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, 2004
------------------------------------------
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 25, 2004
---------------------------------- -------------------------------
Common stock, par value $.01 share 12,044,554
LECROY CORPORATION
FORM 10-Q
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2004
(Unaudited)and June 30, 2004................................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months ended September 30, 2004 and 2003....... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months ended September 30, 2004 and 2003....... 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 34
Item 4. Controls and Procedures........................................ 34
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 36
Item 6. Exhibits....................................................... 37
Signature ............................................................ 37
LeCroy(R), Wavelink(TM), WaveMaster(R), WavePro(R), WaveRunner(R),
WaveSurfer(TM) and MAUI(TM) are our trademarks. All other trademarks,
servicemarks or tradenames referred to in this Form 10-Q are the property of
their respective owners.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LECROY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
In thousands, except par value and share data 2004 2004
- --------------------------------------------- ------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 28,891 $ 28,566
Marketable securities............................................................ 9,570 9,534
Accounts receivable, net......................................................... 24,624 24,675
Inventories, net................................................................. 25,146 21,978
Other current assets............................................................. 12,002 11,921
----------- ----------
Total current assets........................................................... 100,233 96,674
Property and equipment, net.......................................................... 19,433 19,778
Other assets......................................................................... 14,203 13,341
----------- ----------
TOTAL ASSETS......................................................................... $ 133,869 $ 129,793
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease................................................. $ 111 $ 107
Accounts payable................................................................. 12,547 12,097
Accrued expenses and other current liabilities................................... 15,096 14,554
----------- ----------
Total current liabilities...................................................... 27,754 26,758
Deferred revenue and other non-current liabilities................................... 1,751 1,427
----------- ----------
Total liabilities.............................................................. 29,505 28,185
Stockholders' equity:
Common stock, $.01 par value (authorized 45,000,000 shares; 12,044,544 and
11,973,830 shares issued and outstanding as of September 30, 2004 and June
30, 2004, respectively).......................................................... 120 120
Redeemable convertible preferred stock, $.01 par value (authorized 5,000,000 shares
of preferred stock; none issued and outstanding at September 30, 2004 and June 30,
2004)............................................................................. -- --
Additional paid-in capital......................................................... 99,330 98,421
Warrants to purchase common stock.................................................. 2,165 2,165
Accumulated other comprehensive income............................................. 325 434
Deferred stock compensation........................................................ (6,855) (6,509)
Retained earnings.................................................................. 9,279 6,977
----------- ----------
Total stockholders' equity........................................................... 104,364 101,608
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $ 133,869 $ 129,793
=========== ==========
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 2004 2003
- ----------------------------------- ----------- ------------
14 Weeks 13 Weeks
Revenues:
Oscilloscopes and related products....................... $ 32,316 $ 24,605
Service and other........................................ 3,189 2,814
--------- ---------
Total revenues......................................... 35,505 27,419
Cost of sales.............................................. 14,773 11,799
--------- ---------
Gross profit........................................... 20,732 15,620
Operating expenses:
Selling, general and administrative...................... 12,310 9,921
Research and development ................................ 4,736 3,684
--------- ---------
Total operating expenses............................... 17,046 13,605
Operating income........................................... 3,686 2,015
Other expense, net....................................... (32) (322)
--------- ---------
Income before income taxes................................. 3,654 1,693
Provision for income taxes............................... 1,352 626
--------- ---------
Net income................................................. 2,302 1,067
Redemption of convertible preferred stock.................. -- 7,665
--------- ---------
Net income (loss) applicable to common stockholders........ $ 2,302 $ (6,598)
========= =========
Net income (loss) per common share applicable to common
stockholders:
Basic................................................ $ 0.20 $ (0.63)
Diluted.............................................. $ 0.19 $ (0.63)
Weighted average number of common shares:
Basic................................................ 11,612 10,414
Diluted.............................................. 12,177 10,414
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 2004 2003
- ------------ ----------- ------------
14 Weeks 13 Weeks
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 2,302 $ 1,067
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization........................................................... 1,522 1,553
Amortization of deferred stock-based compensation....................................... 449 7
Deferred income taxes................................................................... 993 514
Recognition of deferred revenue......................................................... (324) (324)
(Gain) loss on disposal of property and equipment, net.................................. (3) 23
Tax benefit from exercise of stock options.............................................. 18 --
Change in operating assets and liabilities:
Accounts receivable..................................................................... 82 736
Inventories............................................................................. (3,478) 951
Other current and non-current assets.................................................... (335) (635)
Accounts payable, accrued expenses and other liabilities................................ 956 (88)
--------- ---------
Net cash provided by operating activities................................................. 2,182 3,804
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................................................... (624) (631)
Purchase of marketable securities....................................................... (40) --
Business acquisition costs.............................................................. (967) --
Purchase of intangible assets........................................................... -- (150)
--------- ---------
Net cash used in investing activities..................................................... (1,631) (781)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings under capital leases............................................ (25) (24)
Borrowings under line of credit......................................................... -- 10,000
Redemption of convertible preferred stock............................................... -- (23,000)
Payments related to common stock offering............................................... (7) --
Proceeds from employee stock purchase and option plans.................................. 103 395
Payment of seller-financed intangible assets............................................ (250) --
--------- ---------
Net cash used in financing activities..................................................... (179) (12,629)
--------- ---------
Effect of exchange rate changes on cash................................................... (47) (24)
--------- ---------
Net increase (decrease) in cash and cash equivalents.................................... 325 (9,630)
Cash and cash equivalents at beginning of the period.................................... 28,566 30,851
--------- ---------
Cash and cash equivalents at end of the period.......................................... $ 28,891 $ 21,221
========= =========
Supplemental Cash Flow Disclosure
Cash paid during the period for:
Interest.............................................................................. $ 64 $ 25
Income taxes.......................................................................... 48 30
Non-cash investing and financing activities:
Acquisition of seller-financed intangible assets........................................ 963 --
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, 2004. The condensed consolidated balance sheet as
of June 30, 2004 has been derived from these audited consolidated financial
statements. Certain reclassifications have been made to prior-year amounts to
conform to the current-period 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
of America, 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. The most significant of these estimates and assumptions relate to
the allowance for doubtful accounts, allowance for excess and obsolete
inventory, warranty accrual, stock-based compensation, 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 Company's fiscal period ends on the Saturday closest to September 30,
which resulted in the period ending October 2, 2004. Fiscal 2005 is a
fifty-three week year and, as a result, the first quarter of fiscal 2005 was a
14-week period compared with a 13-week period for the first quarter of fiscal
2004. For clarity of presentation, the condensed consolidated financial
statement period-end references are stated as September 30.
2. ACQUISITION
On September 1, 2004, the Company entered into an agreement to acquire 100%
of the outstanding common stock of Computer Access Technology Corporation
("CATC") for $6.00 per share plus additional cash to the holders of CATC's
outstanding, vested in-the-money stock options and shares issued pursuant to
CATC's employee stock purchase plan. In addition, the Company agreed to assume
CATC's outstanding unvested, as well as certain vested but not cashed out, stock
options. The Company's acquisition of CATC was accomplished via the merger of a
newly-formed, wholly-owned subsidiary of LeCroy with and into CATC, with CATC
surviving as a wholly-owned subsidiary of LeCroy (the "Merger"), which became
effective on October 29, 2004 (see Note 19 - Subsequent Events).
3. 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 compensation expense related to stock options are reflected
in the Company's Condensed Consolidated Statements of Operations, as all options
granted under past and existing plans have 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 its market value on the date of grant and
is included in the Company's Condensed Consolidated Statements of Operations
ratably over the vesting period. Upon the grant of restricted stock, deferred
stock compensation is recorded as an offset to additional paid-in capital and is
amortized on a straight-line basis as compensation expense over the vesting
period.
6
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 for stock-based
employee compensation of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure."
Three Months Ended
September 30,
2004 2003
------------ ------------
In thousands, except per share data
Net income, as reported.................................................. $ 2,302 $ 1,067
Add: stock-based compensation expense included in reported
net income, net of income taxes........................................ 282 4
Deduct: stock-based compensation expense determined under
fair value-based method for all awards, net of income taxes............ (683) (708)
---------- -----------
Pro forma net income .................................................... 1,901 363
Charges related to convertible preferred stock........................... - 7,665
---------- -----------
Pro forma net income (loss) applicable to common stockholders............ $ 1,901 $ (7,302)
========== ===========
Net income (loss) per common share applicable to common stockholders:
Basic, as reported..................................................... $ 0.20 $ (0.63)
Diluted, as reported................................................... $ 0.19 $ (0.63)
Basic, pro forma....................................................... $ 0.16 $ (0.70)
Diluted, pro forma..................................................... $ 0.16 $ (0.70)
In connection with the Merger, on October 29, 2004, the Company established
the 2004 Employment Inducement Stock Plan and assumed CATC's 2000 Stock
Option/Stock Issuance Plan, Special 2000 Stock Option Plan, 2000 Stock Incentive
Plan and 1994 Stock Option Plan (see Note 19 - Subsequent Events).
4. REVENUE RECOGNITION
Revenue recognition. The Company recognizes revenue, net of allowances for
anticipated returns, provided that (1) persuasive evidence of an arrangement
exists, (2) delivery has occurred, (3) the selling price is fixed or
determinable and (4) collection is reasonably assured. Delivery is considered to
have occurred when title and risk of loss have transferred to the customer, or
when services have been provided. The price is considered fixed or determinable
when it is not subject to refund or adjustments.
The Company maintains an allowance for doubtful accounts relating to
accounts receivable estimated to be non-collectible. The Company analyzes
historical bad debts, customer concentrations, customer creditworthiness,
current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts.
Product revenue. The Company generates product revenues from the sales of
oscilloscopes, probes, accessories and application solutions. Application
solutions, which provide the oscilloscope with additional analysis capabilities,
are either delivered via compact disc read-only memory or are already loaded in
the oscilloscope and activated via a key code after the sale is made to the
customer for such application solution. All sales of these related products are
based upon separately established prices for these items and are recorded as
revenue according to the above revenue recognition criteria. No post-contract
support is provided on the application solutions. Revenues from these related
products are included in revenues from oscilloscopes and related products on the
Condensed Consolidated Statements of Operations. Software is embedded in the
Company's oscilloscopes, but the software component is considered incidental.
7
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
License revenue. The Company recognizes software license revenue in
accordance with American Institute of Certified Public Accountants 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 delivery 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 license revenue. The revenue allocated to software
maintenance is recognized ratably over the term of the support agreement. The
revenue allocated to licenses is recognized upon delivery of the licenses.
