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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26634
LECROY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-2507777
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
700 CHESTNUT RIDGE ROAD
CHESTNUT RIDGE, NEW YORK 10977
(Address of Principal Executive Office) (Zip Code)
(845) 425-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark ("X") whether the registrant: (1) has filed all reports
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
Indicate 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 31, 2002
----- -------------------------------
Common stock, par value $.01 share 10,323,071
==============================================================================
LECROY CORPORATION
FORM 10-Q
INDEX
Page No.
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets
as of September 30, 2002 and June 30, 2002 3
Condensed Consolidated Statements of Operations
for the Three Month Periods ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows 5
for the Three Month Periods ended September 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 18
2
LECROY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------
September 30, June 30,
In thousands, except par value and share data 2002 2002
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 28,463 $ 27,322
Accounts receivable, net 21,523 24,296
Inventories, net 24,621 28,108
Other current assets 13,011 11,657
--------- ----------
Total current assets 87,618 91,383
Property and equipment, net 20,972 21,354
Other assets 14,037 14,254
----------- ----------
TOTAL ASSETS $ 122,627 $ 126,991
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,851 $ 12,971
Accrued expenses and other liabilities 16,768 15,702
--------- ----------
Total current liabilities 26,619 28,673
Deferred revenue and other non-current liabilities 3,216 3,547
--------- ----------
Total liabilities 29,835 32,220
Redeemable convertible preferred stock, $.01 par value (authorized 5,000,000
shares; 500,000 shares issued and outstanding; liquidation value, $14.5
million and $14.0 million as of September 30, 2002 and June 30, 2002, 13,781 13,266
respectively)
Stockholders' equity:
Common stock, $.01 par value (authorized 45,000,000 shares;
10,323,071 issued and outstanding as of
September 30, 2002 and June 30, 2002) 103 103
Additional paid-in capital 80,770 81,279
Warrants to purchase common stock 2,165 2,165
Accumulated other comprehensive loss (3,976) (3,695)
(Accumulated deficit) retained earnings (51) 1,653
---------- ---------
Total stockholders' equity 79,011 81,505
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 122,627 $ 126,991
========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
LECROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
Three Months Ended
September 30,
In thousands, except per share data 2002 2001
- ----------------------------------------------------------------------------------------------------------
Revenues:
Digital oscilloscopes and related products $ 22,473 $ 27,596
High-energy physics products - 1,095
Service and other 2,518 2,074
-------- --------
Total revenues 24,991 30,765
Cost of sales (included in fiscal 2003 is $0.2 million of severance) 12,504 14,743
-------- --------
Gross profit 12,487 16,022
Operating expenses:
Selling, general and administrative (included in fiscal
2003 is $2.5 million of severance) 11,098 9,505
Research and development 3,990 4,456
-------- --------
Total operating expenses 15,088 13,961
Operating (loss) income (2,601) 2,061
Other (expense) income, net (104) 271
-------- --------
(Loss) income before income taxes (2,705) 2,332
(Benefit from) provision for income taxes (1,001) 486
-------- --------
Net (loss) income (1,704) 1,846
Charges related to convertible preferred stock 515 467
-------- --------
Net (loss) income applicable to common stockholders $ (2,219) $ 1,379
======== ========
(Loss) income per common share applicable to common stockholders:
Basic $ (0.21) $ 0.15
Diluted $ (0.21) $ 0.14
Weighted average number of common shares:
Basic 10,323 9,468
Diluted 10,323 10,051
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 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,704) $ 1,846
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,798 1,455
Deferred income taxes (1,058) -
Change in operating assets and liabilities:
Accounts receivable 2,682 4,958
Inventories 3,122 (3,945)
Other current and non-current assets (529) 1,226
Accounts payable, accrued expenses and other liabilities (2,291) (7,486)
-------- --------
Net cash provided by (used in) operating activities 2,020 (1,946)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (520) (1,138)
Purchase of intangible assets (510) -
-------- --------
Net cash (used in) investing activities (1,030) (1,138)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt - 165
Repayment of borrowings (20) (23)
Proceeds from the issuance of common stock - 23,284
Proceeds from exercise of stock options - 256
-------- --------
Net cash (used in) provided by financing activities (20) 23,682
-------- --------
Effect of exchange rate changes on cash 171 459
-------- --------
Net increase in cash and cash equivalents 1,141 21,057
Cash and cash equivalents at beginning of the period 27,322 11,449
-------- --------
Cash and cash equivalents at end of the period $ 28,463 $ 32,506
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements
include all the accounts of LeCroy Corporation (the "Company" or "LeCroy") and
its wholly-owned subsidiaries. These condensed consolidated financial statements
are unaudited and should be read in conjunction with the audited consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002. The condensed consolidated balance sheet as
of June 30, 2002 has been derived from these audited consolidated financial
statements. Certain reclassifications have been made to prior-year amounts to
conform to the current-year presentation. All material inter-company
transactions and balances have been eliminated.
The condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
which require management to make estimates and assumptions that affect the
consolidated financial statements and related disclosures. These estimates and
assumptions are based on judgment and available information and, consequently,
actual results could differ from these estimates. In addition, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted.
These unaudited condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, that are, in the
opinion of management, necessary for a fair statement of the financial position
and the results of operations for the interim periods presented. Interim period
operating results may not be indicative of the operating results for a full
year.
2. RESTRUCTURING
During the first quarter of fiscal 2003, the Company adopted a plan to
implement new management operating systems designed to improve processes in
sales, order management, customer relationship management and financial
performance management. These new systems are projected to improve operating
efficiencies and to further reduce our headcount requirements. In connection
with the adoption of this plan, the Company recorded a charge for severance and
other related expenses of $2.7 million; $0.2 million of which was recorded in
Cost of sales and $2.5 million recorded in Selling, general and administrative
expense in the Condensed Consolidated Statements of Operations. As of September
30, 2002, $0.3 million of the total $2.7 million has been paid and $2.4 million
remains accrued in Accrued expenses and other liabilities in the Condensed
Consolidated Balance Sheets.
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%. In connection with these workforce reductions, the Company
recorded a $4.3 million charge ($0.7 million in Cost of sales and $3.6 million
in Selling, general and administrative expense) for severance and related
expenses, including costs associated with the succession of the Company's Chief
Executive Officer. Of the $4.3 million total charge, $4.1 million was initially
credited to Accrued expenses and other liabilities and $0.2 million,
representing a non-cash expense for the amendment of employee stock options, was
credited to Additional paid-in capital. As of September 30, 2002, $2.6 million
of the total $4.1 million has been paid and $1.5 million remains accrued in
Accrued expenses and other liabilities in the Condensed Consolidated Balance
Sheets.
3. DERIVATIVES
The Company enters into foreign exchange forward contracts that are
designated as fair value hedges to minimize the risks associated with foreign
currency fluctuations on assets or liabilities denominated in other than the
functional currency of the Company or its subsidiaries. These foreign exchange
forward contracts are highly inversely correlated to the hedged items and are
considered effective as hedges of 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 were $(0.2) million and $0.1 million for the first quarter of fiscal
2003 and 2002, respectively, and are included in Other (expense) income, net in
the Condensed Consolidated Statements of Operations. At September 30, 2002 and
June 30, 2002, the Company had approximately $7.5 million and $12.8 million,
respectively, of open foreign exchange forward contracts all with short-term
maturities of less than three months.
6
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. COMPREHENSIVE (LOSS) INCOME
For the three months ended September 30, 2002, the Company's comprehensive
loss totaled $2.0 million, compared to a comprehensive income of $3.5 million
for the three months ended September 30, 2001. Comprehensive loss for the three
months ended September 30, 2002 included foreign currency translation losses of
$0.3 million. Comprehensive income for the three months ended September 30, 2001
included foreign currency translation gains of $2.3 million and unrealized
losses on marketable equity securities classified as available for sale of $0.6
million.
