UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26634
LECROY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2507777
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
700 CHESTNUT RIDGE ROAD
CHESTNUT RIDGE, NEW YORK 10977
(Address of principal executive office) (Zip Code)
(845) 425-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES X NO
---- ----
The number of shares outstanding of the registrant's Common Stock, as of
September 2, 2003, was 10,458,011 shares. The aggregate market value of shares
of Common Stock held by non-affiliates as of the last business day of the
registrant's most recently completed second fiscal quarter was $90,572,254.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
LECROY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2003
TABLE OF CONTENTS
FORM 10-K ITEM NUMBER: Page No.
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PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 13
Item 3. Legal Proceedings.......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 14
Item 6. Selected Financial Data.................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.................................. 31
Item 8. Financial Statements and Supplementary Data................................................ 32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....... 57
Item 9A. Controls and Procedures.................................................................... 58
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 59
Item 11. Executive Compensation..................................................................... 59
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 59
Item 13. Certain Relationships and Related Transactions............................................. 59
Item 14. Principal Accounting Fees and Services..................................................... 59
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 60
Signatures................................................................................. 64
Exhibit 21. Subsidiaries of LeCroy Corporation
Exhibit 31. Rule 13a-14(a) Certifications
Exhibit 32. Section 1350 Certifications
2
PART I
ITEM 1. BUSINESS.
LeCroy Corporation ("LeCroy," "Company," "we," "our" or "us") was founded
in 1964 and is incorporated in the State of Delaware. Our principal office and
manufacturing facility is located in Chestnut Ridge, New York. We sell our
products and provide service worldwide through wholly-owned subsidiaries and
representatives.
LeCroy currently operates as one business segment in the Test and
Measurement Instrument market. Using our core competency of WaveShape Analysis,
defined as the capture and analysis of complex electronic signals, we develop,
manufacture, sell and license signal acquisition and analysis products. Our
principal product line consists of a family of high-performance digital
oscilloscopes used primarily by electrical design engineers in various markets,
including computer / semiconductor, data storage, communications and power
measurement. We also produce modular digitizers and proprietary electronic
components. In addition, we generate revenue by providing service on all of our
products beyond the initial warranty period.
Prior to August 2000, LeCroy also operated an additional business segment,
the Vigilant Networks business ("Vigilant Networks"), which comprised our
Vigilant Networks, Inc. ("Vigilant") and Digitech Industries, Inc. ("Digitech")
subsidiaries. Vigilant was formed to pursue a strategy of using our core
competency to develop and market a Local Area Network ("LAN") analyzer.
Vigilant's principal product, the Big Tangerine network analyzer, was not only a
new product, it was also sold into a new market for LeCroy. We made substantial
investments in Vigilant Networks in terms of selling, marketing, research and
development and administrative expenses. While we believed that this product had
a unique technology, we decided that we could not continue to invest the
financial resources necessary to capitalize on its future growth potential. As a
result, in August 2000, we announced our intention to divest the Vigilant
Networks business segment and treat it as a discontinued operation.
We sold the assets and business of Vigilant and a portion of the assets and
business of Digitech for $12.0 million, before fees and expenses, in August
2000. The buyer also assumed certain liabilities of Vigilant. The remaining
business of Digitech has been discontinued (see Note 4 to the Consolidated
Financial Statements for further information). In December 2002, we sold the
residual assets and business of Digitech. The remaining discussion in this
document will relate primarily to the continuing Test and Measurement Instrument
market.
PRODUCT APPLICATION
Researchers, engineers and production technicians rely on test and
measurement instrumentation such as signal analyzers in designing, developing
and manufacturing electronic equipment. When designing and developing electronic
circuits, researchers and engineers use signal analyzers to ensure that the
circuits are performing as designed and to troubleshoot problems. Production
technicians use such instruments to diagnose electronic equipment to determine
whether it is performing as intended.
The most general-purpose test and measurement instrument used for signal
analysis is the oscilloscope. Digital oscilloscopes are signal analyzers that,
like their earlier analog counterparts, can display a representation of an
electronic signal's wave shape, which is essentially a measure of a signal's
voltage as a function of time. Digital oscilloscopes, however, go beyond the
capabilities of analog oscilloscopes in that they capture a signal in digital
form by sampling it over time and storing the data or measurements in memory.
The stored signal can then be viewed later and, more importantly, the instrument
can perform various analyses on the stored data.
Wave shape analysis is becoming increasingly important as data rates in
applications such as computers, semiconductors and communications systems
increase. Within a given digital circuit, it takes a finite amount of time for a
digital signal to change from a "zero" or "off" state to a "one" or "on" state.
As digital data rates increase, signals within a circuit may not have sufficient
time to change cleanly from a "zero" to a "one" or vice-versa. This distorts, or
changes the wave shape of the digital signal, which can lead to computation or
information errors. To identify such problems, engineers use digital
oscilloscopes to analyze the signal's shape, which is not generally possible
using other types of measurement and analysis instruments.
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MARKET OVERVIEW
Market Trends
Electronic signals continue to increase in complexity and speed as new
technologies are brought to market. The proliferation of complex electronics in
the computing, communications and semiconductor industries drives the demand for
analysis tools that allow designers and manufacturers of these devices to get
their products to market on a timely basis. Once the sole domain of computing
and communications, today's complex electronic signals are now embedded in a
variety of devices across many additional industries including semiconductors,
data storage, automotive, military, consumer electronics and industrial
equipment. The continued technology advancement in communications, driven in
part by the expansion of internet, broadband and wireless communication devices,
continues to result in the need for increasingly faster and more complex
electronic signals. With each advancement in technology, the engineer must deal
both with a reduced margin for error and a progressively more difficult task of
fully characterizing the design.
Thoroughly testing these electronic signals requires a measurement tool
capable of physically attaching to the signal of interest, capturing data with
high sample rates and long memories and supporting detailed wave shape analysis
and additional insight into data characteristics and signal trends over time.
The whole system must also maintain the correct shape of the signal, a concept
called signal integrity.
Signal Analyzer Market
Signal analyzers are a component of the overall Test and Measurement
Instrument market, in which we currently participate primarily in the
oscilloscope segment.
Oscilloscope Market. We believe that the digital oscilloscope market is
generally segmented according to bandwidth, and that with advances in
technology, the bandwidth requirements of each market segment will
increase. Products in the low-end or commodity segment of the market
(less than 200 Megahertz ("MHz")) cannot capture fast, long, complex
signals. Such products typically do not have the appropriate combination
of bandwidth, sample rate and memory that is needed for analysis of such
signals. These instruments typically sell for under $5,000. The
mid-to-high performance market segment (bandwidth of 200 MHz to 3
Gigahertz ("GHz")) is characterized by real-time instruments with high
sample rates (from 500 mega samples per second ("MS/s") to 20 giga
samples per second ("GS/s")) and long record lengths (from 10,000 to 100
million sample points) and greater processing power to perform more
sophisticated analyses. These mid-to-high performance digital
oscilloscopes typically range in price from $9,000 to $40,000, although
certain higher bandwidth oscilloscopes for specialized applications are
priced well above $40,000. LeCroy's WavePro(TM) and Waverunner(R) digital
oscilloscope product families are all targeted at customers in the
mid-to-high performance market segment. The high-performance market
segment (bandwidth of 3 GHz to 10 GHz) is also characterized by real-time
instruments with high sample rates (from 4 GS/s to 20 GS/s) and long
record lengths (from 125,000 to 100 million sample points). These
oscilloscopes possess even greater capacity to conduct sophisticated
WaveShape Analysis on the faster, longer and more complex signals that
are prevalent in the current and expected future state of the market.
These high-performance instruments range in price from $43,000 to $95,000
or higher for oscilloscopes targeted to specific applications. Our
WaveMaster(TM), DDA Disk Drive Analyzer and SDA Serial Data Analyzer
digital oscilloscope product families are targeted at customers in this
high-end of the market.
For certain very high signal speed applications, such as optical
communication, instruments with bandwidths of up to 50 GHz or more are
required. At these speeds, real-time oscilloscopes do not have the
ability to track the signal shape in real-time and take samples quickly
enough to be effective. In these applications, a sampling oscilloscope,
which takes one sample per occurrence of the signal on a time delayed
basis, is used to reconstruct the signal shape. Sampling oscilloscopes
have several disadvantages compared to real-time oscilloscopes. One of
the most limiting is the fact that the input signal must be repetitive.
Any non-repetitive elements in the signal are "averaged out" and are not
seen. These instruments can range in price from $50,000 to $100,000.
Within the oscilloscope market, we have targeted several specific
application segments. These application segments include
computer/semiconductor, data storage, communications and power
measurement.