Service revenue. Service revenues include extended warranty contracts and
repairs and calibrations performed on instruments after the expiration of their
normal warranty period. The Company records deferred revenue for extended
warranty contracts and calibrations included within the sales contract
agreement. This deferred revenue is then recognized on a straight-line basis
over the related service period. When arrangements include multiple elements,
the Company uses relative fair values in accordance with Emerging Issues Task
Force ("EITF") 00-21, "Revenue Arrangements with Multiple Deliverables," to
allocate revenue to the elements and recognize revenue when the criteria for
revenue recognition have been met for each element.
Deferred revenue. During the third quarter of fiscal 2004, the Company
began shipping its new WaveSurfer family of oscilloscopes. One component of the
Company's strategy for distributing this new family of oscilloscopes is the use
of a buy-sell distribution channel. This is the Company's initial entry into
this distribution channel and because of the associated uncertainty about
sell-through volumes the Company has determined that it is only appropriate to
recognize revenue when the WaveSurfer is sold by the distributors to their
customers. Until revenue is recognized, WaveSurfers sold to distributors are
included in the Company's finished goods inventory and recorded in deferred
revenue, included in accrued expenses and other current liabilities in the
accompanying Condensed Consolidated Balance Sheets.
SAB 101 "Revenue Recognition in Financial Statements." Beginning in fiscal
2001 with the adoption of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," revenue from license fees under agreements that have exclusivity
clauses and, from the licensee's perspective, have ongoing requirements or
expectations that are more than perfunctory, are recognized over the term of the
related agreements. An ongoing requirement or expectation would be considered
more than perfunctory if any party to the contract considers it to be "essential
to the functionality" of the delivered product or service or failure to complete
the activities would result in the customer receiving a full or partial refund
or rejecting the products delivered or services performed to date.
Under SAB 101 (superseded by SAB 104), 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 is being 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, 2004 and
2003. Such license fees were included in service and other revenue in the
Condensed Consolidated Statements of Operations. As of September 30, 2004, the
remaining balance of pre-tax deferred license fee revenue was $1.6 million, of
which $1.3 million is reflected in accrued expenses and other current
liabilities with the remainder reflected in deferred revenue and non-current
liabilities on the accompanying Condensed Consolidated Balance Sheet.
8
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
5. 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 was recorded in selling, general and administrative expense and
$0.2 million was recorded in research and development expense). The
implementation of this plan resulted in headcount reductions of 27 employees or
approximately 7% of the workforce as compared to June 30, 2002. Final payments
for severance under this plan occurred in the fourth quarter of fiscal 2004. As
of September 30, 2004, $0.8 million of the total $0.9 million has been paid and
$0.1 million remains in accrued expenses and other current 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.
During the first quarter of fiscal 2003, the Company adopted a plan to scale
down fixed infrastructure due to the difficult economic environment and to
implement new management operating systems designed to improve processes in
sales, order management, customer relationship management and financial
performance management. In connection with the adoption of this plan, the
Company recorded a charge for severance and other related expenses in the first
quarter of fiscal 2003 of $2.6 million ($2.1 million of which was recorded in
selling, general and administrative expense and $0.5 million was recorded in
research and development expense). The plan implemented during fiscal 2003
resulted in improved operating efficiencies and headcount reductions of 38
employees or approximately 9% of the workforce as compared to June 30, 2002. As
of September 30, 2004, $2.5 million of the total $2.6 million has been paid and
$0.1 million remains in accrued expenses and other current liabilities in the
Condensed Consolidated Balance Sheet. Severance and other related amounts under
this plan will be paid by the end of the second quarter of fiscal 2006.
6. DERIVATIVES
The Company enters into foreign exchange forward contracts to minimize the
risks associated with foreign currency fluctuations on assets or liabilities
denominated in other than the functional currency of the Company or its
subsidiaries. These foreign exchange forward contracts are not accounted for as
hedges in accordance with SFAS No. 133, "Accounting for Derivative Investments
and Hedging Activities"; therefore, any changes in fair value of these contracts
are recorded in other income (expense), net in the Condensed Consolidated
Statements of Operations. These foreign exchange forward contracts are recorded
on the Condensed Consolidated Balance Sheets at fair value. The changes in fair
value of these contracts are highly inversely correlated to changes in the value
of certain of the Company's foreign currency-denominated assets and liabilities.
The net (losses) or gains resulting from changes in the fair value of these
derivatives and on transactions denominated in other than their functional
currencies were ($62,000) and $20,000 for the three-month periods ended
September 30, 2004 and 2003, respectively. These amounts are included in other
expense, net in the Condensed Consolidated Statements of Operations and include
gross gains of $19,000 and $0.1 million in the three-month periods ended
September 30, 2004 and 2003, respectively. At September 30, 2004 and June 30,
2004, the notional amounts of the Company's open foreign exchange forward
contracts, all with maturities of less than six months, were approximately $6.5
million and $8.2 million, respectively.
9
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
7. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income:
Three months ended
September 30,
-----------------------
2004 2003
--------- ---------
In thousands
Net income.................................. $ 2,302 $ 1,067
Unrealized loss on marketable securities.. (5) --
Foreign currency translation.............. (104) 469
--------- --------
Comprehensive income........................ $ 2,193 $ 1,536
========= ========
The Company's investments in debt securities are classified as
available-for-sale and are reported at fair value based on quoted market prices.
Unrealized gains and losses, net of taxes, are reported as a component of
stockholders' equity. Realized gains and losses on investments are included in
other expense, net on the Condensed Consolidated Statements of Operations when
realized. As of September 30, 2004, the Company had debt securities of $9.6
million, net of an unrealized loss of $27,000. Management has the ability and
intent, if necessary, to liquidate any of these investments in order to meet its
liquidity needs within the normal operating cycle. Accordingly, all investments
in debt securities are classified as current assets.
8. ACCOUNTS RECEIVABLE, NET
The Company has agreements with two of its customers, who are also vendors,
which provide the Company with the legal right to offset outstanding accounts
receivable balances against outstanding accounts payable balances. At September
30, 2004 and June 30, 2004, the Company netted approximately $3.0 million and
$0.6 million, respectively, of accounts receivable against accounts payable on
the Condensed Consolidated Balance Sheets related to these agreements.
9. 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,
2004 2004
--------- ---------
In thousands
Raw materials.............................. $ 8,127 $ 6,617
Work in process............................ 5,082 4,544
Finished goods............................. 11,937 10,817
--------- ---------
$ 25,146 $ 21,978
========= =========
The value of demonstration units included in finished goods was $8.3 million
and $8.0 million at September 30, 2004 and June 30, 2004, respectively. The
Company's demonstration units are held for sale and are sold regularly in the
ordinary course of business through its normal sales distribution channels and
existing customer base.
10
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
10. OTHER CURRENT ASSETS
Other current assets consist of the following:
September 30, June 30,
2004 2004
----------- -----------
In thousands
Deferred tax assets, net......................... $ 7,400 $ 7,400
Other receivables................................ 1,130 511
Prepaid probes and accessories................... 700 818
Value-added tax.................................. 741 595
Other............................................ 2,031 2,597
----------- -----------
$ 12,002 $ 11,921
=========== ===========
11. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
September 30, June 30,
2004 2004
----------- -----------
In thousands
Land, building and improvements.................. $ 14,821 $ 14,640
Furniture, machinery and equipment............... 28,100 25,073
Computer software and hardware................... 15,218 17,637
----------- -----------
58,139 57,350
Less: Accumulated depreciation and amortization.. (38,706) (37,572)
----------- -----------
$ 19,433 $ 19,778
=========== ===========
Depreciation and amortization expense was $1.2 million for the three-month
periods ended September 30, 2004 and 2003.
12. OTHER ASSETS
Other assets consist of the following:
September 30, June 30,
2004 2004
----------- -----------
In thousands
Intangibles, net................................ $ 6,425 $ 5,802
Deferred tax assets, net........................ 3,779 4,771
Goodwill........................................ 1,874 1,874
Other........................................... 2,125 894
----------- -----------
$ 14,203 $ 13,341
=========== ===========
Under SFAS No. 142 "Goodwill and Other Intangible Assets," goodwill is not
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 2004 and determined that
there was no impairment to its recorded goodwill balances. No impairment
indicators arose during the first quarter of fiscal 2005.
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:
11
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Weighted September 30, June 30,
Average Lives 2004 2004
-------------- ------------- ----------
(as of September In thousands
30, 2004)
Amortizable intangible assets:
Technology, manufacturing and distribution rights.......... 4.0 years $ 9,860 $ 8,897
Patents and other intangible assets........................ 4.4 years 661 661
Effect of currency translation on intangible assets........ 148 148
Accumulated amortization................................... (4,244) (3,904)
--------- ----------
Net carrying amount.......................................... $ 6,425 $ 5,802
========= ==========
Non-amortizable intangible assets:
Goodwill................................................. $ 1,874 $ 1,874
========= ==========
Amortization expense for those intangible assets with finite lives was $0.3
million for the three months ended September 30, 2004 and 2003. 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 over the estimated economic life
of the asset. Management estimates intangible assets amortization expense on a
straight-line basis in fiscal 2005 through 2008 will approximate $1.9 million,
$1.8 million, $1.8 million, and $1.2 million, respectively.
In the first quarter of fiscal 2005, the Company purchased a license for
approximately $1.0 million for the use of electronic design automation software
to be amortized over a three year term of the license.
13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
September 30, June 30,
2004 2004
--------- ----------
In thousands
Compensation and benefits.......................... $ 4,062 $ 5,022
Income taxes....................................... 3,332 2,938
Deferred license fee revenue, current portion...... 1,296 1,296
Warranty........................................... 1,241 1,247
Deferred revenue, current portion.................. 2,223 1,606
Retained liabilities from discontinued operations.. 160 160
Other.............................................. 2,782 2,285
--------- ----------
$ 15,096 $ 14,554
========= ==========
14. WARRANTIES AND GUARANTEES
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.
12
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table is a reconciliation of the changes in the Company's
aggregate product warranty liability during the three months ended September 30,
2004 and 2003:
Three months ended
September 30,
-----------------------
2004 2003
--------- ---------
In thousands
Balance at beginning of period..................... $ 1,247 $ 1,235
Accruals for warranties entered into during the period 417 273
Warranty costs incurred during the period........ (423) (267)
-------- --------
Balance at end of period........................... $ 1,241 $ 1,241
======== ========
In connection with an agreement to license the Company's MAUI Instrument
Operating System technology entered into by the Company during the third quarter
of fiscal 2003, the Company agreed to indemnify the licensee against losses
arising from any third party claim against the licensee to the extent such claim
arose directly out of the infringement of a U.S. or Japanese patent by any
LeCroy software components delivered under the license agreement. As of
September 30, 2004, there have been no claims under such indemnification
provisions.
As is customary in the Test and Measurement industry, and as provided for by
local law in the U.S. and other jurisdictions, the Company's standard terms of
sale provide remedies to customers, such as defense, settlement, or payment of a
judgment for intellectual property claims related to the use of the Company's
products. 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.
