0.1 million for the three months ended September 30, 2003. At
September 30, 2003 and June 30, 2003, the Company had approximately $6.9 million
and $6.7 million, respectively, of open foreign exchange forward contracts all
with short-term maturities of less than three months.
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 have been immaterial to our results of
operations, financial position or cash flows.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation required by the Securities Exchange Act of
1934, under the supervision and with the participation of our chief executive
officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, our chief executive officer
and chief financial officer have concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic Securities and Exchange Commission
reports. It should be noted that any system of controls is based in part upon
certain assumptions designed to obtain reasonable (and not absolute) assurance
as to its effectiveness, and there can be no assurance that any design will
succeed in achieving its stated goals.
During the most recent fiscal quarter, there has been no change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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LECROY CORPORATION
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
On August 5, 2003, LeCroy filed a complaint in the United States District
Court for the District of Oregon claiming that Tektronix, Inc. ("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 on 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
defend vigorously 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. LeCroy
has filed a Motion to Dismiss Sicom's case, contending that Sicom does not have
standing to sue LeCroy for patent infringement. Sicom has opposed the Motion.
The Court has stayed discovery until it rules on LeCroy's Motion to Dismiss.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
ITEM 6(A) EXHIBITS
31.1 Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350
ITEM 6(B) REPORTS ON FORM 8-K DURING THE QUARTER ENDED SEPTEMBER 30, 2003
The Company filed a Form 8-K, dated August 6, 2003,
reporting under Item 7 "Financial Statements and
Exhibits" and under Item 12 "Results of Operations and
Financial Condition" the Company's earnings for the
three and twelve months ended June 30, 2003.
The Company filed a Form 8-K/A, dated August 7, 2003,
amending under Item 7 "Financial Statements and
Exhibits" and under Item 12 "Results of Operations and
Financial Condition" the report on Form 8-K filed by
LeCroy Corporation on August 6, 2003.
The Company filed a Form 8-K, dated September 26,
2003, reporting under Item 5 "Other Events" the
repurchase by the Company of its Series A Redeemable
Convertible Preferred Stock and the resignation of
Douglas A. Kingsley from the Board of Directors of the
Company and under Item 9 "Regulation FD Disclosure"
the press release announcing the repurchase and
updating the Company's earnings guidance for the first
fiscal quarter ending September 30, 2003.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 2003 LECROY CORPORATION
/s/ Scott D. Kantor
-------------------------
Scott D. Kantor
Vice President and Chief Financial Officer,
Secretary and Treasurer
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EXHIBIT INDEX
EXHIBITS NO. DESCRIPTION
31.1 Certification by the Chief Executive Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
31.2 Certification by the Chief Financial Officer pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934
32.1 Certification by the Chief Executive Officer pursuant to 18
U.S.C. Section 1350
32.2 Certification by the Chief Financial Officer pursuant to 18
U.S.C. Section 1350
24