4
o Computer/Semiconductor. These markets include companies providing
components, interfaces, subsystems and complete products for high
speed and general purpose computing, network servers and related
devices and systems. The semiconductor industry "feeds" the
computer industry with enabling components and devices. Over the
past several years, these devices have grown in capability and
complexity to provide a higher level of integration and
functionality. The explosion of high speed serial data
communications interfaces is a common theme in both the computer
and semiconductor industries. Interface standards such as PCI
Express, Serial ATA, USB 2.0, XAUI and Firewire have become
ubiquitous in product designs. We believe that the combination of
accurate acquisition with high signal integrity, long memory with
detailed wave shape and data analysis features provide the unique
solution to testing these high speed, complex signals. Our SDA
Serial Data Analyzer digital oscilloscope product family addresses
the needs of these measurement applications.
o Data Storage. The data storage market includes companies that
provide magnetic and optical storage devices such as hard disk
drives, removable media, tape, compact disks (CDs) and digital
video disks (DVDs). The increasing need to store more information
requires the encoding of signals to achieve higher density on the
recording media. We believe that the high sample rates, long
memory and special signal triggering features of our
oscilloscopes, along with their specialized processing software
that incorporates advanced algorithms designed specifically for
the measurement and analysis requirements of the data storage
market, provide the best solution to our customers' testing
requirements. Our DDA series Disk Drive Analyzer digital
oscilloscope products are aimed at these important customer
applications.
o Communications. The communications market can be segmented into
five submarkets: Telecommunications - the broadband transmission
of data over copper or fiber; Datacommunications - the
transmission of data over LANs and WANs; Residential Broadband -
the broadband transmission of data connected to the home; Mobile -
data transmission using wireless devices; and Peripheral Equipment
- the transmission of data to devices such as computers, printers,
etc. In each of these sub-markets, the need for instant access and
uniform service has required the encoding of data and more complex
electronic signals. We believe that the accurate acquisition, long
memory and rapid analysis features of our oscilloscopes provide
the unique solution to testing these high speed, complex signals.
Our SDA Serial Data Analyzer digital oscilloscope product family
addresses the needs of these measurement applications.
o Power Measurement. The power measurement market touches virtually
all industries. Circuit boards and devices within all electronic
products require varying levels of alternating and direct voltages
and currents. Converting these sources of power has been
predominantly accomplished through the use of switch mode power
circuits. We believe that the long memory and advanced analysis
capabilities of our oscilloscopes, along with their specifically
designed current probing devices, provide design engineers with
the best measurement tool to improve the performance, efficiency
and reliability of their power supplies down to the component
level. A variety of application-specific capabilities are
available for our oscilloscopes enabling these important
measurements.
STRATEGY
LeCroy's primary objectives are to increase the growth rate of our
oscilloscope business, and to leverage our WaveShape Analysis capabilities and
our key resources to expand into new markets and application areas. The
following is a summary of the strategies that will be used to accomplish these
objectives:
o Increase the Growth Rate of the Oscilloscope Business. In order to increase
the growth rate of our oscilloscope business, we must:
o Gain market share by continuing to improve the "price to performance"
ratio of our products. Through our research and development ("R&D")
efforts, we have been successful in reducing the cost and size of our
custom integrated circuits, while delivering higher performance and
increased reliability. In addition, our proprietary software and
unique processor and display architecture have further enhanced the
"price to performance" ratio of our products. The success of this
strategy was first illustrated in fiscal 2001 with the successful
introductions of the WavePro and Waverunner-2 product lines. Further
success was achieved in fiscal 2002, with the launch of WaveMaster,
our first silicon germanium-based family of oscilloscopes powered by
our proprietary X-Stream(TM) technology as well as a powerful
Windows-based operating system. In fiscal 2003, we added the silicon
germanium-based WavePro 7000 Series instruments.
5
o Expand our share of targeted application segments where signal complexity
is high, such as serial data communications, data storage and power
measurement. To accomplish this strategy, we must continue to introduce
innovative software and hardware solutions tailored to the needs of
customers in this segment. Examples of such solutions currently offered by
us include:
- Serial Data Communications Test:
o Serial Data Analyzers
o WaveLink High Bandwidth Probing Solutions
o Digital Filter Package
o Jitter and Timing Analysis Software
o M1 Analysis Software
o PolyMask(TM)Communications Test
o X-MAP Custom WaveShape Analysis Software
- Data Storage:
o Disk Drive Analyzers
o Disk Drive Parameter Package
o Disk Drive Noise Analysis
o Optical Recording Measurement Package
o Surface Map Software
- Power Measurement:
o Current Probes
o Differential Amplifiers
o PMA2 Power Measure Analysis Software
o Power Measurement Systems
o Leverage our WaveShape Analysis Competency and Key Resources to Expand into
New Markets.
o As noted earlier in the "Market Trends" section, the proliferation of
electronics in general and digital electronics in particular is
increasing. In addition, the need for the analysis of increasingly
faster and more complex signals has placed limitations on certain
existing test and measurement equipment. Given these trends and
LeCroy's core competency, the opportunities to expand our WaveShape
Analysis capabilities into new markets and applications are
increasing. We expect to capitalize on this opportunity through
internal R&D efforts as well as through pursuing strategic
acquisitions.
o As noted later in the "Sales, Marketing and Distribution" section, we
maintain a direct sales force of highly trained, technically
sophisticated sales engineers. We believe that this key resource can
be leveraged over a higher sales volume by selling complementary
products to the same customer base we currently address. Adding such
products to LeCroy's existing solutions could be accomplished through
license agreements or acquisitions.
There can be no assurance that we will be successful in implementing our
strategies.
PRODUCTS AND SERVICES
Overview
Our products capture and analyze complex electronic signals by applying our
hardware and software technology to digitize signals and analyze them using a
variety of different application packages and configurations. The digital
oscilloscope product family includes three form factors in instrument size and
capabilities to address varying customer requirements. These products include
the WaveMaster, WavePro and Waverunner families of digital oscilloscopes. The
Waverunner products are manufactured for us by our strategic partner, Iwatsu
Electric Co, Ltd. ("Iwatsu"). Our products also include modular digitizers,
probing and accessory products, and other electronic components. In addition, we
offer a full range of aftermarket service and support for all of our products.
The following sections provide additional information on our more significant
products.
6
WaveMaster Digital Oscilloscopes
The WaveMaster series of oscilloscopes was introduced in fiscal 2002 with
the application-specific Disk Drive Analyzer version in December 2001. This was
followed by the general purpose models in March 2002, and the
applications-specific Serial Data Analyzer version in October 2002. These
products, which range in price from $43,000 to $67,000 plus the cost of options,
currently offer bandwidths of 3.0 GHz, 5.0 GHz or 6.0 GHz, sample rates of 20
GS/s and an acquisition memory from 1 mega points ("Mpts") to 100 Mpts.
Application segment-specific software solutions are available to interpret
signal information and enhance the utility of the product.
WavePro Digital Oscilloscopes
The WavePro 900 series of oscilloscopes was introduced in October 2000 to
address customer applications requiring high-performance and measurement
capabilities. In January 2003, we introduced the WavePro 7000 Series
oscilloscopes based on the same silicon germanium technology found in our
flagship WaveMaster series of oscilloscopes. These products, which range in
price from $18,500 to $40,000 plus the cost of options, currently offer
bandwidths from 1 GHz to 3 GHz, sample rates of 20 GS/s and an acquisition
memory from 1 Mpts to 48 Mpts. Application segment-specific software solutions
are available to interpret signal information and enhance the utility of the
product.
Waverunner Digital Oscilloscopes
The Waverunner series of oscilloscopes was first introduced in January
1999, followed by the Waverunner-2 series, which was introduced in January 2001.
Waverunner products, which range in price from $5,200 to $16,500 plus the cost
of options, provide high value and broad utility in the oscilloscope market and
are also the platform for our solution packages in the power measurement and
optical recording application segments. We believe that our ease of operation,
crisp display and application packages make the Waverunner one of the most
versatile oscilloscopes available on the market. The Waverunner products
currently offer bandwidths from 200 MHz to 1.0 GHz, sample rates from 200 MS/s
to 2 GS/s and an acquisition memory of 100 kilo points to 4 Mpts.
Modular Digitizers
We currently offer PXI Modular Digitizers to support applications in
production test that require the measuring and analysis of signals in a flexible
configuration and non-display format. The PXD-222 modular digitizer was
introduced in August 2001. This digitizer, which is priced at $2,900, offers a
bandwidth of 200 MHz and a sample rate of 2.5 GS/s. This is the fastest PXI
digitizer sample rate available in the market. In fiscal 2003, we introduced
eight additional digitizer modules with bandwidths up to 1 GHz and sample rates
of 2 GS/s.
Other Products
To provide customers with what we believe are total solutions to their
signal measurement analysis problems, we offer various complementary Probes and
Accessory Products. Probes provide the physical and electrical or optical
connection from the circuit or semiconductor device under test to the
oscilloscope. Offering probing solutions is often a key to customer satisfaction
in solving general purpose and specific application segment problems. In fiscal
2003, we introduced the WaveLink family of high bandwidth differential probes
with bandwidths up to 7.5 GHz and prices up to $6,900 plus the cost of options.
Service and Aftermarket Products
We provide aftermarket support, repair, maintenance and recalibration of
our installed LeCroy products, as well as installation of a variety of post-sale
upgrades and optional features. We maintain major field service centers in
Chestnut Ridge, New York (located at our corporate headquarters); Geneva,
Switzerland; Tokyo, Japan; Seoul, South Korea and Beijing, China. Sophisticated
service on certain key components of our digital oscilloscope products,
including our printed circuit boards, is performed only at our facilities in
Geneva, Switzerland and Chestnut Ridge, New York. Service and aftermarket
products (including product upgrades) generated approximately 8%, 7% and 5% of
our total revenue in fiscal years ended June 30, 2003, 2002 and 2001,
respectively.
7
CUSTOMERS
The largest group of users of our digital oscilloscopes are electronic
product designers and test engineers. Researchers in many scientific disciplines
including high-energy physics, medicine, geology, ultrasound and mechanics also
use our digital oscilloscopes. Revenue derived from one customer, Iwatsu,
accounted for 11% of our consolidated revenues in fiscal 2002. No other customer
accounted for more than 10% of our consolidated revenues in any of the last
three fiscal years.