15. DEBT
On November 13, 2003, the Company amended its $15.0 million revolving credit
facility with The Bank of New York. The amended agreement provided the Company
with a $25.0 million revolving credit facility expiring on November 30, 2006,
which could be used to provide funds for general corporate purposes and
acquisitions. Borrowings under this line bore interest at prime plus a margin
not to exceed 1.00%, or at the London Interbank Offering Rate ("LIBOR") plus a
margin of between 1.25% and 2.25%, depending on the Company's leverage ratio, as
such term is defined in the credit agreement. A commitment fee of 0.375% per
annum was payable on any unused amount under the facility. This revolving line
of credit was secured by a lien on substantially all of the domestic assets of
the Company. As of September 30, 2004, the Company was in compliance with its
financial covenant requirements and there were no borrowings outstanding under
this line of credit. On October 29, 2004, the Company entered into a new $75.0
million credit facility with the lenders written therein and The Bank of New
York, as administrative agent for such lenders, which replaced the $25.0 million
revolving credit facility referred to above (See Note 19 - Subsequent Events).
16. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999 (the "Closing"), the Company completed a private placement
of 500,000 shares of its redeemable convertible preferred stock for proceeds of
$10.0 million. 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.
On September 27, 2003, the Company repurchased from the holders of its
redeemable convertible preferred stock all 500,000 issued and outstanding shares
for $23.0 million in cash. In connection with the repurchase 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 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 Securities and Exchange Commission's position published in
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 fiscal
2004.
13
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Company and the holders of its preferred stock agreed that the final
repurchase of preferred stock would be negotiated as though the transaction had
occurred at the beginning of the first quarter of fiscal 2004. As a result, the
Company accounted for the transaction as though no dividends had accrued in
fiscal 2004 and that the charge for the value originally attributed to the
warrants at the point of issue that remained unaccreted at the time of
redemption was accelerated and combined with the redemption premium to reflect
the total charge related to the redemption of convertible preferred stock in the
Condensed Consolidated Statement of Operations.
17. COMMITMENTS AND CONTINGENCIES
On April 28, 2003, Tektronix, Inc. ("Tektronix") filed a complaint against
the Company in the United States District Court for the District of Oregon
claiming that the Company infringed on eight of Tektronix' U.S. patents. In the
Company's responsive pleading, the Company denied that it has infringed, or is
infringing, any of these patents, and contends that the patents are invalid.
Four of these patents concern software user interface features for
oscilloscopes, two concern circuitry and two concern probes. On August 5, 2003,
the Company filed a counterclaim in the United States District Court for the
District of Oregon claiming that Tektronix is infringing three of the Company's
patents. The Company believes it has meritorious defenses and intends to defend
this action vigorously. Discovery in this case is ongoing and the outcome cannot
be predicted.
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 a U.S. patent relating to the graphical display of test limits.
LeCroy answered the complaint denying infringement and asserted a counterclaim
alleging the invalidity of the patent and that Sicom had abused the judicial
process by bringing a baseless patent infringement claim. On July 16, 2003,
LeCroy filed a Motion to Dismiss Sicom's case, contending that Sicom did not
have standing to bring the litigation. On November 20, 2003, the Court granted
LeCroy's Motion to Dismiss. On December 18, 2003, Sicom filed a Notice of Appeal
to the United States Court of Appeals for the Federal Circuit. On December 30,
2003, Sicom filed a new patent infringement lawsuit against LeCroy in the United
States District Court for the District of Delaware. Tektronix and Agilent
Technologies are also co-defendants in this new litigation. The complaint in
this new case is essentially the same as the complaint filed by Sicom on January
15, 2003, except that Sicom now states that it entered into an amendment to its
license agreement with the Canadian government on December 19, 2003, and that
Sicom now has the exclusive right to bring suit for infringement of the patent
in the United States. On January 5, 2004, Sicom filed a Notice and Order of
Dismissal of Appeal of its appeal to the Court of Appeals for the Federal
Circuit and the Order was entered on the following day. In LeCroy's responsive
pleading, LeCroy denied that it has infringed, or is infringing, the patent, and
contends that the patent is invalid. The defendants in this case, including us,
filed a Motion to Dismiss for lack of standing contending that Sicom's amended
license agreement with Canada does not cure the standing defects that caused the
Court to dismiss the original lawsuit. The court granted the Defendants' Motion
on October 5, 2004, dismissing the case with prejudice. On October 28, 2004,
Sicom filed a Notice of Appeal to the United States Court of Appeals for the
Federal Circuit. LeCroy intends to defend itself vigorously in this litigation.
From time to time, the Company is involved in lawsuits, claims,
investigations and proceedings, including patent and environmental matters,
which arise in the ordinary course of business. There are no matters pending,
including those described above, that the Company expects to be material to its
business, results of operations, financial condition or cash flows.
14
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
18. EARNINGS PER COMMON SHARE
The following is a presentation of the numerators and the denominators of
the basic and diluted net income (loss) per share computations for the three
months ended September 30, 2004 and 2003.
Three Months Ended
September 30,
-----------------------
2004 2003
--------- ---------
In thousands
Numerator:
Net Income............................................. $ 2,302 $ 1,067
Redemption of convertible preferred stock.............. -- (7,665)
--------- ---------
Net income (loss) applicable to common stockholders.... $ 2,302 $ (6,598)
========= =========
Denominator:
Weighted average shares outstanding:
Basic .......................................... 11,612 10,414
Employee stock options and other................ 565 --
--------- ---------
Diluted......................................... 12,177 10,414
========= =========
The computation of diluted net income per common share for the three months
ended September 30, 2004 and 2003 does not include approximately 1.3 million and
0.6 million, respectively, common stock options, as the effect of including such
options would have been anti-dilutive to earnings per share as defined in SFAS
No. 128, "Earnings per Share".
Subsequent to September 30, 2004, the Company issued additional stock
options and restricted stock in connection with the CATC acquisition (see Note
19 - Subsequent Events).
19. SUBSEQUENT EVENTS
As mentioned in Note 2 to the Condensed Consolidated Financial Statements,
the acquisition of CATC via the Merger became effective on October 29, 2004.
Under the terms of the Merger, the Company acquired 100% of the outstanding
common stock of CATC for approximately $120.3 million. The Company paid
additional cash of approximately $4.0 million to the holders of CATC's
outstanding, vested in-the-money stock options and employee stock purchase plan
rights. In addition, the Company granted approximately 648,000 stock options to
assume CATC's outstanding unvested, as well as certain vested but not cashed out
stock options. The fair value of the options granted is approximately $6.0
million and is included in the acquisition costs net of approximately $2.0
million representing the intrinsic value of unearned compensation to be
amortized over the remaining vesting period of the assumed unvested options.
Including transaction costs approximating $2.3 million, the acquisition cost was
approximately $83.0 million, net of CATC's approximately $47.5 million of cash
and cash equivalents.
As referenced in Note 3 to the Condensed Consolidated Financial Statements,
on October 29, 2004, the Company's Board of Directors approved the LeCroy
Corporation 2004 Employment Inducement Stock Plan (the "2004 Plan") to promote
the interests of the Company and its stockholders by strengthening the Company's
ability to attract and induce persons to become employees of the Company,
including certain of CATC's employees. The 2004 Plan does not require
stockholder approval. The initial number of shares of LeCroy common stock that
may be issued or transferred pursuant to options or restricted stock awards
granted under the 2004 Plan is 750,000. On October 29, 2004, the Company issued
the following grants under the 2004 Plan: (i) 70,000 shares of restricted common
stock to certain former officers of CATC and (ii) options to purchase an
aggregate of 230,984 shares of common stock to 61 former CATC employees who
became non-officer employees of LeCroy (none of whom received an option grant of
more than 20,000 shares).
15
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
In connection with the Merger, LeCroy assumed CATC's 2000 Stock Option/Stock
Issuance Plan, Special 2000 Stock Option Plan, 2000 Stock Incentive Plan and
1994 Stock Option Plan (collectively, the "CATC Stock Plans"). On October 27,
2004, the Board of Directors of CATC approved technical amendments to each of
the CATC Stock Plans in anticipation of their assumption by LeCroy pursuant to
the Merger, including without limitation, amendments reflecting that any stock
option and other awards granted thereunder will be exercisable for LeCroy common
stock.
Also on October 29, 2004, the Company entered into a five-year, $75.0
million senior secured credit facility (the "Credit Agreement"), comprised of a
$50.0 million term loan (the "Term Loan") and a $25.0 million revolving credit
facility (the "Revolver"), with the lenders listed therein and The Bank of New
York, as administrative agent for such lenders. The Credit Agreement replaces
the Company's existing $25.0 million revolving credit facility. The proceeds
under the Term Loan have been used fully to finance the acquisition of CATC and
pay transaction expenses related to the Merger. Proceeds from the Revolver may
be used for general corporate purposes, including the financing of working
capital requirements, capital expenditures and acquisitions. Performance by
LeCroy of its obligations under the Credit Agreement is secured by all of the
assets of the Company and its domestic subsidiaries.
Borrowings under the Credit Agreement will bear interest at variable rates
equal to, at the Company's election, (1) the higher of (a) the prime rate or (b)
the federal funds rate plus 0.5%, plus an applicable margin of between 0.00% and
1.5% based on the Company's leverage ratio, as defined, or (2) LIBOR plus an
applicable margin of between 1.25% and 2.75% based on the Company's leverage
ratio, as defined. Interest is payable quarterly beginning March 31, 2005. In
addition, the Company must pay commitment fees on unused borrowings during the
term of the Credit Agreement at rates between 0.375% and 0.5% dependent upon its
leverage ratio.
As part of the Credit Agreement, the Company is required to comply with
certain financial covenants, measured quarterly, including a minimum interest
coverage ratio, minimum total net worth, maximum leverage ratio, minimum fixed
charge coverage ratio and limitations on capital expenditures.
Outstanding borrowings of $50.0 million under the Term Loan will be repaid
quarterly through October 2009, beginning March 31, 2005, based on an annualized
amortization rate starting at 15% in calendar year 2005 and increasing 250 basis
points per year for the term of the Credit Agreement.
Additionally, the Company incurred approximately $1.3 million of
transactions fees associated with the Credit Agreement, which have been deferred
and will be amortized over the life of the Credit Agreement. As of September 30,
2004, unamortized transaction fees of approximately $87,000 remain in the
Condensed Consolidated Balance Sheet from the previously amended revolving
credit facility and will be expensed to interest expense in the second fiscal
quarter of 2005.
16
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 the
other financial information and consolidated financial statements and related
notes appearing elsewhere in this Form 10-Q. This discussion contains forward
looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in the forward looking statements
as a result of a variety of factors, including those discussed in "Risk Factors"
and elsewhere in this Form 10-Q.