During the fourth quarter of fiscal 2002, the Company sold its remaining
shares of marketable equity securities classified as available for sale.
Cumulative foreign currency translation losses were $4.0 million at September
30, 2002 and $3.7 million at June 30, 2002.
5. ACCOUNTS RECEIVABLE, NET
During the second quarter of fiscal 2002, the Company entered into an
agreement with one of its customers, who is also a vendor, in which it was
granted the legal right to offset outstanding accounts receivable balances
against outstanding accounts payable balances. At September 30, 2002 and June
30, 2002, the Company netted approximately $1.7 million and $4.8 million,
respectively, of accounts receivable against accounts payable on the Condensed
Consolidated Balance Sheets.
6. INVENTORIES, NET
Inventories, including demonstration units in finished goods, are stated at
the lower of cost (first-in, first-out method) or market.
SEPTEMBER 30, JUNE 30,
2002 2002
------------- --------
IN THOUSANDS
Raw materials....................... $ 7,080 $ 7,735
Work in process..................... 5,450 5,571
Finished goods...................... 12,091 14,802
----------- ---------
$ 24,621 $ 28,108
=========== =========
The value of demonstration units included in finished goods was $7.5
million at September 30, 2002 and June 30, 2002.
During the second quarter of fiscal 2002, the Company increased its
allowance for excess and obsolete inventory by $3.6 million through a charge to
Cost of sales. This inventory charge relates to the cost of inventory associated
with discontinued product lines and inventory levels that were deemed to be in
excess of forecasted requirements.
7. OTHER CURRENT ASSETS
Other current assets consist of the following:
SEPTEMBER 30, JUNE 30,
2002 2002
------------- -----------
IN THOUSANDS
Deferred tax assets, net................ $ 9,881 $ 8,700
Other................................... 3,130 2,957
----------- -----------
$ 13,011 $ 11,657
=========== ===========
7
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
8. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
SEPTEMBER 30, JUNE 30,
2002 2002
---- ----
IN THOUSANDS
Land and building................................... $ 12,942 $ 12,814
Furniture, machinery and equipment.................. 32,138 31,556
Computer software................................... 6,074 6,074
----------- -----------
51,154 50,444
Less: Accumulated depreciation and amortization.... (30,182) (29,090)
----------- -----------
$ 20,972 $ 21,354
=========== ===========
Depreciation and amortization expense related to property and equipment for
the three months ended September 30, 2002 and 2001 was $1.1 million and $1.0
million, respectively.
9. GOODWILL AND INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2001. Under
SFAS 142, goodwill is no longer amortized but reviewed for impairment annually
or more frequently if certain indicators arise. The Company completed the annual
impairment test required under SFAS No. 142 during the fourth quarter of fiscal
2002 and determined that there was no impairment to its recorded goodwill
balances.
The following table reflects the gross carrying amount and accumulated
amortization of the Company's goodwill and intangible assets included in Other
assets on the Condensed Consolidated Balance Sheets as of the dates indicated:
SEPTEMBER 30, JUNE 30,
2002 2002
---- ----
IN THOUSANDS
Intangible assets:
Amortized intangible assets:
Technology, manufacturing and distribution rights..... $ 10,332 $ 10,332
Patents and other intangible assets................... 201 201
Effect of currency translation on intangible assets... 148 162
Accumulated amortization.............................. (4,598) (3,988)
------------ -----------
Net carrying amount..................................... $ 6,083 $ 6,707
============ ===========
Non-amortized intangible assets:
Goodwill, net........................................ $ 1,574 $ 1,574
============ ===========
Amortization expense for those intangible assets still required to be
amortized under SFAS No. 142 was $0.7 million and $0.4 million for the three
months ended September 30, 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 2005
or on a straight-line basis. The Company estimates amortization expense on a
straight-line basis will approximate $2.4 million in fiscal 2003 and 2004 and
$1.7 million in 2005.