SALES, MARKETING AND DISTRIBUTION
We maintain a direct sales force of highly trained, technically
sophisticated sales engineers who are knowledgeable in the use of signal
analyzers in general and the features and advantages of our products in
particular. In addition, particularly because of our focus on high-performance
digital oscilloscopes, our sales engineers are skilled in performing product
demonstrations for current and prospective customers. We believe we have a
competitive advantage in sales situations in which our sales engineers have the
opportunity to demonstrate the advantages of our digital oscilloscopes;
accordingly, such demonstrations are an integral part of our sales strategy.
We sell our digital oscilloscope products through our own direct sales
force in the United States, Europe, Japan, China, South Korea and Singapore,
with regional sales headquarters located in Chestnut Ridge, New York; Geneva,
Switzerland; and Tokyo, Japan. As of June 30, 2003, our direct digital
oscilloscope sales force consisted of approximately 80 sales engineers and
regional managers worldwide. We also use manufacturer's representatives and
distributors in support of our direct selling efforts and in territories where
the sales potential does not currently justify the maintenance of a direct sales
force. In addition, in Japan we maintain a strategic alliance with Iwatsu, a
communications and test and measurement company, that sells and distributes some
of our products under the "Iwatsu/LeCroy" and "Iwatsu" labels.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, conduct marketing programs and
seminars, issue press releases regarding new products, publish technical
articles and participate in industry trade shows and conferences.
SEASONALITY
We have historically experienced somewhat lower activity during our first
fiscal quarter than in other fiscal quarters which, we believe, is due
principally to the lower level of orders and market activity during the summer
months, particularly in Europe. We believe this seasonal aspect of our business
is likely to continue in the future.
RESEARCH AND DEVELOPMENT
LeCroy believes there is a global trend resulting from the demand for
faster data rates that continues to expand the use of higher speed and
complexity of electrical and optical signals. The capture and analysis of these
signals requires higher bandwidths, faster sample rates, longer memories, better
signal integrity and more powerful, flexible processing capabilities. It is the
primary objective of our research and development strategy to meet these demands
by extending our capabilities in these areas while improving the
manufacturability, cost, reliability and time-to-market of our products. There
can be no assurance that we will meet this objective.
We are continuing to develop our signal conditioning, sampling, data
storage, and data movement and processing technologies using advanced integrated
circuit techniques and processes. In addition, we continue to develop innovative
electrical circuit probing technology that allows better waveform fidelity and
circuit connection capabilities. During fiscal 2002, we introduced our first
product incorporating innovative signal conditioning and sampling technologies
fabricated on an extremely high speed silicon germanium process developed by IBM
Corporation ("IBM"). In June 2002, LeCroy entered into an agreement with IBM in
which LeCroy committed to pay $4.0 million for access to IBM's next-generation
silicon germanium technology. LeCroy will use this technology to develop
components that are expected to deliver higher density, greater speed and
reduced power consumption than those currently available. Such components will
be used in future high-speed digital oscilloscopes.
8
We also maintain a software engineering group that recently completed
development of the Windows-based operating system employed in the new WaveMaster
digital oscilloscope family. These engineers are continuing to advance our
Windows-based WaveShape Analysis technology to keep pace with the advancements
occurring in hardware development. The group also develops application solutions
to perform specific analysis for data storage, power measurement, communications
and other markets.
We conduct research and development activities at our Geneva, Switzerland
and Chestnut Ridge, New York facilities. Research and development costs, which
are expensed as incurred, were approximately $18.2 million, $22.0 million and
$17.7 million in our fiscal years ended June 30, 2003, 2002 and 2001,
respectively, which expenses represented 16.9%, 19.7% and 12.5% of total
revenues, respectively, for such fiscal years. Research and development costs in
fiscal 2003, 2002 and 2001 include $0.7 million, $0.2 million and $0.1 million
(0.6%, 0.2% and 0.1% of total revenues), respectively, of severance charges and
in fiscal 2002 include the $4.0 million (3.6% of total revenues) technology
access fee to IBM. We intend to continue to invest a significant percentage of
our revenues in our research and development efforts.
MANUFACTURING AND SUPPLIERS
LeCroy's digital oscilloscopes and related products, other than the
Waverunner oscilloscopes, are manufactured at our facilities in Chestnut Ridge,
New York. The Waverunner products are manufactured by our strategic partner,
Iwatsu.
We obtain certain parts, components and sub-assemblies from single
sources. This particularly has been the case with several key integrated
circuits made by certain single source suppliers. Although we have not
experienced significant production delays attributable to supply changes, we
believe that, for integrated circuits in particular, alternative sources of
supply would be difficult to develop over a short period of time. An
interruption in supply or an increase in price for our parts, components and
sub-assemblies would have a material adverse affect on our business, results of
operations and financial condition.
As of June 30, 2003, we employed 56 manufacturing employees at our Chestnut
Ridge facility in an area of approximately 35,000 square feet devoted to such
tasks.
COMPETITION
The market for signal analyzers is highly competitive and characterized by
rapid and continual advances in technology. According to estimates provided by
Prime Data, Inc. ("Prime Data"), an independent industry survey organization,
total digital oscilloscope sales, excluding handheld instruments, grew from $638
million in 1994 to a high of $1,051 million in calendar 2000. The market in
calendar 2002 was estimated to be $808 million. Prime Data estimates that the
three largest suppliers of digital oscilloscopes, exclusive of handheld models,
and their approximate respective market shares for calendar 2002 were Tektronix,
Inc. ("Tektronix") with 51.4%, LeCroy with 14.4% and Agilent Technologies, Inc.
with 14.2%. Many of our principal competitors have substantially greater sales,
marketing, development and financial resources than we do. We believe that each
of these companies offers a wide range of products that attempt to address most
segments of the digital oscilloscope market.
We believe that the principal bases of competition in the signal analyzer
market are a product's performance (bandwidth, sample rate, record length and
processing power), its price and quality, the vendor's name recognition and
reputation, product availability and the quality of post-sale support. We also
believe that our success will depend in part on our ability to maintain and
develop the advanced technology used in our signal analyzer products and our
ability to offer high-performance products at a favorable "price-to-performance"
ratio. We believe that we currently compete effectively with respect to each of
the principal bases of competition in the signal analyzer market in the general
price range ($5,000 to $70,000) in which our digital oscilloscopes are focused
and that we will be able to continue to do so, although there can be no
assurance that this is or will be the case. In addition, as discussed in the
"Strategy" section, we intend to expand our addressable market into higher
performance applications that tend to sell at a higher price level.
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BACKLOG
LeCroy's backlog of unshipped customer orders was approximately $8.6
million and $7.2 million as of June 30, 2003 and 2002, respectively. Customers
may cancel orders at any time. Backlog at June 30, 2003 excludes $3.3 million of
deferred revenue established in connection with the adoption of a new accounting
pronouncement in fiscal 2001 (see Note 1 "Revenue Recognition" to the
Consolidated Financial Statements for further information). We believe that our
level of backlog at any particular time is not necessarily indicative of our
future operating performance.
PATENTS, TRADEMARKS AND LICENSES
LeCroy currently relies on a combination of patents, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods, as well as technical expertise and continuing technological
research and development to establish and protect proprietary rights in its
products. We believe, however, that because of the rapid pace of change and
advancement in digital oscilloscope technology, legal intellectual property
protection is and will continue to be a less significant factor in our success
than our core competency of WaveShape Analysis and the experience and expertise
of our personnel.
We protect significant technologies, products and processes that we
consider important to our business by, among other things, filing applications
for patent protection. As of June 30, 2003, we held a total of thirty United
States patents expiring in the years from 2006 to 2020 and fourteen foreign
patents expiring in the years from 2009 to 2016. We also have a number of patent
applications pending or under evaluation in the United States and in various
foreign jurisdictions. The patent positions of high-technology companies such as
LeCroy are uncertain and involve complex legal issues and factual questions.
There can be no assurance that any of our pending or future applications will
result in issued patents or that any issued patents will provide us with
adequate protection of the covered technologies, products or processes.
Moreover, the laws of foreign countries in which our products are or may be
developed or sold may not protect our intellectual property and other
proprietary rights to the same extent as the laws of the United States.
Although we believe that our products and technologies do not infringe the
proprietary rights of third parties, there can be no assurance that third
parties will not assert claims against us based on the infringement or alleged
infringement of any such rights. Such claims are typically costly to defend,
regardless of the legal outcome. There can be no assurance that we would prevail
with respect to any such claim, or that a license to third party rights, if
needed, would be available on acceptable terms. In any event, patent and
proprietary rights litigation can be extremely protracted and expensive. For a
description of litigation involving our patents, see Item 3 entitled "Legal
Proceedings."
In February 1994, we settled litigation with Tektronix involving
allegations that our digital oscilloscope products infringed certain patents
held by Tektronix. As part of the settlement, we entered into a license
agreement with respect to such patents. Pursuant to the license agreement we
made royalty payments to Tektronix totaling $8.5 million and received a
worldwide, nonexclusive license under the applicable patents. Royalty expense,
which approximated $0.5 million for the year ended June 30, 2001, is included in
Cost of sales in the Consolidated Statements of Operations. As of June 30, 2001,
we have expensed the maximum royalty payments due under the Tektronix license
agreement.
The license agreement provides that Tektronix may terminate the license in
the event that: we acquire 20% or more of the stock of, or a controlling
interest in, any of a number of specified companies participating in the
oscilloscope market or any of their respective affiliates (each, a "Restricted
Company"); any Restricted Company acquires 20% or more of the stock of, or a
controlling interest in, us or an affiliate of ours; or we attempt to transfer
the Tektronix license to a Restricted Company, and do not first obtain
Tektronix's prior written consent. This provision of the license agreement could
preclude us from making an investment in or acquisition of such companies. It
could also discourage such companies or other third parties from attempting to
acquire control of us or limit the price that such parties might be willing to
pay for our Common Stock. In addition, this provision could limit the price that
investors might be willing to pay in the future for our Common Stock.