We utilize fiscal quarters that end on the Saturday nearest to March 31,
June 30, September 30, and December 31. For clarity of presentation, we have
described all periods as if they end at the end of the calendar quarter.
OVERVIEW
We develop, manufacture, sell and license oscilloscopes and related test and
measurement equipment. Our oscilloscopes are tools used by designers and
engineers to measure and analyze complex electronic signals in order to develop
high-performance systems, to validate electronic designs and to improve time to
market. We currently offer four families of oscilloscopes, which address
different solutions to the markets we serve: WaveMaster, our highest performance
product family; WavePro, which is targeted at the mid- to high-performance
sector; WaveRunner, designed for the mid-performance sector; and WaveSurfer,
designed for value-oriented users in the low-performance bandwidth sector of the
market. We were founded in 1964 to develop, manufacture and sell high
performance signal analysis tools to scientists engaged in high energy physics
research and, in 1985, we introduced our first oscilloscope using our core
competency of designing signal acquisition and digitizing technology.
We generate revenue in a single segment within the Test and Measurement
market, primarily from the sale of our oscilloscopes, probes, accessories, and
applications solutions, and to a lesser extent, our extended warranty contracts
and repairs and calibrations we perform on our instruments after the expiration
of their warranties. Revenue is recognized when products are shipped or services
are rendered to customers net of allowances for anticipated returns. We defer
revenues on shipments to buy-sell distributors of our new WaveSurfer family of
oscilloscopes until sold by the distributors to their end customers. We sell our
products into a broad range of end markets, including computer and
semiconductor, data storage devices, automotive and industrial, and military and
aerospace markets. We believe designers in all of these markets are developing
products which rely on increasingly complex electronic signals to provide the
features and performance their customers require. Our customers include leading
original equipment manufacturers, or OEMs, such as BAE Systems, IBM, Maxtor,
Raytheon, Robert Bosch, Seagate, Samsung and Siemens VDO.
We deploy a direct sales model and employ a highly skilled global sales
force where it makes economic sense to do so. We supplement our direct sales
force with a combination of manufacturers' representatives and distributors in
areas where demand levels do not justify direct distribution by us. We segment
the world into four areas - North America, Europe/Middle East, Japan and
Asia/Pacific. In North America we primarily sell our products directly in the
United States. In Europe/Middle East, we sell our products directly in
Switzerland, Germany, Italy, France, the United Kingdom and Sweden. In Japan, we
sell our products directly. In Asia/Pacific, we sell our products directly in
South Korea, Singapore and five regions in China. During the third quarter of
fiscal 2004, we commenced shipping our new WaveSurfer family of lower bandwidth
oscilloscopes, which are being distributed through a combination of a buy-sell
distribution channel and our direct channel.
Generally, we transact revenues and pay our operating expenses in the local
currencies of the countries in which we have a direct distribution presence or
other operations, with limited exceptions, most notably in China where our sales
and operating expenses are denominated in U.S. dollars. In Europe/Middle East,
we transact business in Euro, Swiss francs, British pounds, Swedish krona and
U.S. dollars. In Japan, we transact business in Japanese yen. In South Korea, we
transact business in Korean won and in Singapore, we transact business in both
U.S. dollars and Singapore dollars. For a discussion of our foreign currency
exchange rate exposure, see Item 3 of this Part I entitled "Quantitative and
Qualitative Disclosure About Market Risk" below.
17
We have, at times, historically experienced lower levels of demand during
our first fiscal quarter than in other fiscal quarters which, we believe, have
been principally due to the lower level of general market activity during the
summer months, particularly in Europe.
Cost of sales represents manufacturing costs, which primarily comprise
materials, labor and factory overhead. Gross margins represent revenues less
cost of sales. Additional factors integral to gross margins earned on our
products are mix, as the list prices of our products range from $4,000 to
$94,000, and foreign currencies, as approximately two-thirds of our revenues are
derived overseas, much of which is denominated in local currencies while
manufacturing costs are U.S. dollar denominated.
Selling, general and administrative expenses consist of salaries and related
overhead costs for sales, marketing and administrative, personnel, legal,
accounting and other professional services.
Research and development expenses consist primarily of salaries and related
overhead costs associated with employees engaged in research, design and
development activities, as well as the cost of masks, wafers and other materials
and related test services and equipment used in the development process.
RESTRUCTURING AND ASSET IMPAIRMENT
In response to the continued economic downturn in 2003, we took steps to
change our manufacturing strategy, discontinue older product lines and reduce
our operating expenses in an effort to better position our business for the long
term. The resultant charges taken to accomplish these efforts were:
Three Months ended
September 30,
Year Ended June 30, (unaudited)
------------------ ------------------
(In thousands) 2004 2003 2004 2003
---------- -------- -------- --------
Charges for:
Impaired intangible assets....................... $ -- $ 2,280 $ -- $ --
Severance and related costs...................... -- 163 -- 90
------ -------- ------- --------
Cost of sales.................................. $ -- $ 2,443 $ -- $ 90
====== ======== ======= ========
Charges for:
Severance and related costs...................... $ -- $ 670 $ -- $ 522
------ -------- ------- --------
Research and development....................... $ -- $ 670 $ -- $ 522
====== ======== ======= ========
Charges for:
Severance and related costs...................... $ -- $ 2,382 $ -- $ 2,042
Plant closure.................................... -- 286 -- --
Unused restructuring reserve..................... -- (78) -- --
------ -------- ------- --------
Selling, general and administrative........... $ -- $ 2,590 $ -- $ 2,042
====== ======== ======= ========
As of September 30, 2004, $3.3 million of the total $3.5 million severance,
plant closure and related reserve has been paid. In addition, as of September
30, 2004, remaining lease termination costs of $0.1 million remains in accrued
expenses and other current liabilities and will be paid by the end of the third
quarter of fiscal 2006. Severance and other related amounts of $0.1 million will
be paid by the end of the second quarter of fiscal 2006. No similar
restructuring charges were incurred in fiscal 2004 or in the three months ended
September 30, 2004.
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.
18
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, 2004
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, estimation of warranty
liabilities and valuation of goodwill. There have been no changes in our
critical accounting policies since June 30, 2004.
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-months ended September 30, 2004 and 2003.
Three months ended
September 30,
(Unaudited) 2004 2003
--------- ---------
Revenues:
Oscilloscopes and related products .......... 91.0% 89.7%
Service and other............................ 9.0 10.3
------ ------
Total revenues............................. 100.0 100.0
Cost of sales.................................. 41.6 43.0
------ ------
Gross profit............................... 58.4 57.0
Operating expenses:
Selling, general and administrative 34.7 36.2
Research and development..................... 13.3 13.4
------ ------
Total operating expenses.................. 48.0 49.6
Operating income .............................. 10.4 7.4
Other expense, net........................... (0.1) (1.2)
------ ------
Income before income taxes..................... 10.3 6.2
Provision for income taxes................... 3.8 2.3
------ ------
Net income .................................... 6.5 3.9
Redemption of convertible preferred
stock........................................ -- 28.0
------ ------
Net income (loss) applicable to common
stockholders................................. 6.5% (24.1)%
====== ======
COMPARISON OF THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
Total revenues were $35.5 million in the first quarter of fiscal 2005,
compared to $27.4 million in the first quarter of fiscal 2004, an increase of
29.5%, or $8.1 million. The net increase of $8.1 was mainly related to sales of
oscilloscopes and related products. The increase in oscilloscopes and related
products was mainly driven by the WaveSurfer family launched in the fourth
quarter of fiscal 2004. Additionally, increased demand for WaveRunner
oscilloscopes resulted in a $4.0 million increase in revenues representing 26.9%
unit growth year on year.
Service and other revenues primarily consist of service revenues and license
and maintenance fees. Service revenue increased 9.1% to $2.4 million in the
first quarter of fiscal 2005 from $2.2 million in the same period last year.
Service and other revenue in the first quarter of both fiscal 2005 and 2004
includes $0.3 million of revenue that was deferred with the adoption of the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements," as of the beginning of
fiscal 2001.
19
Foreign currency fluctuations contributed approximately $1.1 million to the
increase in total revenues in the first quarter of fiscal 2005 compared to the
same period last year. Revenues by geographic location expressed in absolute
dollars and as a percentage of total revenues were:
Three Months Ended
September 30,
(unaudited)
--------------------------
(In thousands) 2004 2003
--------- ---------
North America.................................. $ 10,110 $ 9,508
Europe/Middle East............................. 10,830 7,396
Japan ......................................... 6,510 4,511
Asia/Pacific................................... 8,055 6,004
--------- ---------
Total revenues.............................. $ 35,505 $ 27,419
========= =========
Three Months Ended
September 30,
(unaudited)
--------------------------
2004 2003
--------- ---------
North America.................................. 28.5% 34.7%
Europe/Middle East............................. 30.5 26.9
Japan ......................................... 18.3 16.5
Asia/Pacific................................... 22.7 21.9
--------- ---------
Total revenues.............................. 100.0% 100.0%
========= =========
Gross profit in the first quarter of fiscal 2005 was $20.7 million, or 58.4%
gross margin, compared to $15.6 million, or 57.0% gross margin in the same
period in fiscal 2004. The increase in gross margin was primarily due to two
factors: (i) higher average selling prices in our WaveRunner 6000 series of
oscilloscopes compared to the previous generation of WaveRunners, which were
replaced starting in October 2003; (ii) a higher proportion of sales
internationally where we benefit from higher average selling prices and
favorable exchange rates; and (iii) favorable absorption of fixed production
capacity primarily resulting from an 82% increase in oscilloscope units shipped
relative to the same period in fiscal 2004.
Selling, general and administrative expense was $12.3 million in the first
quarter of fiscal 2005 compared to $9.9 million in the first quarter of fiscal
2004, an increase of 24.1% or $2.4 million. Included in selling, general and
administrative expense in the first quarter of fiscal 2005 is $374,000 of
non-cash amortization of deferred compensation related to our equity-based
long-term incentive plan introduced at the end of fiscal 2004. The remaining
increase was primarily due to increased variable selling costs related to higher
revenues, salary increases and certain legal and compliance expenses. Variable
selling and order generation costs increased by $1.8 million and general and
administrative costs increased by $0.6 million in the first quarter of fiscal
2005 compared to the same period in the prior year. As a percentage of revenues,
selling, general and administrative expense decreased from 36.2% in the first
quarter of fiscal 2004 to 34.7% in the first quarter of fiscal 2005. This
decrease as a percentage of revenues was primarily due to our ability to
leverage expenses over the incremental revenues in the first quarter of fiscal
2005. In the second quarter of fiscal 2005, we estimate selling, general and
administrative expense will increase when compared to the second quarter of
fiscal 2004 due to increased variable selling costs on higher forecasted
revenues, higher performance bonuses compared to the same period in fiscal 2004
and the impact of the acquisition of combining Computer Access Technology
Corporation ("CATC").