8
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
10. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
SEPTEMBER 30, JUNE 30,
2002 2002
------------- ----------
IN THOUSANDS
Compensation and benefits........................... $ 6,693 $ 5,348
Income taxes........................................ 2,584 2,634
Warranty............................................ 1,237 1,247
Deferred revenue.................................... 1,040 1,057
Retained liabilities from discontinued operations... 990 1,283
Other............................................... 4,224 4,133
----------- -----------
$ 16,768 $ 15,702
=========== ===========
11. COMMON STOCK
On August 15, 2001 (the "Closing"), the Company sold 1,428,572 shares of
its Common Stock for gross proceeds of $25.0 million in a private equity
placement. The Company intends to use the proceeds for operating needs and to
fund growth through acquisitions and other transactions. In connection with the
private equity placement, the Company issued to its placement agent a warrant to
purchase up to 28,571 shares of Common Stock at an exercise price of $17.50. On
the Closing, the Company used the Black-Scholes option-pricing model to assign
an aggregate value of $0.3 million to this warrant.
12. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999 (the "Closing"), the Company completed a private placement
of 500,000 shares of convertible redeemable preferred stock (the "Preferred
Stock") for proceeds of $10.0 million. The shares of the Preferred Stock are
convertible at any time by the holders into 500,000 shares of Common Stock.
After the fifth anniversary of the Closing, the holders may redeem their shares
at cost plus a 12% compounding annual dividend since the date of issue. The
shares of Preferred Stock automatically convert to Common Stock on a one-for-one
basis in the event of a firmly underwritten public offering raising at least
$20.0 million, provided that the price per share is at least $40 if the offering
takes place after the second anniversary of the Closing (an "automatic
conversion"). Upon an automatic conversion, the holders of the Preferred Stock
will also receive payment of all accrued 12% dividends from the issue date to
the conversion date. The holders of the Preferred Stock are also entitled to
payment of the 12% compounding annual dividend in the event of a liquidation of
the Company or upon a merger or sale of substantially all of the Company's
assets. Using the 12% dividend rate, the liquidation value of the Preferred
Stock at September 30, 2002 was $14.5 million.
13. 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 term 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. For the three months ended September 30, 2002 and 2001, the Company
recognized pre-tax deferred license fee revenue of $0.3 million of the $7.1
million deferred license fee revenue. Such license fees were included in Service
and other revenue in the Condensed Consolidated Statements of Operations. As of
September 30, 2002, the remaining balance of pre-tax deferred license fee
revenue was $4.2 million. The Company has not entered into an agreement in which
it has recognized license fee revenue since the third quarter of fiscal 1999.
9
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
14. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the Financial Accounting Standards Board ("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 No. 94-3 had
recognized the liability at the commitment date to an exit plan. The Company is
required to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 will change the
timing of liability and expense recognition related to exit or disposal
activities, but not the ultimate amount of such expenses.
15. SUBSEQUENT EVENTS
In October 2002, the Company announced plans to eliminate at least one
older product line and to make significant changes to its manufacturing
strategy. These changes, which are designed to further improve the Company's
operating efficiency, are expected to result in a non-cash charge of
approximately $2.0 million in the second quarter of fiscal 2003 related to the
write-off of related assets.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
LeCroy currently operates as one business segment in the Test and
Measurement Instrument market. Using its core competency of WaveShape Analysis,
defined as the capture and analysis of complex electronic signals, the Company
develops, manufactures and sells signal acquisition and analysis products. Its
principal product line consists of a family of high-performance digital
oscilloscopes used primarily by electrical design engineers in various markets,
including computer / semi-conductor, data storage and power measurement. The
Company also produces modular digitizers and various electronic components. In
addition, it generates revenue by offering service on all of its products beyond
the normal warranty period.