The license agreement provides that the license will automatically
terminate when all of the applicable patents expire, which is September 4, 2004.
Once the license terminates, LeCroy will not suffer any negative consequences
under the terms of the license agreement as a result of any of the
above-mentioned investments or acquisitions.
10
EMPLOYEES
As of June 30, 2003, LeCroy had 368 full-time employees, of whom 226 work
in our Chestnut Ridge facility. Our employees are not represented by a labor
union and we have not experienced any work stoppages. We believe that our
employee relations are generally satisfactory.
REGULATION
As we manufacture our products in the United States and sell our products
and purchase parts, components and sub-assemblies in a number of countries, we
are subject to legal and regulatory requirements, particularly the imposition of
tariffs, customs and export controls, in a variety of countries. In addition,
the export of digital oscilloscopes from the United States is subject to
regulation under the Treaty for Nuclear Non-Proliferation.
Our former subsidiary Digitech Industries, Inc., has been involved in
environmental remediation activities, the liability for which has been retained
by us after the sale of the Vigilant Networks segment and the residual assets of
Digitech (see Note 20 to Consolidated Financial Statements). We do not foresee
that the ultimate resolution of this environmental matter will have a material
adverse effect on our results of future operations, financial position or our
competitive position.
INVESTOR INFORMATION
Our Internet website address is www.lecroy.com. We make available, free of
charge on our website, by clicking on "About LeCroy" and then selecting the
"Investor Relations" link and the "SEC Filings" link, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as soon as reasonably practicable after electronically filing such material
with, or furnishing it to, the Securities and Exchange Commission (the "SEC").
11
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
NAME AGE POSITION
- ---- --- --------
Thomas H. Reslewic 44 President, Chief Executive Officer
R. Scott Bausback 42 Executive Vice President, Chief Operating
Officer
Conrad J. Fernandes 42 Vice President, Worldwide Sales
David C. Graef 46 Vice President, Chief Technology Officer
Scott D. Kantor 40 Vice President, Finance, Chief Financial
Officer, Secretary and Treasurer
THOMAS H. RESLEWIC was named to LeCroy's Board of Directors in January
2002. He joined LeCroy in 1990 and has served as President and Chief Executive
Officer since January 2002. Mr. Reslewic previously served LeCroy as President
from October 2000 until December 2001, and Executive Vice President and Chief
Operating Officer from February 1998 until October 2000. Mr. Reslewic has a
Bachelor of Science degree in physics from the College of the Holy Cross and a
Master of Business Administration degree from the University of Oregon.
R. SCOTT BAUSBACK has served as Vice President - Chief Operating Officer
since joining LeCroy in September 2001. Previously, he held a variety of sales
and marketing management positions during an 18-year tenure at Tektronix,
culminating in his role as the Vice President and General Manager for the
Communications Business Unit from September 1998 until June 2001. Mr. Bausback
has a Bachelor of Science degree in electrical engineering from Rutgers College
of Engineering and completed the YEI Executive Education program at
Kenan-Flagler Business School at the University of North Carolina at Chapel
Hill.
CONRAD J. FERNANDES has served as Vice President - Worldwide Sales since
July 2001. Previously, Mr. Fernandes served as Vice President - International
Sales from 1999 until 2000, as Director of Asia-Pacific Sales from 1994 until
1999 and as Product Marketing Manager from 1990 until 1994. Mr. Fernandes has a
Bachelor of Electronic Engineering degree and a Master of Business
Administration degree from City University of London.
DAVID C. GRAEF has served as Vice President - Chief Technology Officer
since April 2003. Previously, he served as Vice President - Research and
Development from January 1999 through March 2003, as Engineering Manager from
June 1996 through December 1998 and as Senior Engineer from January 1989 through
May 1996. Mr. Graef has a Bachelor of Science degree in Electrical Engineering
from the University of Bridgeport.
SCOTT D. KANTOR has served as Vice President - Finance and Chief Financial
Officer since February 2003. Previously, he served as LeCroy's Vice President
and Corporate Controller since 1999. Before joining LeCroy, Mr. Kantor was with
Sappi Fine Paper N.A., since 1997, where he served as Assistant Financial
Controller and led a business process reengineering project that resulted in the
redesign of the company's financial processes in connection with a large-scale
ERP implementation. Mr. Kantor previously held accounting and financial
reporting positions at Genzyme Corporation and Costar Corporation and was a
Senior Accountant with Deloitte & Touche, LLP. Mr. Kantor has a Bachelor of
Science degree from California State University and a Master of Business
Administration degree from Boston University.
Our executive officers are appointed by the Board of Directors and serve
until their successors have been duly elected and qualified. There are no family
relationships among any of our executive officers or directors.
We have entered into indemnification agreements with our executive officers
and directors, pursuant to which we have agreed to indemnify such persons to the
fullest extent permitted by law, and providing for certain other protections.
12
ITEM 2. PROPERTIES.
LeCroy's executive offices and manufacturing facility are located in a
two-story, approximately 88,000 square foot, building in Chestnut Ridge, New
York that is owned by LeCroy. In addition, we lease other office space around
the world to support our local sales and service operations.
We believe that our facilities are in good condition and are suitable and
sufficient for our current operations.
ITEM 3. LEGAL PROCEEDINGS.
On August 5, 2003, LeCroy filed a complaint in the United States District
Court for the District of Oregon claiming that Tektronix has infringed on four
of LeCroy's patents. On April 28, 2003, Tektronix had filed a complaint against
LeCroy in the United States District Court for the District of Oregon claiming
that LeCroy infringed eight of its U.S. patents. Four of these patents concern
software user interface features for oscilloscopes, two concern circuitry, and
two concern probes. LeCroy denies that it has infringed, or is infringing, any
of these patents, and contends that the patents are invalid. We believe we have
meritorious defenses and we intend to vigorously defend this action.
On January 15, 2003, LeCroy was sued by Sicom Systems ("Sicom") in the
United States District Court for the District of Delaware for patent
infringement of United States patent number 5,333,147 (the "147 patent")
entitled "Automatic Monitoring of Digital Communication Channel Conditions Using
Eye Patterns." LeCroy answered the complaint denying infringement and asserted a
counterclaim alleging the invalidity of the 147 patent and that Sicom had abused
the judicial process by bringing a baseless patent infringement claim.
We are involved in lawsuits, claims, investigations and proceedings,
including patent and environmental matters that arise in the ordinary course of
business. There are no matters pending, including those described above, that we
expect to be material in relation to our business, consolidated financial
condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 2003, there were no matters submitted
to a vote of securities holders, through the solicitation of proxies or
otherwise.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
LeCroy's Common Stock is traded on The Nasdaq National Market(R) under the
symbol LCRY. As of September 2, 2003, we had 285 registered holders of record of
our Common Stock, excluding stockholders whose shares were held by brokerage
firms, depositories and other institutional firms in "street name" for their
customers. The following table sets forth, for the periods indicated, the range
of high and low sales prices for the Common Stock as reported by The Nasdaq
National Market.
HIGH LOW
---- ----
FISCAL YEAR 2003
First Quarter................................ $11.95 $7.93
Second Quarter............................... 11.70 7.42
Third Quarter................................ 13.25 7.93
Fourth Quarter............................... 11.06 7.84
FISCAL YEAR 2002
First Quarter................................ $26.00 $13.52
Second Quarter............................... 20.00 13.75
Third Quarter................................ 19.97 16.16
Fourth Quarter............................... 17.65 10.05
We have never declared nor paid cash dividends on our Common Stock and we
intend to retain all available funds for use in the operation and expansion of
our business. We therefore do not anticipate that any cash dividends will be
declared or paid in the foreseeable future.
On June 30, 1999, we issued and sold an aggregate of 500,000 shares of our
Series A Convertible Redeemable Preferred Stock ("Series A Preferred Stock") for
an aggregate purchase price of $10,000,000 and warrants to purchase an aggregate
of 250,000 shares of our Common Stock for an aggregate purchase price of $0.01.
The securities were sold to Advent Global GECC III Limited Partnership,
EnviroTech Investment Fund I Limited Partnership, Adwest Limited Partnership,
Oakstone Ventures Limited Partnership and Advent Partners Limited Partnership,
all of which are accredited investors as defined under Regulation D of the
Securities Act. Proceeds of the issuance of Series A Preferred Stock and
warrants to purchase Common Stock were allocated for general working capital
purposes.
The Series A Preferred Stock is convertible into shares of Common Stock at
any time at the option of the holder and, under certain circumstances specified
in our Certificate of Incorporation, the Series A Preferred Stock is
automatically convertible into shares of Common Stock (see Note 17 to the
Consolidated Financial Statements for further information). The warrants are
exercisable, at an exercise price of $20 per share of Common Stock, at any time
until June 30, 2006. Each share of Series A Preferred Stock is entitled to one
vote on all matters presented to holders of record of our Common Stock.
In August 2000, we sold 517,520 shares of our Common Stock for gross
proceeds of $5.2 million in a private equity placement. Proceeds from this sale
of securities were used to repay existing indebtedness and fund working capital
requirements and for other general corporate purposes.
In August 2001, we sold 1,428,572 shares of our Common Stock for gross
proceeds of $25.0 million. We intend to use the proceeds for operating needs and
to fund growth through acquisitions and other transactions.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected Consolidated Statements of Operations Data for the
five years ended June 30, 2003 and the Consolidated Balance Sheet data at June
30, 2003, 2002, 2001, 2000 and 1999 are derived from our Consolidated Financial
Statements and have been adjusted to reflect the discontinuance of the Vigilant
Networks business segment. The data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our Consolidated Financial Statements and related Notes thereto
included elsewhere in this Form 10-K.