Research and development expense was $4.7 million in the first quarter of
fiscal 2005, compared to $3.7 million in the first quarter of fiscal 2004, an
increase of 28.6% or $1.0 million. Included in research and development expense
in the first quarter of fiscal 2005 is $71,000 of non-cash amortization of
deferred compensation related to our equity-based long term incentive plan
introduced at the end of fiscal 2004. The increase was primarily due to salary
increases and the timing of certain project specific engineering expenses
related to new product introduction. As a percentage of total revenues, research
and development expense decreased from 13.4% in the first quarter of fiscal 2004
to 13.3% in the first quarter of fiscal 2005, which is consistent with our
long-term operating model of spending approximately 13% of revenues on product
development. In the current fiscal year we intend to continue to invest a
substantial percentage of our revenues in our research and development efforts.
We have development efforts underway and expect to introduce new products in the
current year that address customer needs for solutions in market sectors such as
wide band and ultra-wide band oscilloscopes. We believe that our advanced
hardware and software technologies incorporated into our core products can be
adapted to address additional sectors of the large and diverse test and
measurement market where we have not historically focused.
20
Other expense, net, which consists primarily of net interest income and
expense and foreign exchange gains and losses, was ($32,000) in the first
quarter of fiscal 2005, compared to ($0.3) million in the first quarter of
fiscal 2004, which included $0.4 million of transaction costs associated with
the redemption of preferred stock. In the first quarter of fiscal 2005, foreign
exchange losses of $62,000 were partially offset by interest income of $30,000.
In the corresponding quarter in fiscal 2004, we earned $28,000 of net interest
income and recognized $20,000 of foreign exchange gains.
Our effective tax rate was 37.0% in the first quarter of fiscal 2005 and
2004.
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 a net loss applicable to common
stockholders in the first quarter of fiscal 2004.
ACQUISITION
As mentioned in Note 2 to the Condensed Consolidated Financial Statements,
the acquisition of CATC via the Merger became effective October 29, 2004. Under
the terms of the Merger, the Company acquired 100% of the outstanding common
stock of CATC for approximately $120.3 million. The Company paid
additional cash of approximately $4.0 million to the holders of CATC's
outstanding, vested in-the-money stock options and employee stock purchase plan
rights. In addition, the Company granted approximately 648,000 stock options to
assume CATC's outstanding unvested, as well as certain vested but not cashed
out, stock options. The fair value of the options granted is approximately $6.0
million and is included in the acquisition costs net of approximately $2.0
million recorded as unearned compensation to be amortized over the remaining
vesting period of the assumed unvested options. Including transaction costs
approximating $2.3 million, the acquisition cost was approximately $83.0 million
net of CATC's approximately $47.5 million of cash and cash equivalents.
As noted in Note 3 to the Condensed Consolidated Financial Statements, on
October 29, 2004 the Company's Board of Directors approved the LeCroy
Corporation 2004 Employment Inducement Stock Plan (the "2004 Plan") to promote
the interests of the Company and its stockholders by strengthening the Company's
ability to attract and induce persons to become employees of the Company,
including a majority of CATC's employees. The 2004 Plan does not require
stockholder approval . The initial number of shares of LeCroy common stock that
may be issued or transferred pursuant to options or restricted stock awards
granted under the 2004 Plan is 750,000. On October 29, 2004, the Company issued
the following grants under the 2004 Plan: (i) 70,000 shares of restricted common
stock to certain former officers of CATC and (ii) options to purchase an
aggregate of 230,984 shares of common stock to 61 former CATC employees who
became non-officer employees of LeCroy (none of whom received an option grant of
more than 20,000 shares).
21
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities at September 30, 2004
improved to $38.5 million compared to $38.1 million at June 30, 2004.
We provided $2.2 million of net cash from operating activities in the first
quarter of fiscal 2005 compared to $3.8 million in the same period last year.
Changes in operating assets and liabilities resulted in a $3.7 million increase
in net use of cash relative to the first quarter last year primarily as a result
of a $3.5 million increase in inventories due to the receipt of a substantial
quantity of parts in anticipation of a new product cycle at the high end as well
as deployment of WaveRunner demos in support of the launch of the WaveRunner
6000A. This net use of cash more than offset the beneficial cash generative
effects of the 63% increase in net income plus non cash charges in net income
year over year, as well as the 93% increase in the consumption of deferred tax
assets representing that portion of our provision for income taxes that will not
require an outlay of cash.
Net cash used in investing activities was ($1.6) million in the first
quarter of fiscal 2005 compared to ($0.8) million in the same period in fiscal
2004. This increase was primarily due to $1.0 million of business acquisition
costs paid in the first quarter of fiscal 2005 in anticipation of our
acquisition of CATC (see "Acquisition" above).
Net cash used in financing activities was ($0.2) million for the first
quarter of fiscal 2005 compared to ($12.6) for the same period in fiscal 2004.
This decrease in cash used in financing activities was primarily due to the
repurchase of our preferred stock partially offset by borrowings of $10.0
million under our revolving credit facility in the first quarter of fiscal 2004.
On October 29, 2004 the Company completed its acquisition of CATC for
approximately $83.0 million net of approximately $2.3 million of transactions
fees and approximately $47.5 million of CATC's cash and cash equivalent (see
"Acquisition" above). The acquisition was financed through a Term Loan borrowing
and the utilization of cash and cash equivalents as described below.
On November 13, 2003, we amended our $15.0 million revolving credit facility
with The Bank of New York. The amended agreement provided us with a $25.0
million revolving credit facility expiring on November 30, 2006, which could be
used to provide funds for general corporate purposes and acquisitions.
Borrowings under this line bore interest at an annual rate of prime plus a
margin not to exceed 1.00%, or at the London Interbank Offering Rate (LIBOR)
plus a margin of between 1.25% and 2.25%, depending on our leverage ratio, as
such term is defined in the credit agreement. A commitment fee of 0.375% per
annum was payable on any unused amount under the facility. This revolving credit
facility was secured by a lien on substantially all of our domestic assets. As
of September 30, 2004, we were in compliance with our financial covenant
requirements and there were no borrowings outstanding under this line of credit.
On October 29, 2004, the Company entered into a five-year, $75.0 million
senior secured credit facility (the "Credit Agreement"), comprised of a $50.0
million term loan (the "Term Loan") and a $25.0 million revolving credit
facility (the "Revolver"), with the lenders listed therein and The Bank of New
York, as administrative agent for such lenders. The Credit Agreement replaces
the Company's existing $25.0 million revolving credit facility. The proceeds
under the Term Loan have been used fully to finance the acquisition of CATC and
pay transaction expenses related to the Merger. Proceeds from the Revolver may
be used for general corporate purposes, including the financing of working
capital requirements, capital expenditures and acquisitions. Performance by
LeCroy of its obligations under the Credit Agreement is secured by all of the
assets of the Company and its domestic subsidiaries.
Borrowings under the Credit Agreement will bear interest at variable rates
equal to, at the Company's election, (1) the higher of (a) the prime rate or (b)
the federal funds rate plus 0.5%, plus an applicable margin of between 0.00% and
1.5% based on the Company's leverage ratio, or (2) LIBOR plus an applicable
margin of between 1.25% and 2.75% based on the Company's leverage ratio.
Interest is payable quarterly beginning March 31, 2005. In addition, the Company
must pay commitment fees on unused borrowings during the term of the Credit
Agreement at rates between 0.375% and 0.5% dependent upon its leverage ratio.
22
As part of the Credit Agreement, the Company is required to comply with
certain financial covenants, measured quarterly, including a minimum interest
coverage ratio, minimum total net worth, maximum leverage ratio, minimum fixed
charge coverage ratio and limitations on capital expenditures.
Outstanding borrowings of $50.0 million under the Term Loan will amortize
quarterly, beginning March 31, 2005, based on an annualized amortization rate
starting at 15% in calendar year 2005 and increasing 250 basis points per year
for the term of the Credit Agreement.
We have a $2.0 million capital lease line of credit to fund certain capital
expenditures. As of September 30, 2004, we had $0.2 million outstanding under
this line of credit, $0.1 million of which was current and the remaining $0.1
million of which was included in deferred revenue and other non-current
liabilities on the Condensed Consolidated Balance Sheet. This line of credit
expires November 2005 and outstanding borrowings bear interest at an annual rate
of 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 (approximately $1.4 million as of September 30,
2004). No amounts were outstanding under these facilities as of September 30,
2004 and June 30, 2004. We also have an overdraft facility in our LeCroy S.A.
subsidiary totaling 1.0 million Swiss francs (approximately $0.8 million as of
September 30, 2004). As of September 30, 2004, there were no amounts outstanding
under this facility.
We believe that our cash on hand, cash equivalents, marketable securities,
cash flow generated by our continuing operations and our availability under our
revolving credit lines will be sufficient to fund working capital, capital
expenditure and debt service requirements for at least the next twelve months.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Our contractual obligations and commitments include obligations associated
with our capital and operating leases, employee severance agreements, technology
license agreement and our Term Loan as set forth in the table below:
Payments due by Period as of September 30, 2004
-------------------------------------------------------
Less than More than 5
Total 1 Year 1-3 Years 3-5 Years Years
-------- --------- --------- --------- -----------
(In thousands)
Capital lease obligations................... $ 170 $ 101 $ 69 $ -- $ --
Employee severance agreements............... 132 108 24 -- --
Operating lease obligations................. 5,089 1,430 3,438 221 --
Intangible asset obligation................. 963 298 665 -- --
-------- -------- -------- -------- --------
Obligations as of September 30, 2004........ 6,354 1,937 4,196 221 --
Term Loan obligations *..................... 50,000 3,750 28,125 18,125 --
-------- -------- -------- -------- --------
Total....................................... $ 56,354 $ 5,687 $ 32,321 $ 18,346 $ --
======== ======== ======== ======== ========
* The Term Loan was entered into on October 29, 2004.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements. When used in this Form
10-Q, the words "anticipate," "believe," "estimate," "will," "plan," "intend,"
and "expect" and similar expressions identify forward-looking statements.
Although we believe that our plans, intentions, and expectations reflected in
any forward-looking statements are reasonable, these plans, intentions, or
expectations may not be achieved. Our actual results, performance, or
achievements could differ materially from those contemplated, expressed, or
implied, by the forward looking statements contained in this Form 10-Q.
Important factors that could cause actual results to differ materially from our
forward looking statements are set forth in this Form 10-Q, including under the
heading "Risk Factors." All forward looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements set forth in this Form 10-Q. Except as required by federal
securities laws, we are under no obligation to update any forward looking
statement, whether as a result of new information, future events, or otherwise.