CONSOLIDATED RESULTS OF OPERATIONS
The following table indicates the percentage of total revenues represented
by each item in the Company's Condensed Consolidated Statements of Operations
for the three month periods ended September 30, 2002 and 2001.
Three Months Ended
September 30,
2002 2001
------ ------
Revenues:
Digital oscilloscopes and related products................................... 89.9% 89.7%
High-energy physics products................................................. - 3.6
Service and other............................................................ 10.1 6.7
------- -------
Total revenues............................................................ 100.0 100.0
Cost of sales (included in fiscal 2003 is a $0.2 million
(0.8% of sales)severance charge).......................................... 50.0 47.9
------ -------
Gross profit................................................................. 50.0 52.1
Operating expenses:
Selling, general and administrative (included in fiscal 2003
is a $2.5 million (9.8% of sales) severance charge)....................... 44.4 30.9
Research and development..................................................... 16.0 14.5
------ -------
Total operating expenses.................................................. 60.4 45.4
Operating (loss) income........................................................... (10.4) 6.7
Other (expense) income, net.................................................. (0.4) 0.9
------- -------
(Loss) income before income taxes................................................. (10.8) 7.6
(Benefit from) provision for income taxes.................................... (4.0) 1.6
------- --------
Net (loss) income applicable to common stockholders............................... (6.8)% 6.0%
======= ========
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
Total revenues were $25.0 million in the first quarter of fiscal 2003,
compared to $30.8 million in the first quarter of fiscal 2002, a decrease of
18.8%, or $5.8 million. This decrease was primarily due to the continuing impact
of the current difficult economic environment and the discontinuance of our
High-energy physics product line that generated $1.1 million in revenue in the
prior year.
Gross margin, excluding $0.2 million (0.8% of sales) in severance charges,
was 50.8% in the first quarter of fiscal 2003, compared to 52.1% in the first
quarter of fiscal 2002. The decrease in gross margin from the prior year was due
to the unfavorable absorption of costs resulting from lower sales volume and
higher amortization of technology, manufacturing and distribution rights. These
negative impacts were partially offset by favorable margins on the Company's new
high-end WaveMaster(TM) product line of digital oscilloscopes released in the
third quarter of fiscal 2002.
11
Selling, general and administrative expense, excluding $2.5 million (9.8%
of sales) in severance charges in the first quarter of fiscal 2003, decreased by
9.0%, or $0.9 million, from $9.5 million in the first quarter of fiscal 2002 to
$8.6 million in the first quarter of fiscal 2003. This decrease is attributable
to the sustained benefit of cost reduction initiatives taken by the Company over
the last several quarters in light of the poor economic environment including
headcount reductions, salary freezes and controls on discretionary spending. As
a percentage of sales, selling general and administrative expenses, excluding
$2.5 million (9.8% of sales) in severance charges in the first quarter of fiscal
2003, increased from 30.9% in the first quarter of fiscal 2002 to 34.6% in the
first quarter of fiscal 2003. This increase as a percentage of sales was
primarily due to the inability to leverage the costs of fixed infrastructure
over the lower sales base and an increase in fixed selling costs as a result of
the conversion, in the fourth quarter of fiscal 2002, of the U.S. sales force
from partial coverage by manufacturers' representatives to full coverage by the
Company's direct sales force.
Research and development expense was $4.0 million in the first quarter of
fiscal 2003, compared to $4.5 million in the first quarter of fiscal 2002, a
decrease of 10.5% or $0.5 million. As a percentage of sales, research and
development expense increased from 14.5 % in the first quarter fiscal 2002 to
16.0% in the first quarter of fiscal 2003. This increase as a percentage of
sales was primarily due to the inability to fully leverage expenses over the
lower sales base. The Company intends to continue to invest a substantial
percentage of its revenues in its research and development efforts.