14
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
YEARS ENDED JUNE 30,
----------------------------------------------------------
In thousands, except per share amounts 2003 2002 2001 2000 1999
----- ----- ----- ----- -----
Revenues:
Digital oscilloscopes and related products............ $ 95,008 $ 101,077 $ 129,425 $ 110,237 $ 100,366
High-energy physics products.......................... - 1,419 3,757 4,132 7,362
Service and other (1)................................. 12,851 8,960 8,206 7,031 11,763
-------- --------- --------- --------- ---------
Total revenues...................................... 107,859 111,456 141,388 121,400 119,491
Cost of sales (2)........................................ 51,471 59,982 67,838 61,706 60,298
-------- --------- --------- --------- ---------
Gross profit.......................................... 56,388 51,474 73,550 59,694 59,193
Operating expenses:
Selling, general and administrative (3)(5)............ 40,940 40,212 44,459 35,644 42,305
Research and development (4)(5)....................... 18,226 22,006 17,682 15,165 15,861
-------- --------- --------- --------- ---------
Total operating expenses............................ 59,166 62,218 62,141 50,809 58,166
-------- --------- --------- --------- ---------
Operating (loss) income.................................. (2,778) (10,744) 11,409 8,885 1,027
(Loss) gain from sale of marketable securities........ - (122) - 2,460 -
Other (expense) income, net........................... (84) 310 (471) (276) 158
-------- --------- --------- --------- ---------
(Loss) income from continuing operations before
income taxes and the cumulative
effect of an accounting change ...................... (2,862) (10,556) 10,938 11,069 1,185
Benefit from (provision for) income taxes............. 1,059 4,307 897 (3,498) (2,499)
-------- --------- --------- --------- ---------
(Loss) income from continuing operations before the
cumulative effect of an accounting change............ (1,803) (6,249) 11,835 7,571 (1,314)
Gain (loss) from discontinued operations, net of tax.. 129 - (1,994) (11,009) (5,474)
-------- --------- --------- --------- ---------
(Loss) income before the cumulative effect of an
accounting change..................................... (1,674) (6,249) 9,841 (3,438) (6,788)
Cumulative effect of an accounting change for
revenue recognition, net of tax....................... - - 4,417 - -
-------- --------- --------- --------- ---------
Net (loss) income........................................ (1,674) (6,249) 5,424 (3,438) (6,788)
Charges related to convertible preferred stock........... 2,069 1,876 1,700 1,540 1,844
Cumulative effect of an accounting change for
preferred stock....................................... - - 1,848 - -
-------- --------- --------- --------- ---------
Net (loss) income applicable to common stockholders.... $ (3,743) $ (8,125) $ 1,876 $ (4,978) $ (8,632)
======== ========= ========= ========= =========
(Loss) income per common share-basic:
(Loss) income from continuing operations before the
cumulative effect of an accounting change
applicable to common stockholders.................. $ (0.37) $ (0.81) $ 1.20 $ 0.78 $ (0.41)
Gain (loss) from discontinued operations............. 0.01 - (0.24) (1.42) (0.72)
Cumulative effect of an accounting change............ - - (0.74) - -
-------- --------- --------- --------- ---------
Net (loss) income applicable to common stockholders.. $ (0.36) $ (0.81) $ 0.22 $ (0.64) $ (1.13)
======== ========= ========= ========= =========
(Loss) income per common share-diluted:
(Loss) income from continuing operations
before the cumulative effect of an accounting
change applicable to common stockholders........... $ (0.37) $ (0.81) $ 1.15 $ 0.76 $ (0.41)
Gain (loss) from discontinued operations............. 0.01 - (0.23) (1.38) (0.72)
Cumulative effect of an accounting change............ - - (0.71) - -
-------- --------- --------- --------- ---------
Net (loss) income applicable to common stockholders.. $ (0.36) $ (0.81) $ 0.21 $ (0.62) $ (1.13)
======== ========= ========= ========= =========
Weighted average number of common shares:
Basic .............................................. 10,364 10,052 8,476 7,749 7,621
Diluted ............................................ 10,364 10,052 8,847 7,977 7,621
(See legend on following page)
15
(1) Service and other revenue in each of fiscal 2003, 2002 and 2001
includes the recognition of $1.3 million of revenue that was deferred
with the adoption of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" as of the beginning of fiscal 2001 (see Note 1 to the
Consolidated Financial Statements). Included in Service and other
revenue in fiscal 2003 and 1999 are technology license fees of $3.0
million and $4.9 million, respectively.
(2) Included in Cost of sales in fiscal 2003 is $2.3 million of asset
impairment charges and a $0.2 million charge for severance. In fiscal
2002, we recorded a $1.0 million charge for severance and $3.6 million
of excess and obsolete inventory charges related to the cost of
inventory associated with discontinued product lines and inventory
levels that had been deemed to be in excess of forecasted
requirements. In fiscal 2001, Cost of sales includes $0.1 million in
severance-related charges. Included in Cost of sales in fiscal 1999
are inventory write-downs of $2.2 million pursuant to restructuring of
our business. (See Note 3 to the Consolidated Financial Statements for
a detailed discussion of our restructuring plans).
(3) Included in Selling, general and administrative expense in fiscal 2003
is a $0.3 million charge related to the cost of closing our Beaverton,
Oregon facility and a $2.4 million charge for severance partially
offset by the reversal of an unused 2002 restructuring reserve of $0.1
million. In fiscal 2002, we recorded $3.0 million in severance-related
charges. In fiscal 2001, we recorded a charge for severance of $0.7
million, partially offset by the reversal of an unused 1999
restructuring reserve of $0.2 million. In fiscal 2000, we reversed
$2.0 million of a restructuring reserve established in fiscal 1999. In
fiscal 1999, we recorded charges of $6.8 million related to the
consolidation of our oscilloscope operations. (See Note 3 to the
Consolidated Financial Statements for a detailed discussion of our
restructuring plans).
(4) Research and development in each of fiscal 2003, 2002 and 2001
includes severance-related charges of $0.7 million, $0.2 million and
$0.1 million, respectively, and in fiscal 2002 a $4.0 million
technology access fee to IBM.
(5) Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications had no impact on
previously reported net loss (income).
YEARS ENDED JUNE 30,
----------------------- -----------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (6)..................... $ 62,831 $ 63,265 $ 41,610 $ 24,129 $ 31,516
Total assets ........................... 122,152 126,991 122,160 100,849 99,685
Total debt and capitalized leases....... 291 375 456 11,000 8,200
Redeemable convertible preferred stock.. 15,335 13,266 11,390 9,692 8,152
Total stockholders' equity.............. 80,514 81,505 60,480 47,109 51,855
(6) At June 30, 2000, all of our outstanding debt of $11.0 million under
our bank credit facility was classified as current and was included
in net working capital.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and our Consolidated Financial Statements and related
Notes thereto included elsewhere in this Form 10-K. The information contained
below includes statements regarding the intent, belief or current expectations
of LeCroy or our officers or directors that, if not historical, are
forward-looking statements subject to certain risks and uncertainties that could
cause actual performance and results of operations to differ materially from
those projected or suggested in the forward-looking statements. For a discussion
on forward-looking statements, see the information set forth at the end of this
Item 7. under the heading "Forward-Looking Statements."
LeCroy currently operates as one business segment in the Test and
Measurement Instrument market. Using our core competency of WaveShape Analysis,
defined as the capture and analysis of complex electronic signals, we develop,
manufacture, sell and license signal acquisition and analysis products. Our
principal product line consists of a family of high-performance digital
oscilloscopes used primarily by electrical design engineers in various markets,
including computer / semi-conductor, data storage, communications and power
measurement. We also produce modular digitizers and proprietary electronic
components. In addition, we generate revenue by providing service on all of our
products beyond the initial warranty period.
CONSOLIDATED RESULTS OF OPERATIONS
The following table indicates the percentage of total revenues represented
by each item in our Consolidated Statements of Operations for the fiscal years
ended June 30, 2003, 2002 and 2001. On August 25, 2000, we sold substantially
all of the assets and business of our Vigilant Networks business segment.
Accordingly, the results of operations of this business segment have been
reflected as discontinued operations.