23
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below together with all of the
other information included in this Form 10-Q when evaluating the Company and its
business. If any of the following risks actually occurs, our business, financial
condition, or results of operations could suffer. In that case, the trading
price of our common stock could decline and our stockholders may lose all or
part of their investment.
RISKS RELATED TO OUR BUSINESS
OUR OPERATING RESULTS ARE EXPECTED TO CONTINUE TO FLUCTUATE AND MAY NOT
MEET OUR FINANCIAL GUIDANCE OR PUBLISHED ANALYST FORECASTS, WHICH MAY CAUSE
THE PRICE OF OUR COMMON STOCK TO DECLINE SIGNIFICANTLY.
Our past operating results, including our gross margins, have fluctuated
from fiscal period to fiscal period. We expect our future operating results and
gross margins will continue to fluctuate from fiscal period to fiscal period due
to a number of factors, many of which are outside our control and any of which
could cause our stock price to fluctuate. The primary factors that affect us
include the following:
o changes in overall demand for our products;
o the timing of the introduction and market acceptance of new products
by us or competing companies;
o the timing and magnitude of research and development expenses;
o changes in the estimation of the future size and growth rates of our
markets;
o changes in our production efficiency;
o disruptions in operations at any of our facilities or the facilities
of any of our contract manufacturers for any reason;
o changes in our selling prices; and
o changes in foreign currency exchange risks.
In addition, we have historically experienced somewhat lower activity
during our first fiscal quarter than in other fiscal quarters which, we believe,
is due principally to the lower level of orders and market activity during the
summer months, particularly in Europe. We believe this seasonal aspect of our
business is likely to continue in the future.
OUR STOCK PRICE MAY BE VOLATILE IN THE FUTURE, AND OUR STOCKHOLDERS MAY NOT
BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID.
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:
o historically low trading volume in our stock;
o announcements of developments related to our business;
24
o announcements of technological innovations or new products or
enhancements by us or our competitors;
o sales by competitors, including sales to our customers;
o sales of common stock into the public market, including those by
directors and members of management;
o developments in our relationships with our customers, partners,
distributors, and suppliers;
o shortfalls or changes in revenue, gross margins, earnings or losses,
or other financial results from analysts' expectations;
o regulatory developments;
o fluctuations in results of operations;
o trends in the seasonality of our sales; and
o general conditions in our market or the markets served by our
customers.
In addition, in recent years the stock market in general and the market for
shares of technology stocks in particular have experienced extreme price
fluctuations, which have often been due largely to factors other than the
operating performance of the affected companies. We cannot ensure that the
market price of our common stock will not decline substantially, or otherwise
continue to experience significant fluctuations in the future, including
fluctuations that are unrelated to our operating performance.
IF DEMAND FOR OUR PRODUCTS DOES NOT MATCH MANUFACTURING CAPACITY, WE MAY
UNDERUTILIZE OUR CAPACITY OR, ALTERNATIVELY, BE UNABLE TO FULFILL ORDERS IN
A TIMELY MANNER, AND IN EITHER SITUATION OUR EARNINGS MAY SUFFER.
The sale of our products is dependent, to a large degree, on customers
whose industries are subject to cyclical trends in the demands for their
products. We may not be able to adapt production capacity and related cost
structures to rapidly changing market conditions in a timely manner. When demand
does not meet expectations, manufacturing capacity will likely exceed production
requirements. We have at times increased our production capacity and the
overhead that supports production based on anticipated market demand which has
not always developed as expected. As a result, we have periodically
underutilized our capacity, which has adversely affected our earnings due to
existing fixed costs. In addition, 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.
IF OUR OPERATING RESULTS DO NOT CONTINUE TO 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. As of September 30, 2004, we
had recorded $11.2 million of net deferred tax assets related to the future tax
benefit of certain expenses reported for financial statement purposes that have
not yet been deducted on our tax returns. Realization of our net deferred tax
assets is dependent on our ability to generate future taxable income. As of
September 30, 2004, we had recorded a valuation allowance of $5.3 million to
reserve for those deferred tax assets we believe are not likely to be realized
in future periods. An additional valuation allowance would be recorded if it was
more likely than not that some or all of our net deferred assets will not be
realized. If we establish additional valuation allowances, we would record a tax
expense in our consolidated statement of operations, which would have an adverse
impact on our operating results.
WE FACE RISKS FROM FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCY VERSUS THE
U.S. DOLLAR AND THE COST OF CURRENCY EXCHANGE, WHICH AFFECT OUR COST OF
SALES AND OPERATING MARGINS AND COULD RESULT IN EXCHANGE LOSSES.
25
A large portion of our sales and expenses are denominated in foreign
currencies. 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. Changes in the relation of foreign currencies to
the U.S. dollar will affect our cost of sales and operating margins and could
result in exchange losses. Among the more significant potential risks to us of
relative fluctuations in foreign currency exchange rates is the relationship
among and between the U.S. dollar, European monetary unit, Swiss franc, British
pound, Swedish krona, Japanese yen, Korean won, and Singapore dollar.
We have 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 us or our
subsidiaries. It cannot be assured, however, that this program will effectively
offset all of our foreign currency risk related to these assets or liabilities.
These foreign exchange forward contracts do not qualify for hedge accounting.
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.
No assurance can be given that our strategies will prevent future currency
fluctuations from having a material adverse affect on our business, financial
condition, results of operations or liquidity.
WE MAY NOT BE SUCCESSFUL IN THE EXPANSION OF OUR BUSINESS OPERATIONS IN
CHINA, WHICH COULD RESULT IN A LOSS OF OUR INVESTMENT AND THEREBY HARM OUR
OPERATING RESULTS.
We intend to continue to expand our business operations and sales in China.
However, we may be unsuccessful in implementing this strategy as planned or at
all. Factors that could inhibit our successful expansion into China include its
highly cyclical business environment, historically poor recognition of
intellectual property rights and poor performance in stopping counterfeiting and
piracy activity.
WE FACE NUMEROUS RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS, WHICH
COULD CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF
OPERATIONS SINCE APPROXIMATELY TWO-THIRDS OF OUR REVENUES ARE DERIVED FROM
INTERNATIONAL SALES.
We market and sell our products and services outside the United States, and
currently have employees located in China, France, Germany, Hong Kong, Italy,
Japan, Singapore, South Korea, Sweden, Switzerland and the United Kingdom. Many
of our customers and licensees are located outside the United States. As part of
our strategy, we have expanded our international sales, particularly in China.
We face numerous risks in doing business outside the United States, including:
o dependence on sales representatives or foreign distributors and their
sales channels;
o longer accounts receivable collection cycles;
o less effective and less predictable protection of intellectual
property;
o trade protection measures, import or export licensing requirements,
tariffs and other trade barriers;
o unusual or burdensome foreign laws or regulatory requirements or
unexpected changes to those laws or requirements;
26
o a stronger U.S. dollar which could make our products more expensive;
o changes in the political or economic condition of a specific country
or region, particularly in emerging markets; and
o potentially adverse tax consequences.
Such factors could cause our future international sales to decline.
Our business practices in international markets are also subject to the
requirements of the Foreign Corrupt Practices Act. If any of our employees are
found to have violated these requirements, we could be subject to significant
fines and other penalties.
Our products are also subject to United States export control restrictions.
In certain cases, we may not be permitted to export products without obtaining
an export license. U.S. export laws also prohibit the export of our products to
a number of countries deemed by the United States to be hostile. The export of
our high-performance oscilloscopes from the United States, which accounts for a
material portion of our internationally derived revenue, is also subject to
regulation under the Treaty for Nuclear Non-Proliferation. However, only a small
portion of those oscilloscopes are sold in countries where that treaty restricts
the end-user. These restrictions may make foreign competitors facing less
stringent controls on their products more competitive in the global market. We
cannot be certain that the U.S. government will approve any pending or future
export license requests. In addition, the list of products and countries for
which export approval is required, and the regulatory policies with respect
thereto, could be revised. Our international sales and, because approximately
two-thirds of our revenue is derived from sales outside the United States, our
sales in general, could be materially harmed by our inability to obtain required
licenses or by the costs of compliance.
We may be greatly impacted by the political, economic, and military
conditions in China, Taiwan, North Korea, and South Korea. These countries have
recently conducted military exercises in or near the others' territorial waters
and airspace. Such disputes may continue or escalate, resulting in economic
embargoes, disruptions in shipping, or even military hostilities. This could
severely harm our business by interrupting or delaying shipment of our products
to or through these areas and/or reducing our sales in these areas.
WE DEPEND ON SINGLE-SOURCE SUPPLIERS FOR SOME OF OUR PRODUCTS, AND THE LOSS
OF THESE SUPPLIERS COULD HARM OUR BUSINESS BY INTERRUPTING OR TERMINATING
OUR MANUFACTURE OF THOSE PRODUCTS.
We purchase a small number of parts from single-source suppliers. In
particular, several key integrated circuits that we use are made by
International Business Machines, or IBM. Although we have not experienced
significant production delays attributable to supply changes, we believe that,
for integrated circuits in particular, alternative sources of supply would be
difficult to develop over a short period of time. Because we have no direct
control over our third-party suppliers, interruptions or delays in the products
and services provided by these third parties may be difficult to remedy in a
timely fashion. In addition, if such suppliers are unable or unwilling to
deliver the necessary parts or products, we may be unable to redesign or adapt
our technology to work without such parts or find alternative suppliers or
manufacturers. In such events, we could experience interruptions, delays,
increased costs, or quality control problems.
WE DEPEND UPON KEY PERSONNEL AND QUALIFIED FUTURE HIRES TO IMPLEMENT OUR
EXPANSION STRATEGY, AND IF WE ARE UNABLE TO RETAIN OR ATTRACT PERSONNEL WE
MAY NOT BE ABLE TO MANAGE AND OPERATE SUCCESSFULLY AND WE MAY NOT BE ABLE
TO MEET OUR STRATEGIC OBJECTIVES.
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
27
operations could be materially and adversely affected. We do not maintain "key
man" life insurance policies on any of our personnel. Future expansion of
operations will require us to attract, train and retain new personnel. In
addition, we may be limited by non-solicitation agreements entered into by our
key personnel with respect to hiring employees from our competitors. 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, results of operations
or financial condition could be materially and adversely affected.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL AND PROPRIETARY
RIGHTS, WHICH WOULD DEPRIVE US OF A COMPETITIVE ADVANTAGE AND THEREBY
NEGATIVELY IMPACT OUR ABILITY TO COMPETE.