Other (expense) income, net, which consists primarily of net interest
income or expense and foreign exchange gains or losses, was an expense of $0.1
million in the first quarter of fiscal 2003, compared to income of $0.3 million
in the first quarter of fiscal 2002. This decrease is primarily due to foreign
exchange losses on assets or liabilities denominated in other than the
functional currency of the Company or its subsidiaries.
The Company's effective tax rate was 37% in the first quarter of fiscal
2003, compared to 21% in the first quarter of fiscal 2002. The lower effective
tax rate in the first quarter of fiscal 2002 was due to the release of a $0.4
million tax reserve related to a favorable audit settlement in September 2001.
RESTRUCTURING
During the first quarter of fiscal 2003, the Company adopted a plan to
implement new management operating systems designed to improve processes in
sales, order management, customer relationship management and financial
performance management. These new systems are projected to improve operating
efficiencies and to further reduce our headcount requirements. In connection
with the adoption of this plan, the Company recorded a charge for severance and
other related expenses of $2.7 million; $0.2 million of which was recorded in
Cost of sales and $2.5 million recorded in Selling, general and administrative
expense in the Condensed Consolidated Statements of Operations. As of September
30, 2002, $0.3 million of the total $2.7 million has been paid and $2.4 million
remains accrued in Accrued expenses and other liabilities in the Condensed
Consolidated Balance Sheets.
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%. In connection with these workforce reductions, the Company
recorded a $4.3 million charge ($0.7 million in Cost of sales and $3.6 million
in Selling, general and administrative expense) for severance and related
expenses, including costs associated with the succession of the Company's Chief
Executive Officer. Of the $4.3 million total charge, $4.1 million was initially
credited to Accrued expenses and other liabilities and $0.2 million,
representing a non-cash expense for the amendment of employee stock options, was
credited to Additional paid-in capital. As of September 30, 2002, $2.6 million
of the total $4.1 million has been paid and $1.5 million remains accrued in
Accrued expenses and other liabilities in the Condensed Consolidated Balance
Sheets.
LIQUIDITY AND CAPITAL COMMITMENTS
Working capital was $61.0 million at September 30, 2002, which represented
a working capital ratio of 3.3 to 1, compared to $62.7 million, or 3.2 to 1, at
June 30, 2002.
Net cash provided by (used in) operating activities for the three months
ended September 30, 2002 was $2.0 million compared with $(1.9) million for the
comparable period in the prior year. The increase in net cash provided by
operating activities was primarily due to reductions in inventory of $3.1
million and in accounts receivable of $2.7 million resulting from lower sales
volume. The decrease in inventory was also the result of improvements in
operating efficiency. These benefits to operating cash flows during the first
quarter of fiscal 2003 were partially offset by a $2.3 million reduction in
accounts payable. For the corresponding period in the prior year, net cash used
in operating activities reflects the reduction in accounts payable, accrued
expenses and other liabilities of $7.5 million, which primarily consisted of
$2.2 million of payments on retained discontinued operations liabilities,
year-end incentive payments and a reduction in accounts payable levels.
12
Net cash (used in) investing activities for the three months ended
September 30, 2002 was $(1.0) million, compared with $(1.1) million for the
comparable period for the prior year. This reflects a $0.6 million reduction in
capital expenditures in response to the continued weakness in the technology
sector of the economy, offset by the partial payment for the acquisition of
technology rights.
Net cash (used in) provided by financing activities for the three months
ended September 30, 2002 was $(20,000), compared with $23.7 million for the
comparable period for the prior year. The decrease in cash provided by financing
activities was primarily due to net proceeds of $23.3 million raised from a
private equity placement in August 2001.
The Company has a $15.0 million revolving line of credit with a commercial
bank expiring on September 30, 2003, which can be used to provide funds for
general corporate purposes and acquisitions. Borrowings under this line bear
interest at prime plus a margin of between .25% and 1.25%, or LIBOR plus a
margin of between 1.5% and 2.5%, depending on the Company's Leverage Ratio. As
of September 30, 2002, there were no borrowings outstanding under this line of
credit.