YEARS ENDED JUNE 30,
2003 2002 2001
---- ---- ----
Revenues:
Digital oscilloscopes and related products................................... 88.1% 90.7% 91.5%
High-energy physics products................................................. - 1.3 2.7
Service and other............................................................ 11.9 8.0 5.8
------- ------- -------
Total revenues............................................................ 100.0 100.0 100.0
Cost of sales (included in fiscal 2003 is $2.3 million of asset impairment
charges (2.1% of total revenues) and $0.2 million of severance charges
(0.2% of total revenues); included in fiscal 2002 is $3.6 million of
inventory charges (3.2% of total revenues) and $1.0 million of severance
charges (0.9% of total revenues); included in fiscal 2001 is $0.1
million of severance charges (0.1% of total revenues)).................... 47.7 53.8 48.0
------- ------- -------
Gross profit........................................................... 52.3 46.2 52.0
Operating expenses:
Selling, general and administrative (included in fiscal 2003 is $0.3
million of plant closing costs (0.3% of total revenues) and $2.4 million
of severance charges (2.2% of total revenues), partially offset by the
reversal of an unused 2002 restructuring reserve of $0.1 million (0.1%
of total revenues); included in fiscal 2002 is $3.0 of million of
severance charges (2.7% of total revenues); included in fiscal 2001 is
$0.7 million of severance charges (0.5% of total revenues), partially
offset by the reversal of an unused 1999 restructuring reserve of $0.2
million (0.2% of total revenues))......................................... 38.0 36.1 31.5
Research and development (included in fiscal 2003, 2002 and 2001 were
severance charges of $0.7 million, $0.2 million and $0.1 million (0.6%,
0.2% and 0.1% of total revenues), respectively; included in fiscal 2002
is a $4.0 million technology access fee (3.6% of total revenues))......... 16.9 19.7 12.5
------- ------- -------
Total operating expenses.................................................. 54.9 55.8 44.0
Operating (loss) income........................................................... (2.6) (9.6) 8.0
Other (expense) income, net................................................. (0.1) 0.1 (0.3)
------- ------- -------
(Loss) income from continuing operations before income taxes and
the cumulative effect of an accounting change ............................ (2.7) (9.5) 7.7
Benefit from income taxes................................................... 1.0 3.9 0.6
------- ------- -------
(Loss) income from continuing operations before the cumulative
effect of an accounting change ........................................... (1.7) (5.6) 8.3
Gain (loss) from discontinued operations, net of tax........................ 0.1 - (1.4)
------- ------- -------
Net (loss) income before the cumulative effect of an accounting change............ (1.6) (5.6) 6.9
Cumulative effect of an accounting change for revenue
recognition, net of tax.................................................... - - 3.1
------- ------- -------
Net (loss) income................................................................. (1.6)% (5.6)% 3.8%
======= ======= =======
17
COMPARISON OF FISCAL YEARS 2003 AND 2002
Total revenues were $107.9 million in fiscal 2003 compared to $111.5
million in fiscal 2002, a decrease of 3.2%, or $3.6 million. Revenues from
digital oscilloscopes and related products decreased 6.0%, or $6.1 million, in
fiscal 2003. Lower sales from discontinued product lines, OEM/distributed
products and components were partially offset by sales of our
application-specific Serial Data Analyzer and Disk Drive Analyzer versions of
our high-end WaveMaster(TM) product line of digital oscilloscopes and increased
sales of probes and accessory products.
Revenues from high-energy physics products declined by $1.4 million, or
100%, in fiscal 2003 as a result of our decision in December 2001 to discontinue
this product line. Revenues from Service and other revenue increased 43.4%, or
$3.9 million, in fiscal 2003 primarily due to a $3.0 million agreement to
license our MAUI(TM) Instrument Operating System technology. Service and other
revenue in each of fiscal 2003, 2002 and 2001 includes the recognition of $1.3
million of revenue that was deferred with the adoption of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue
Recognition in Financial Statements" as of the beginning of fiscal 2001 (see
Note 1 to the Consolidated Financial Statements).
On a geographical basis, the Americas comprised $32.4 million, or 30%, of
fiscal 2003 revenues compared to $33.1 million, or 30%, of fiscal 2002, Europe
and the Middle East comprised $31.2 million, or 29%, of fiscal 2003 revenues
compared to $33.1 million, or 30%, of fiscal 2002 and the Asia/Pacific region
accounted for $44.3 million, or 41%, of fiscal 2003 revenues compared to $45.3
million, or 40%, of fiscal 2002.
Gross margin was 52.3% in fiscal 2003 compared to 46.2% in fiscal 2002.
Included in Cost of sales in fiscal 2003 is a $2.3 million (2.1% of total
revenues) charge for the write-off of impaired intangible assets resulting from
our decision to exit certain product lines and to make a significant change in
our manufacturing strategy and $0.2 million (0.2% of total revenues) of
severance charges. Included in Cost of sales in fiscal 2002 is a $1.0 million
(0.9% of total revenues) charge for severance and a charge of $3.6 million (3.2%
of total revenues) to increase our allowance for excess and obsolete inventory.
This inventory charge relates to the cost of inventory associated with
discontinued product lines and inventory levels that had been deemed to be in
excess of forecasted requirements. The increase in gross margin in fiscal 2003
resulted from the $3.0 million technology license included in Service and other
revenue, favorable margins on our high-end WaveMaster product line of digital
oscilloscopes, more favorable product margins on the existing base of products
due to higher average selling prices of our high-end products, increased
operational efficiency and improved cost structure.
Selling, general and administrative expense increased by 1.8%, or $0.7
million, from $40.2 million in fiscal 2002 to $40.9 million in fiscal 2003.
Selling, general and administrative expense in fiscal 2003 includes $2.4 million
of severance (2.2% of total revenues) charges and $0.3 million (0.3% of total
revenues) of plant closing costs partially offset by the reversal of an unused
2002 restructuring reserve of $0.1 million (0.1% of total revenues) and in
fiscal 2002 includes $3.0 of million of severance (2.7% of total revenues)
charges. This increase in Selling, general and administrative expense is
attributable to increased fixed selling costs as a result of the conversion, in
the fourth quarter of fiscal 2002, of the U.S. sales force from partial coverage
by manufacturers' representatives to full coverage by our direct sales force,
establishing a direct presence in Singapore, the opening of two new offices in
China partially offset by lower restructuring charges in fiscal 2003. As a
percentage of total revenues, Selling, general and administrative expense was
38.0% in fiscal 2003, compared with 36.1% in fiscal 2002. This increase as a
percentage of total revenues was primarily due to our inability to leverage
higher costs of fixed infrastructure over the lower sales base.
Research and development expense decreased by 17.2%, or $3.8 million, from
$22.0 million in fiscal 2002 to $18.2 million in fiscal 2003. Included in
Research and development in fiscal 2003 and 2002 are severance charges of $0.7
million and $0.2 million (0.6% and 0.2% of total revenues), respectively, and in
fiscal 2002 a $4.0 million (3.6% of total revenues) technology access fee to IBM
Corporation ("IBM"). We will use the access to this next-generation silicon
germanium technology acquired from IBM to develop components that are expected
to deliver higher density, greater speed and reduced power consumption than
those currently available. Such components will be used in future high-speed
digital oscilloscopes. As a percentage of sales, Research and development
expense decreased from 19.7% in fiscal 2002 to 16.9% in fiscal 2003. This
decrease as a percentage of total revenues was primarily due the technology
access fee purchased in fiscal 2002 partially offset by increased severance
charges and the inability to fully leverage expenses over the lower sales base
in fiscal 2003. Despite the effects of the difficult economy, we maintained our
commitment to product development in fiscal 2003 as evidenced by the successful
execution of our product strategy of leveraging our high-end silicon germanium
18
acquisition technology and MAUI Instrument Operating System deployed in
WaveMaster into our WavePro product line of digital oscilloscopes. We intend to
continue to invest a significant percentage of our revenues in our research and
development efforts.
Other (expense) income, net, which consists primarily of net interest
income and foreign exchange gains or losses, was an expense of ($0.1) million in
fiscal 2003, compared to income of $0.3 million in fiscal 2002. The decrease in
income in fiscal 2003 was primarily due to a $0.3 million increase in foreign
exchange losses on transactions denominated in other than the functional
currency of LeCroy or our subsidiaries and lower net interest income earned on
our cash balances due to lower interest rates.
In fiscal 2003, we recorded a tax benefit of $1.1 million, or an effective
tax rate of (37.0%), compared to a tax benefit of $4.3 million, or an effective
tax rate of (40.8)%, in fiscal 2002. The effective tax rate in fiscal 2002 was
based on an estimated annual effective tax rate of approximately 37.0%,
increased by the release of a $0.4 million tax reserve related to a favorable
audit settlement in the first quarter of fiscal 2002.
Charges related to convertible preferred stock, comprising the Preferred
Stock dividend and the accretion for the value of fully exercisable warrants
granted in connection with the private placement of the Preferred Stock, were
$2.1 million and $1.9 million in fiscal 2003 and 2002, respectively.
See "Discontinued Operations" for a discussion and analysis of such
amounts.
COMPARISON OF FISCAL YEARS 2002 AND 2001
Total revenues were $111.5 million in fiscal 2002 compared to $141.4
million in fiscal 2001, a decrease of 21.2%, or $29.9 million. Revenues from
digital oscilloscopes and related products decreased 21.9%, or $28.3 million, in
fiscal 2002 primarily due to the impact of the difficult economic environment on
our higher end products and execution issues in our U.S. sales channel. Revenues
from high-energy physics products declined by $2.3 million, or 62.2%, in fiscal
2002 as a result of our decision in December 2001 to discontinue this product
line. Service and other revenue in both fiscal 2002 and 2001 includes the
recognition of $1.3 million of revenue that was deferred with the adoption of
the Securities and Exchange Commission's SAB 101 "Revenue Recognition in
Financial Statements" as of the beginning of fiscal 2001 (see Note 1 to the
Consolidated Financial Statements).
On a geographical basis, the Americas comprised $33.1 million, or 30%, of
fiscal 2002 revenues compared to $48.7 million, or 34%, of fiscal 2001, Europe
and the Middle East comprised $33.1 million, or 30%, of fiscal 2002 revenues
compared to $40.0 million, or 28%, of fiscal 2001 and the Asia/Pacific region
accounted for $45.3 million, or 40%, of fiscal 2002 revenues compared to $52.7
million, or 38%, of fiscal 2001. The decline in revenues from the Americas in
fiscal 2002 was primarily due to the impact of the difficult economic
environment in the U.S. and execution issues in our U.S. sales channel. We
addressed these execution issues in the fourth quarter of fiscal 2002 by hiring
new sales management and converting the U.S. sales channel from partial coverage
by manufacturers' sales representatives to full coverage by our direct sales
force.
Gross margin was 46.2% in fiscal 2002 compared to 52.0% in fiscal 2001.