As a technology-based company, our success depends on developing and
protecting our intellectual property. We rely generally on patent, copyright,
trademark and trade secret laws in the United States and abroad. Electronic
equipment as complex as most of our products, however, is generally not
patentable in its entirety. We also license intellectual property from third
parties and rely on those parties to maintain and protect their technology. We
cannot be certain that actions we take to establish and protect proprietary
rights will be adequate, particularly in countries where intellectual property
rights are not highly developed or protected. If we are unable to adequately
protect our technology, or if we are unable to continue to obtain or maintain
licenses for protected technology from third parties, it may be difficult to
design alternatives to such technology without incurring significant costs.
Thus, the loss of intellectual property rights to technology could have a
material adverse effect on our business, results of operations or financial
condition.
We are engaged in intellectual property litigation, including with
Tektronix. On April 28, 2003, Tektronix filed a complaint against us in the
United States District Court for the District of Oregon claiming that we
infringed on eight of its U.S. patents. In our responsive pleading, we denied
that we have infringed, or are infringing, on any of these patents, and contend
that the patents are invalid. Four of these patents concern software user
interface features for oscilloscopes, two concern circuitry and two concern
probes. On August 5, 2003, we filed an amended counterclaim in the United States
District Court for the District of Oregon claiming that Tektronix is infringing
on three of our patents. Discovery in this case is ongoing and the outcome
cannot be predicted.
From time to time, in the ordinary course of business, we receive notices
from third parties regarding intellectual property infringement or take action
against others with regard to intellectual property rights. Even where we are
successful in defending or pursuing such claims, we may incur significant costs.
In the event of a successful claim against us, we could lose our rights to
needed technology or be required to pay license fees for the infringed rights,
either of which could have an adverse impact on our business.
WE LICENSE CERTAIN INTELLECTUAL PROPERTY FROM THIRD PARTIES, AND THE LOSS
OF THESE LICENSES COULD DELAY DEVELOPMENT OF FUTURE PRODUCTS OR PREVENT THE
SALE OR ENHANCEMENT OF EXISTING PRODUCTS.
We rely on licenses of intellectual property for our businesses, including
technology used in our products. We cannot ensure that these licenses will be
available in the future on favorable terms or at all. The loss of these licenses
or the ability to maintain any of them on acceptable terms could delay
development of future products or prevent the further sale or enhancement of
existing products. Such loss could adversely affect our business, results of
operations and financial condition.
POTENTIAL ACQUISITIONS, STRATEGIC ALLIANCES, AND JOINT VENTURES MAY RESULT
IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED.
In the normal course of business, we engage in discussions with third
parties relating to possible acquisitions, strategic alliances and joint
ventures. On September 1, 2004, we entered into an Agreement and Plan of Merger
with Computer Access Technology Corporation, or CATC, pursuant to which we
acquired all of the outstanding shares of common stock of CATC on October 29,
2004. As a result of our acquisition of CATC or other transactions which may be
consummated, our financial results may differ from the investment community's
expectations in a given quarter. In addition, acquisitions and strategic
alliances may require us to integrate a different company culture, management
team and business infrastructure. We may have difficulty developing,
manufacturing and marketing the products of a newly-acquired company in a way
that enhances the performance of our combined businesses or product lines to
realize the value from expected synergies. Depending on the size and complexity
of an acquisition, our successful integration of the entity depends on a variety
of factors, including:
28
o the retention of key employees;
o the management of facilities and employees in different geographic
areas;
o the retention of key customers; and
o the integration or coordination of different research and development,
product manufacturing and sales programs and facilities.
Any impairment of the value of purchased assets or goodwill could have a
significant negative impact on our future operating results.
All of these efforts require varying levels of management resources, which
may divert our attention from other business operations. Further, if market
conditions or other factors lead us to change our strategic direction, we may
not realize the expected value from such transactions. If we do not realize the
expected benefits or synergies of such transactions, our consolidated financial
position, results of operations, cash flows and stock price could be negatively
impacted.
WE MAY NOT BE ABLE TO OBTAIN THE CAPITAL WE NEED TO MAINTAIN OR GROW OUR
BUSINESS.
Our ability to execute our long-term strategy may depend to a significant
degree on our ability to obtain long-term debt and equity capital. We have no
commitments for additional borrowings at this time, other than our $75.0 million
credit facility with The Bank of New York and the other lenders party thereto,
which replaced our $25.0 million credit facility with The Bank of New York, or
for sales of equity, other than under our existing employee benefit plans. We
cannot determine the precise amount and timing of our funding needs at this
time. We may be unable to obtain future additional financing on terms acceptable
to us, or at all.
The following factors could affect our ability to obtain additional
financing on favorable terms, or at all:
o our results of operations;
o general economic conditions and conditions in our industry;
o the perception in the capital markets of our business;
o our ratio of debt to equity;
o our financial condition;
o our business prospects; and
o changes in interest rates.
In addition, certain covenants relating to our $75.0 million credit
facility impose certain limitations on additional indebtedness. If we are unable
to obtain sufficient capital in the future, we may have to curtail our capital
expenditures and reduce research and development expenditures. Any such actions
could have a material adverse effect on our business, financial condition,
results of operations and liquidity.
29
WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF VIOLATIONS OF OR
LIABILITIES UNDER ENVIRONMENTAL LAWS.
Our operations are subject to laws and regulations relating to the
protection of the environment, including those governing the discharge of
pollutants into the air or water, the management and disposal of hazardous
substances or wastes and the cleanup of contaminated sites. Some of our
operations require environmental permits and controls to prevent and reduce air
and water pollution, and these permits are subject to modification, renewal and
revocation by issuing authorities. We could incur substantial costs, including
cleanup costs, fines and civil or criminal sanctions and third-party claims for
property damage and personal injury as a result of violations of or liabilities
under environmental laws or noncompliance with environmental permits.
Our former subsidiary, Digitech Industries, Inc., has been involved in
environmental remediation activities, the liability for which was retained by us
and entirely reserved for after the sale of the Vigilant Networks segment and
the residual assets of Digitech. Any liability beyond what is currently expected
and reserved for could have a material adverse affect on our results of
operations.
WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS, AND
FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT
CONTRACTS COULD HARM OUR BUSINESS BY LEADING TO A REDUCTION IN REVENUE
ASSOCIATED WITH THESE CUSTOMERS.
We have agreements relating to the sale of our products to government
entities and, as a result, we are subject to various statutes and regulations
that apply to companies doing business with the government. The laws governing
government contracts differ from the laws governing private contracts. For
example, many government contracts contain pricing terms and conditions that are
not applicable to private contracts. We are also subject to investigation for
compliance with the regulations governing government contracts. A failure to
comply with these regulations might result in suspension of these contracts, or
administrative penalties.
IF WE ARE REQUIRED TO EXPENSE THE FAIR VALUE OF STOCK OPTIONS GRANTED UNDER
OUR EMPLOYEE STOCK PLANS, 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. In March 2004, the Financial Accounting
Standards Board, or FASB, issued an exposure draft entitled "Share-based
Payment, an amendment of FASB Statements No. 123 and No. 95," requiring
companies to expense the fair value of all employee equity-based awards granted,
modified or settled. The tentative requirements would be effective for us in our
2006 fiscal year commencing July 2005 and would require any options issued or
vesting on or after that date to be recognized as compensation expense in
accordance with the future statement. Currently, we record compensation expense
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations for option grants that
have an exercise price below fair value. It is possible that future laws,
regulations and accounting pronouncements 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 effect on our results of operations.
WE HAVE A CREDIT FACILITY THAT CONTAINS FINANCIAL COVENANTS, AND THE
FAILURE TO COMPLY WITH THESE COVENANTS COULD HARM OUR FINANCIAL CONDITION
BECAUSE OUR CREDIT FACILITY MAY BE UNAVAILABLE TO US.
We have a $75.0 million credit facility with The Bank of New York and the
other lenders party thereto, which replaced our $25.0 million credit facility
with The Bank of New York. We are subject to financial covenants under our
credit facility, including interest coverage ratio, minimum total net worth,
leverage ratio and fixed charge coverage ratio requirements. We expect that
existing cash and cash equivalents, cash provided from operations, and
borrowings pursuant to our credit facility will be sufficient to meet ongoing
cash requirements. Failure to generate sufficient cash or comply with the
financial covenants under our credit facility may adversely affect our business,
results of operations, liquidity and financial condition.
30
ISSUANCE OF SHARES IN CONNECTION WITH FINANCING TRANSACTIONS OR UNDER STOCK
PLANS AND OUTSTANDING WARRANTS WILL DILUTE CURRENT STOCKHOLDERS.
Pursuant to our stock plans, our management is authorized to grant
restricted stock awards or stock options to our employees, directors and
consultants. In addition, we also have warrants outstanding to purchase shares
of our common stock. Our stockholders will incur dilution upon exercise of any
outstanding stock options or warrants. In addition, if we raise additional funds
by issuing additional common stock, or securities convertible into or
exchangeable or exercisable for common stock, further dilution to our existing
stockholders will result, and new investors could have rights superior to
existing stockholders.
ANTI-TAKEOVER PROVISIONS UNDER OUR STOCKHOLDER RIGHTS PLAN, CHARTER
DOCUMENTS AND DELAWARE LAW COULD DELAY OR PREVENT A CHANGE OF CONTROL AND
COULD ALSO LIMIT THE MARKET PRICE OF OUR STOCK.
Our stockholder rights plan, certificate of incorporation and bylaws contain
provisions that could delay or prevent a change of control of our company that
our stockholders might consider favorable. Certain provisions of our certificate
of incorporation and bylaws allow us to:
o authorize the issuance of preferred stock which can be created and
issued by the board of directors without prior stockholder approval,
with rights senior to those of the common stock;
o provide for a classified board of directors, with each director
serving a staggered three-year term;
o prohibit stockholders from filling board vacancies, calling special
stockholder meetings, or taking action by written consent; and
o require advance written notice of stockholder proposals and director
nominations.
In addition, we are governed by the provisions of Section 203 of the Delaware
General Corporate Law, which may prohibit certain business combinations with
stockholders owning 15% or more of our outstanding voting stock. These and other
provisions in our certificate of incorporation, bylaws and stockholder rights
plan and Delaware law could make it more difficult for stockholders or potential
acquirers to obtain control of our board of directors or initiate actions that
are opposed by the then-current board of directors, including delay or impede a
merger, tender offer, or proxy contest involving our company. Any delay or
prevention of a change of control transaction or changes in our board of
directors could cause the market price of our common stock to decline.
IF CATC DEVOTES RESOURCES TO DEVELOPING PRODUCTS FOR EMERGING
COMMUNICATIONS STANDARDS THAT ULTIMATELY ARE NOT WIDELY ACCEPTED, OUR
BUSINESS COULD BE HARMED.