On June 12, 2000, the Company secured a $2.0 million capital lease line of
credit to fund certain capital expenditures. As of September 30, 2002, the
Company had $0.4 million outstanding under this line of credit, $0.1 million of
which was included in Accrued expenses and other liabilities and the remaining
$0.3 million in Non-current liabilities on the Condensed Consolidated Balance
Sheets. The outstanding borrowings under this line bear interest at 12.2%.
In addition to the above U.S. based credit facilities, the Company
maintains certain short-term foreign credit facilities, principally with two
Japanese banks totaling 150 million yen ($1.2 million as of September 30, 2002).
No amounts were outstanding under such facilities as of September 30, 2002.
The Company has operating leases covering plant, certain office facilities
and equipment that expire at various dates through 2012. Future minimum annual
lease payments required during the years ending in fiscal 2003 through 2007 and
later years, under noncancelable operating leases having an original term of
more than one year, are $2.0 million, $1.6 million, $1.1 million, $0.9 million,
$0.9 million and $2.7 million, respectively.
As of September 30, 2002, the Company has two technology license
agreements, under which it is unconditionally committed to pay $2.7 million,
$0.5 million and $0.3 million in fiscal 2003, 2004 and 2005, respectively.
The Company believes that its cash on hand, cash flow generated by its
continuing operations and availability under its revolving credit agreement will
be sufficient to fund working capital and capital expenditure requirements for
at least the next twelve months and provide funds for potential acquisition
opportunities.
CRITICAL ACCOUNTING POLICIES
The preparation of these condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and accompanying
notes. These estimates and assumptions are based on management's judgment and
available information and, consequently, actual results could be different from
these estimates.
These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002 for
a description of the Company's critical accounting policies involving
significant judgment by the Company's management. There have been no changes in
the Company's critical accounting policies since June 30, 2002.
13
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 term 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. For the three months ended September 30, 2002 and 2001, the Company
recognized pre-tax deferred license fee revenue of $0.3 million of the $7.1
million deferred license fee revenue. Such license fees were included in Service
and other revenue in the Condensed Consolidated Statements of Operations. As of
September 30, 2002, the remaining balance of pre-tax deferred license fee
revenue was $4.2 million. The Company has not entered into an agreement in which
it has recognized license fee revenue since the third quarter of fiscal 1999.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2002, the Financial Accounting Standards Board ("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 No. 94-3 had
recognized the liability at the commitment date to an exit plan. The Company is
required to adopt the provisions of SFAS No. 146 effective for exit or disposal
activities initiated after December 31, 2002. SFAS No. 146 will change the
timing of liability and expense recognition related to exit or disposal
activities, but not the ultimate amount of such expenses.
SUBSEQUENT EVENTS
In October 2002, the Company announced plans to eliminate at least one
older product line and to make significant changes to its manufacturing
strategy. These changes, which are designed to further improve the Company's
operating efficiency, are expected to result in a non-cash charge of
approximately $2.0 million in the second quarter of fiscal 2003 related to the
write-off of related assets.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company purchases materials from suppliers and sells its products
around the world and maintains investments in foreign subsidiaries, all
denominated in a variety of currencies. As a consequence, it is exposed to risks
from fluctuations in foreign currency exchange rates with respect to a number of
currencies, changes in government policies and legal and regulatory
requirements, political instability, transportation delays and the imposition of
tariffs and export controls. Among the more significant potential risks to the
Company of relative fluctuations in foreign currency exchange rates is the
relationship among and between the United States dollar, the European monetary
unit, Swiss franc, British pound, Japanese yen and Korean won.