Included in Cost of sales in fiscal 2002 was $1.0 million (0.9% of total
revenues) of severance charges and a $3.6 million (3.2% of total revenues)
charge for excess and obsolete inventory. This inventory charge relates to the
cost of inventory associated with discontinued product lines and inventory
levels that had been deemed to be in excess of forecasted requirements. Included
in Cost of sales in fiscal 2001 was $0.1 million (0.1% of total revenues) of
severance charges. The decrease in gross margin from the prior year was due to
the unfavorable absorption of costs resulting from lower sales volume, an
unfavorable sales mix of lower margin products and higher technology-related
royalties, in addition to the charges for severance and excess and obsolete
inventory in fiscal 2002. These negative impacts were partially offset by
favorable margins on our new high-end WaveMaster product line of digital
oscilloscopes released in the third quarter of fiscal 2002.
Selling, general and administrative expense decreased by 9.6%, or $4.2
million, from $44.5 million in fiscal 2001 to $40.2 million in fiscal 2002.
Included in Selling, general and administrative expense in fiscal 2002 is $3.0
million (2.7% of total revenues) of severance charges and in fiscal 2001 is $0.7
million (0.5% of total revenues) of severance charges partially offset by the
reversal of an unused 1999 restructuring reserve of $0.2 million (0.2% of total
revenues). The decrease in Selling, general and administrative expense is
attributable to the cost reduction initiatives taken in light of the poor
economic environment including headcount reductions, salary freezes,
19
reduced incentive payments and controls on discretionary spending, as well as
lower variable selling costs partially offset by the increase in severance
charges in fiscal 2002. As a percentage of total revenues, Selling, general and
administrative expense was 36.1% in fiscal 2002, compared with 31.5% in fiscal
2001. This increase as a percentage of total revenues was primarily due to the
inability to leverage the costs of fixed infrastructure over the lower sales
base and the increase in severance charges in fiscal 2002. These fixed costs
increased in fiscal 2002 as a result of the conversion, in the fourth quarter,
of the U.S. sales force from partial coverage by manufacturers' representatives
to full coverage by the our direct sales force.
Research and development expense increased by 24.5%, or $4.3 million,
from $17.7 million in fiscal 2001 to $22.0 million in fiscal 2002. Included in
Research and development in fiscal 2002 and 2001 are severance-related charges
of $0.2 million and $0.1 million (0.2% and 0.1% of total revenues),
respectively, and in fiscal 2002 a $4.0 million (3.6% of total revenues)
technology access fee to IBM. Despite the effects of the difficult economy, we
maintained our commitment to product development in fiscal 2002 as evidenced by
the successful launch of WaveMaster, our first silicon germanium-based family of
oscilloscopes. As a percentage of total revenues, Research and development
expense increased from 12.5% in fiscal 2001 to 19.7% in fiscal 2002. This
increase as a percentage of total revenues was primarily due to the inability to
leverage expenses fully over the lower sales base, the purchased technology and
the release of our high-end WaveMaster product line of digital oscilloscopes in
the third quarter of fiscal 2002. We intend to continue to invest a significant
percentage of our revenues in our research and development efforts.
Other (expense) income, net, which consists of net interest income and
foreign exchange gains or losses, was income of $0.3 million in fiscal 2002,
compared to an expense of ($0.5) million in fiscal 2001. The increase in income
was due to a $0.7 million reduction of foreign exchange losses as a result of
our hedging program initiated in the third quarter of fiscal 2001. In addition,
there was a $0.1 million improvement in net interest income due to higher
average cash balances from the net proceeds of $23.2 million raised from a
private equity placement in August 2001 and no significant bank borrowings
during fiscal 2002. During the fourth quarter of fiscal 2002, we sold the
remaining 1.0 million shares of our equity investment in Iwatsu. This
transaction generated $1.8 million of cash and resulted in a pre-tax loss of
($0.1) million. No shares of Iwatsu stock were sold during fiscal 2001.
In fiscal 2002, we recorded a tax benefit of $4.3 million, or an effective
tax rate of (40.8)%, compared to a tax benefit of $0.9 million, or an effective
tax rate of (8.2)%, in fiscal 2001. The (40.8)% effective tax rate consists of
our (37.0)% annual effective tax rate increased by the release of a $0.4 million
tax reserve related to a favorable audit settlement. During fiscal 2001, we used
$8.2 million of net operating losses ($3.2 million of tax benefit) to offset
taxable income from continuing operations and reversed, during the fourth
quarter of fiscal 2001, $4.1 million of our valuation allowance into income.
Partially offsetting these items, we recorded a tax expense of $1.6 million for
the projected repatriation of cash from one of our foreign subsidiaries. Our tax
provision in fiscal 2001 before the tax benefit from net operating losses and
the reversal of our valuation allowance, partially offset by the tax expense for
the projected cash repatriation from one of our foreign subsidiaries, would have
been $4.7 million, or an effective tax rate of 43.3%.
Charges related to convertible preferred stock, comprising the Preferred
Stock dividend and the accretion for the value of fully exercisable warrants
granted in connection with the private placement of the Preferred Stock, were
$1.9 million and $1.7 million in fiscal 2002 and 2001, respectively. See Note 17
to the Consolidated Financial Statements for a discussion on the cumulative
effect of an accounting change for Preferred Stock.
See "Revenue Recognition" for a discussion and analysis of the cumulative
effect of an accounting change for revenue recognition.
See "Discontinued Operations" for a discussion and analysis of such
amounts.
RESTRUCTURING AND OTHER CHARGES (CREDITS), NET
During the fourth quarter of fiscal 2003, we adopted a plan to consolidate
our probe development activities into our Chestnut Ridge, New York facility. In
connection with this plan, we closed our Beaverton, Oregon facility and recorded
lease termination costs of $0.3 million and a charge for severance of $0.6
million; $0.1 million of which was recorded in Cost of sales, $0.6 million
recorded in Selling, general and administrative expense and $0.2 million
recorded in Research and development in the Consolidated Statement of
Operations. The implementation of this plan resulted in headcount reductions of
27 employees or approximately 7% of the workforce as compared to June 30, 2002.
As of June 30, 2003, $0.3 million of the total $0.9 million has been paid and
$0.6 million remains in Accrued expenses and other liabilities in the
Consolidated Balance Sheet. Lease termination costs under this plan will be paid
by the end of the third quarter of fiscal 2006 and severance will be paid by the
end of the fourth quarter of fiscal 2004.
20
During the first quarter of fiscal 2003, we adopted a plan to scale down
fixed infrastructure due to the difficult economic environment and to implement
new management operating systems designed to improve processes in sales, order
management, customer relationship management and financial performance
management. In connection with the adoption of this plan, we recorded a charge
for severance and other related expenses in the first quarter of fiscal 2003 of
$2.7 million; $0.1 million of which was recorded in Cost of sales, $2.1 million
recorded in Selling, general and administrative expense and $0.5 million
recorded in Research and development in the Consolidated Statement of
Operations. The plan implemented during fiscal 2003 resulted in improved
operating efficiencies and reduced our headcount by 38 employees or
approximately 9% of the workforce as compared to June 30, 2002. As of June 30,
2003, $2.0 million of the total $2.7 million has been paid and $0.7 million
remains in Accrued expenses and other liabilities in the Consolidated Balance
Sheet. Severance and other related amounts under this plan will be paid by the
end of fiscal 2004.
We took steps during fiscal 2002 to reduce our expenses in response to the
continued weakness in the technology sector of the economy. As part of this
effort, LeCroy reduced its workforce by 69 employees or approximately 15% as
compared to June 30, 2001. In connection with these workforce reductions, we
recorded a $4.2 million charge ($1.0 million recorded in Cost of sales, $3.0
million in Selling, general and administrative expense and $0.2 million in
Research and development in the Consolidated Statement of Operations) for
severance and related expenses, including costs associated with the succession
of our Chief Executive Officer during the second quarter of fiscal 2002. Of the
$4.2 million total charge, $4.0 million was initially credited to Accrued
expenses and other liabilities and $0.2 million, representing a non-cash expense
for the amendment of employee stock options, was credited to Additional paid-in
capital. As of June 30, 2003, $3.7 million of the total $4.0 million has been
paid, $0.2 million remains accrued in Accrued expenses and other liabilities in
the Consolidated Balance Sheet and $0.1 million of unused restructuring reserve
was credited to Selling, general and administrative expense in the fourth
quarter of fiscal 2003. Severance and other related amounts, including costs
associated with the succession of our Chief Executive Officer, will be paid by
the end of the second quarter of fiscal 2004.
During the fourth quarter of fiscal 2001, in anticipation of continued
weakness of the economy, we reduced our workforce by 25 employees or
approximately 5% as compared to June 30, 2000. As a result of this workforce
reduction, we recorded a severance charge of $0.9 million ($0.1 million recorded
in Cost of sales, $0.7 million in Selling, general and administrative expense
and $0.1 million in Research and development in the Consolidated Statement of
Operations). The 2001 restructuring plan was completed as of June 30, 2002.
During fiscal 1999, we adopted a restructuring plan, the objectives of
which were to consolidate our oscilloscope operations in order to enhance
operating efficiencies and to dedicate resources to the development of advanced
technologies. The 1999 restructuring plan was completed in fiscal 2001.
Cumulative through fiscal 2001, $8.2 million of the initial restructuring
reserve established had been paid or used to reduce asset balances. Of this $8.2
million, $2.1 million related to inventories, $3.0 million related to severance
and other employee benefit costs, $1.3 million related to the Geneva facility
lease and $1.8 million related to the write-down of plant assets, capitalized
management information system software and other costs. In addition, during
fiscal 2000, we negotiated the assignment of the remaining lease payments on the
Geneva facility to a third party as of August 1, 2000. As a result, a
restructuring credit of $2.0 million relating to the reversal of the remaining
lease payments, net of fees, was recorded in the fourth quarter of fiscal 2000.