Our future growth depends, in part, upon CATC's ability to develop,
manufacture and sell in volume advanced verification systems for existing,
emerging and yet unforeseen communications standards. CATC has little or no
control over the conception, development or adoption of new standards. Moreover,
even as it relates to currently emerging standards, the markets are rapidly
evolving and CATC has virtually no ability to impact the adoption of those
standards. As a result, there is significant uncertainty as to whether markets
for new and emerging standards ultimately will develop at all or, if they do
develop, their potential size or future growth rate. CATC may incur significant
expenses and dedicate significant time and resources to develop products for
standards that fail to gain broad acceptance. Failure of a standard for which
CATC devotes substantial resources to gain widespread acceptance would likely
harm our business.
IF CATC FAILS TO MAINTAIN AND EXPAND ITS RELATIONSHIPS WITH THE CORE OR
PROMOTER COMPANIES IN ITS TARGET MARKETS, THEY MAY HAVE DIFFICULTY
DEVELOPING AND MARKETING THEIR PRODUCTS.
It is important to CATC's success to establish, maintain and expand their
relationships with technology and infrastructure leader companies developing
emerging communications standards in their target markets. We believe CATC must
work closely with these companies to gain valuable insights into new market
demands, obtain early access to standards as they develop and help us design new
or enhanced products. Generally, CATC does not enter into contracts obligating
these companies to work or share their technology. Industry leaders could choose
to work with other companies in the future. If CATC fails to establish, maintain
and expand its industry relationships, CATC could lose first-mover advantage
with respect to emerging standards and it would likely be more difficult for
CATC to develop and market products that address these standards.
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WE FACE BURDENS RELATING TO THE RECENT TREND TOWARD STRICTER CORPORATE
GOVERNANCE AND FINANCIAL REPORTING STANDARDS.
Recently adopted or new legislation or regulations that follow the trend of
imposing stricter corporate governance and financial reporting standards,
including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, may
lead to an increase in our costs of compliance. A failure to comply with these
new laws and regulations may impact market perception of our financial condition
and could materially harm our business. Additionally, it is unclear what
additional laws or regulations may develop, and we cannot predict the ultimate
impact of any future changes.
RISKS RELATED TO OUR INDUSTRY
WE OPERATE IN HIGHLY COMPETITIVE MARKETS AND THIS COMPETITION COULD REDUCE
OUR MARKET SHARE AND HARM OUR BUSINESS.
The oscilloscope market is highly competitive and characterized by rapid
and continual advances in technology. Our principal competitors in this market
are Tektronix and Agilent Technologies, Inc. Both of our principal competitors
have substantially greater sales and marketing, development and financial
resources than we do. We believe that Tektronix, Agilent and other competitors
each offer a wide range of products that attempt to address most sectors of the
oscilloscope market.
We have historically engaged in intense competition with Tektronix. Some of
our senior managers, including our chief executive officer and chief operating
officer, are former employees of Tektronix. In 1994, we settled litigation with
Tektronix alleging that our oscilloscope products infringed certain patents held
by Tektronix by entering into a license agreement for the right to use that
intellectual property. We are currently engaged in intellectual property
litigation with Tektronix in which both sides have claimed that the other is
infringing its patents. This litigation is described in more detail under Item
1, "Legal Proceedings," of Part II of this Form 10-Q.
We believe that the principal bases of competition in the oscilloscope
market are a product's performance (bandwidth, sample rate, memory length and
processing power), its price and quality, the vendor's name recognition and
reputation, product availability and the 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. We also believe that our
success will depend in part on our ability to maintain and develop the advanced
technology used in our oscilloscope products and our ability to offer
high-performance products at a favorable "price-to-performance" ratio. We cannot
assure that we will continue to compete effectively.
A PROLONGED ECONOMIC DOWNTURN COULD MATERIALLY HARM OUR BUSINESS BY
DECREASING CAPITAL SPENDING.
Negative trends in the general economy, including trends resulting from
actual or threatened military action by the United States and threats of
terrorist attacks on the United States and abroad, could cause a decrease in
capital spending in many of the markets we serve. In particular, a downward
cycle affecting the computer and semiconductor, data storage devices, automotive
and industrial, and military and aerospace markets would likely result in a
reduction in demand for our products and would have a material adverse effect on
our business, results of operations, financial condition and liquidity. In
addition, if customers' markets decline, we may not be able to collect
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.
32
WE MUST SUCCESSFULLY EXECUTE OUR STRATEGY TO INTRODUCE NEW PRODUCTS.
One of our key strategies is to expand our addressable portion of the
oscilloscope market by introducing new products such as sampling oscilloscopes.
We have in the past withdrawn a product line due to implementation concerns. In
August 2000, we divested our Vigilant Networks, Inc. subsidiary because, while
its technology was potentially viable, the additional capital investment
required for its commercial success was judged to be too high. The success of
our new product offerings will depend on a number of factors, including our
ability to identify customer needs properly, 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.
WITHOUT THE TIMELY INTRODUCTION OF COMPETITIVE PRODUCTS, OUR PRODUCTS MAY
BECOME TECHNOLOGICALLY OBSOLETE.
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 may become technologically obsolete, in which
case our revenue and operating results could suffer.
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 various significant international, federal, state and local
regulations, including but not limited to health and safety, product content,
labor and import/export regulations. For example, the export of high-performance
oscilloscopes from the United States is subject to regulation under the Treaty
for Nuclear Non-Proliferation. These regulations are complex, change frequently
and have tended to become more stringent over time. We may be required to incur
significant expenses to comply with these regulations or to remedy violations of
these regulations. Any failure by us to comply with applicable government
regulations could also result in cessation of our operations or portions of our
operations, product recalls or impositions of fines and restrictions on our
ability to carry on or expand our operations. In addition, because many of our
products are regulated or sold into regulated industries, we must comply with
additional regulations in marketing our products.
33
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 us of relative
fluctuations in foreign currency exchange rates is the relationship among and
between the U.S. dollar, Euro, Swiss franc, British pound, Swedish krona,
Japanese yen, Korean won and Singapore dollar.
We have 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 us or our
subsidiaries. It cannot be assured, however, that this program will effectively
offset all of our foreign currency risk related to these assets or liabilities.
These foreign exchange forward contracts do not qualify for hedge accounting in
accordance with SFAS No. 133, "Accounting for Derivative Investments and Hedging
Activities."
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 (losses) or gains resulting from changes in the fair value of these
derivatives and on transactions denominated in other than their functional
currencies were ($62,000) and $20,000 for the three-month periods ended
September 30, 2004 and 2003, respectively. These net (losses) gains are included
in other expense, net in the Condensed Consolidated Statements of Operations and
include gross gains of $19,000 and $0.1 million in the three-month periods ended
September 30, 2004 and 2003, respectively. At September 30, 2004 and June 30,
2004, the notional amounts of our open foreign exchange forward contracts, all
with maturities of less than six months, were approximately $6.5 million and
$8.2 million, respectively.
We performed a sensitivity analysis for the first quarter of fiscal 2005
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, cash equivalents. marketable securities as well as our new
$75.0 million credit facility. 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. Please refer to Note 19 - Subsequent Events for
specifics related to our new credit facility.
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely making known to them material information relating to the Company and the
Company's consolidated subsidiaries required to be disclosed in the Company's
reports filed or submitted under the Exchange Act.
34
There have not been any changes in the Company's internal control over
financial reporting during the quarter ended September 30, 2004 that have
materially affected, or are reasonably likely to materially affect, its internal
control over financial reporting.
35
LECROY CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 28, 2003, Tektronix Inc. ("Tektronix") filed a complaint against
the Company in the United States District Court for the District of Oregon
claiming that the Company infringed on eight of Tektronix' U.S. patents. In the
Company's responsive pleading, the Company denied that it has infringed, or is
infringing, any of these patents, and contends that the patents are invalid.
Four of these patents concern software user interface features for
oscilloscopes, two concern circuitry and two concern probes. On August 5, 2003,
the Company filed a counterclaim in the United States District Court for the
District of Oregon claiming that Tektronix is infringing three of the Company's
patents. The Company believes it has meritorious defenses and intends to defend
this action vigorously. Discovery in this case is ongoing and the outcome cannot
be predicted.
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 a U.S. patent relating to the graphical display of test limits.
LeCroy answered the complaint denying infringement and asserted a counterclaim
alleging the invalidity of the patent and that Sicom had abused the judicial
process by bringing a baseless patent infringement claim. On July 16, 2003,
LeCroy filed a Motion to Dismiss Sicom's case, contending that Sicom did not
have standing to bring the litigation. On November 20, 2003, the Court granted
LeCroy's Motion to Dismiss. On December 18, 2003, Sicom filed a Notice of Appeal
to the United States Court of Appeals for the Federal Circuit. On December 30,
2003, Sicom filed a new patent infringement lawsuit against LeCroy in the United
States District Court for the District of Delaware. Tektronix and Agilent
Technologies are also co-defendants in this new litigation. The complaint in
this new case is essentially the same as the complaint filed by Sicom on January
15, 2003, except that Sicom now states that it entered into an amendment to its
license agreement with the Canadian government on December 19, 2003, and that
Sicom now has the exclusive right to bring suit for infringement of the patent
in the United States. On January 5, 2004, Sicom filed a Notice and Order of
Dismissal of Appeal of its appeal to the Court of Appeals for the Federal
Circuit and the Order was entered on the following day. In LeCroy's responsive
pleading, LeCroy denied that it has infringed, or is infringing, the patent, and
contends that the patent is invalid. The defendants in this case, including us,
filed a Motion to Dismiss for lack of standing, contending that Sicom's amended
license agreement with Canada does not cure the standing defects that caused the
Court to dismiss the original lawsuit. The Court granted the Defendants' Motion
on October 5, 2004, dismissing the case with prejudice. On October 28, 2004,
Sicom filed a Notice of Appeal to the United States Court of Appeals for the
Federal Circuit. LeCroy intends to defend itself vigorously in this litigation.
From time to time, the Company is involved in lawsuits, claims,
investigations and proceedings, including patent and environmental matters,
which arise in the ordinary course of business. There are no matters pending,
including those described above, that the Company expects to be material to its
business, results of operations, financial condition or cash flows.
36
ITEM 6. EXHIBITS
EXHIBITS
2.1 Agreement and Plan of Merger, dated as of September 1, 2004,
among LeCroy Corporation, Cobalt Acquisition Corporation and
Computer Access Technology Corporation, incorporated by
reference to the Company's Form 8-K filed with the SEC on
September 2, 2004
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
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, 2004 LeCROY CORPORATION
/s/ Scott D. Kantor
----------------------------------------------
Scott D. Kantor
Vice President and Chief Financial Officer,
Secretary and Treasurer
37
EXHIBIT INDEX
EXHIBITS NO. DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of September 1, 2004,
among LeCroy Corporation, Cobalt Acquisition Corporation and
Computer Access Technology Corporation, incorporated by
reference to the Company's Form 8-K filed with the SEC on
September 2, 2004
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
38