During the third quarter of fiscal 2001, the Company began a program of
entering into foreign exchange forward contracts to minimize the risks
associated with currency fluctuations on assets or liabilities denominated in
other than the functional currency of LeCroy or its subsidiaries. It cannot be
assured, however, that this program will effectively offset all of the Company's
foreign currency risk related to these assets or liabilities. Other than this
program, the Company does not attempt to reduce its foreign currency exchange
risks by entering into foreign currency management programs and it has no plans
to do so in the near term. As a consequence, there can be no assurance that
fluctuations in foreign currency exchange rates in the future as a result of
mismatches between local currency revenues and expenses, the translation of
foreign currencies into the U.S. dollar, the Company's financial reporting
currency, or otherwise, will not adversely affect the Company's results of
operations. Moreover, fluctuations in exchange rates could affect the demand for
our products. During the three month periods ended September 30, 2002 and 2001,
the Company reported foreign currency exchange (losses) gains on assets or
liabilities denominated in other than their functional currencies and related
foreign exchange forward contracts of $(0.2) million and $0.1 million,
respectively. At September 30, 2002 and June 30, 2002, the Company had
approximately $7.5 million and $12.8 million, respectively, of open foreign
exchange forward contracts all with short-term maturities of less than three
months.
The Company performed a sensitivity analysis assuming a hypothetical 10%
adverse change in foreign currency exchange rates on its foreign exchange
forward contracts and its assets or liabilities denominated in other than their
functional currencies. In management's opinion, a 10% adverse change in foreign
currency exchange rates would not have a material effect on these instruments or
the Company's results of operations, financial position or cash flows.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
the Company's actual results or activities to differ materially from these
forward-looking statements include but are not limited to: the effect of
economic conditions, including the effect on purchases by the Company's
customers; competitive factors, including pricing pressures, technological
developments and products offered by competitors; changes in product sales and
mix; the Company's ability to deliver a timely flow of competitive new products
and market acceptance of these products; inventory risks due to changes in
market demand or the Company's business strategies; currency fluctuations; risks
due to an interruption in supply or an increase in price for the Company's
parts, components and subassemblies; and other risk factors listed from time to
time in the Company's reports filed with the Securities and Exchange Commission
and press releases, specifically, those discussed in the section entitled "Risk
Factors" in the Form S-3 Registration Statements No. 333-64848 and No.
333-43690.
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
Included in this Form 10-Q are a number of important risk factors and
uncertainties that should be considered by stockholders and by potential
investors in the Company. Also, readers should carefully review the Company's
reports filed with the Securities and Exchange Commission and press releases,
specifically, those sections entitled "Risk Factors" in the Form S-3
Registration Statements No. 333-64848 and No. 333-43690.
15
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an
evaluation was carried out under the supervision and with the participation of
the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation,
the CEO and CFO have concluded that the Company's disclosure controls and
procedures are effective to ensure that material information relating to the
Company and its consolidated subsidiaries is made known to them, particularly
during the period when our periodic reports are being prepared. Subsequent to
the date of management's evaluation, there were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
16
LECROY CORPORATION
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------------------------------------------
ITEM 6(A) EXHIBITS
99.1 Chief Executive Officer certification pursuant to 18 U.S.C.ss.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Chief Financial Officer certification pursuant to 18
U.S.C.ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
ITEM 6(B) REPORTS ON FORM 8-K
No current reports on Form 8-K were filed during
the quarter ended September 30, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LECROY CORPORATION
Date: November 12, 2002
/s/ Raymond F. Kunzmann
-------------------------------------------
Vice President and Chief Financial Officer,
Secretary and Treasurer
17
CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas H. Reslewic, Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LeCroy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Thomas H. Reslewic
----------------------
Thomas H. Reslewic
Chief Executive Officer
November 12, 2002
18
CERTIFICATION PURSUANT TO RULE 13A-14 OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Raymond F. Kunzmann, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of LeCroy
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Raymond F. Kunzmann
-----------------------
Raymond F. Kunzmann
Chief Financial Officer
November 12, 2002
19