The residual balance of $0.2 million was credited to Selling, general and
administrative expense in fiscal 2001.
DISCONTINUED OPERATIONS
In August 2000, LeCroy divested its Vigilant Networks business segment,
which comprised its Vigilant Networks, Inc. ("Vigilant") and Digitech
Industries, Inc. ("Digitech") subsidiaries. Vigilant Networks' principal
product, the Big Tangerine network analyzer, was a new product which was also
being sold into a new market for LeCroy. Since this product's inception, we had
made substantial investments in the Vigilant Networks business segment in terms
of selling, marketing, research and development and administrative expenses.
While the network analyzer had a unique technology, we decided that we could not
continue to invest the financial resources necessary to capitalize on its future
growth potential.
21
In August 2000, we closed the sale of the assets and business of Vigilant
and a portion of the assets and business of Digitech for gross proceeds of $12.0
million. The remaining business of Digitech was classified as discontinued
operations. The buyer also assumed certain liabilities of Vigilant. In
connection with the sale, we issued warrants to purchase 200,000 shares of
LeCroy Common Stock at $10.05 per share to the buyer. Using the Black-Scholes
option pricing model, these warrants were valued at approximately $1.3 million.
After deducting the value of these warrants, along with fees and certain
retained liabilities, we recorded a loss of ($0.6) million, net of a $0.3
million tax benefit, on the sale and discontinuance of the Vigilant Networks
business segment. This includes a $1.4 million adjustment to the loss recorded
in the fourth quarter of fiscal 2001 due to changes in estimates. Fiscal 2001
revenues from discontinued operations were $0.4 million (through the measurement
date) and losses from discontinued operations, net of tax, were ($1.4) million
(through the measurement date).
In fiscal 2003, we recorded a $0.1 million Gain on sale of discontinued
operations in the Consolidated Statement of Operations, net of a $0.1 million
tax provision, for the sale of the residual assets and business of Digitech and
the reversal of unused accrued discontinued operations reserves.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $62.8 million at June 30, 2003, which represented a
working capital ratio of 3.7 to 1, compared to $63.3 million, or 3.3 to 1, at
June 30, 2002.
Net cash provided by (used in) operating activities for the fiscal years
ended June 30, 2003, 2002 and 2001 was $6.7 million, ($6.9) million and $0.6
million, respectively. The increase in net cash provided by operating activities
in fiscal 2003 versus 2002 was primarily due to the $4.6 million decrease in net
loss, the $3.0 million reduction in inventory due to increased operating
efficiencies, increased accounts receivable collections activity of $1.5 million
and reduced cash payments of $3.8 million for accounts payable, accrued expenses
and other liabilities. The increase in cash used in operating activities in
fiscal 2002 versus 2001 was primarily due to a decrease in accounts payable,
accrued expenses and other liabilities, partially offset by a decrease in
accounts receivable balances related to lower revenue and improved collections
experience on past due balances. The reduction in accounts payable, accrued
expenses and other liabilities in fiscal 2002 reflects $3.1 million of payments
on retained discontinued operations liabilities, severance payments and a
reduction in accounts payable levels.
Net cash (used in) provided by investing activities for the fiscal years
ended June 30, 2003, 2002 and 2001 was ($3.9) million, ($2.2) million and $5.0
million, respectively. This increase in net cash used in investing activities in
fiscal 2003 versus 2002 was primarily due to a $1.3 million acquisition of a
technology license partially offset by a $1.5 million reduction in capital
expenditures in fiscal 2003 and proceeds from the sale of marketable securities
of $1.8 million in fiscal 2002. The decrease in cash provided by investing
activities in fiscal 2002 versus 2001 was primarily due to the gross proceeds of
$12.0 million received from the sale of the assets and business of the Vigilant
Networks business segment in fiscal 2001, which effect was partially offset by
the proceeds from the sale of marketable securities of $1.8 million in fiscal
2002 and the investment of ($2.1) million in computer software in fiscal 2001.
Net cash provided by (used in) financing activities for the fiscal years
ended June 30, 2003, 2002 and 2001 was $0.5 million, $24.8 million and ($3.3)
million, respectively. The decrease in cash provided by financing activities in
fiscal 2003 versus 2002 was primarily due to the private equity placement in
fiscal 2002 raising net proceeds of $23.2 million. Additionally, fewer stock
options were exercised during fiscal 2003 due to a lower average stock price as
compared to fiscal 2002. The increase in cash provided by financing activities
in fiscal 2002 versus 2001 was primarily due to the net proceeds of $23.2
million raised from the private equity placement in fiscal 2002.
We have a $15.0 million revolving line of credit with a commercial bank
expiring on September 30, 2003, which can be used to provide funds for general
corporate purposes and acquisitions. Borrowings under this line bear interest at
prime plus a margin of between .25% and 1.25%, or LIBOR plus a margin of between
1.5% and 2.5%, depending on our Leverage Ratio. This revolving line of credit is
secured by a lien on substantially all of our domestic assets. As of June 30,
2003, we have met our financial covenant requirements and there were no
borrowings outstanding under this line of credit. The credit agreement was
amended on September 2, 2003 to extend the expiration date of the revolving line
of credit to November 30, 2003. Management plans to complete its negotiations
and have a new revolving line of credit in place before this amendment expires.
22
On June 12, 2000, we secured a $2.0 million capital lease line of credit to
fund certain capital expenditures. As of June 30, 2003, we had $0.3 million
outstanding under this line of credit, $0.1 million of which was included in
Accrued expenses and other liabilities and the remaining $0.2 million of which
was included in Deferred Revenue and other non-current liabilities on the
Consolidated Balance Sheet. Outstanding borrowings under this line bear interest
at 12.2%.
In addition to the above U.S.-based facilities, we maintain certain
short-term foreign credit facilities, principally facilities with two Japanese
banks totaling 150 million yen ($1.3 million as of June 30, 2003). No amounts
were outstanding under these facilities as of June 30, 2003.
Our contractual obligations and commitments include obligations associated
with our capital and operating leases and a technology license agreement as set
forth in the table below:
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
--------- -------- --------- --------- ---------
(IN THOUSANDS)
Capital lease obligations................. $ 291 $ 95 $ 196 $ - $ -
Employee severance agreement.............. 348 321 27 - -
Operating lease obligations............... 4,442 1,467 1,916 1,059 -
Other contractual commitments to purchase
information technology (1)............. 750 500 250 - -
--------- -------- --------- --------- ---------
Total....................... $ 5,831 $ 2,383 $ 2,389 $ 1,059 $ -
========= ======== ========= ========= =========
(1) As of June 30, 2003, we had a technology license agreement, under which
we are unconditionally committed to pay $0.5 million and $0.3 million in fiscal
2003 and 2004, respectively.
We believe that our cash on hand and cash flow generated by our continuing
operations will be sufficient to fund working capital and capital expenditure
requirements for at least the next twelve months and provide funds for potential
acquisition opportunities.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are described in Notes 1 and 2 to the
Consolidated Financial Statements. The preparation of consolidated financial
statements in accordance with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the consolidated financial statements and related disclosures. These estimates
and assumptions are based on management's judgment and available information
and, consequently, actual results could be different from these estimates.
LeCroy believes that the critical accounting policies discussed below
involve significant management judgment due to the sensitivity of the methods,
assumptions and estimates necessary in determining the related assets,
liability, revenue and expense amounts.
Allowance for Doubtful Accounts - We maintain an allowance for doubtful
accounts relating to the portion of the accounts receivable which we estimate is
non-collectable. We analyze historical bad debts, customer concentrations,
customer creditworthiness, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. The allowance for doubtful accounts, which includes the allowance for
anticipated returns, was $0.4 million at June 30, 2003 and 2002. Changes in the
overall economic environment or in the financial condition of our customers may
require adjustments to the allowance for doubtful accounts which could have a
material adverse effect on our financial condition, results of operations and
cash flows.
Allowance for Excess and Obsolete Inventory - LeCroy provides an allowance
for estimated excess and obsolete levels of inventory equal to the lower of the
cost of inventory and its estimated market value based on assumptions relating
to future demand and market conditions. The allowance for excess and obsolete
inventory was $2.1 million and $1.5 million at June 30, 2003 and June 30, 2002,
respectively. If actual market conditions prove less favorable than those
projected by management, additional inventory write downs may be required which
could have a material adverse effect on our financial condition, results of
operations and cash flows.
23
Valuation of Long-Lived and Intangible Assets - The carrying values of
long-lived assets and identifiable amortizable intangibles (including
technology, manufacturing and distribution rights) are assessed for impairment
whenever events or changes in circumstances indicate that the carrying values
may not be recoverable. When such events or changes in circumstances occur, we
assess the recoverability of long-lived assets by determining whether the
carrying values of such assets will be recovered through undiscounted expected
future cash flows. If the undiscounted cash flows are less than the carrying
amounts, an impairment loss is recorded to the extent that the carrying amounts
exceed the fair value. Factors which could trigger an impairment review include
the following: significant underperformance of LeCroy relative to historical or
projected operating results; significant changes in the manner of our use of the
assets or the strategy for the overall business; and significant negative
industry or economic trends.
The cost of technology, manufacturing and distribution rights acquired is
amortized primarily on the basis of the higher of units shipped over the
contract periods or on a straight-line basis. Management assesses the
recoverability of these rights on the basis of actual and forecasted production
units as well as the average selling price and standard costs of the related
products after the amortization of the rights to determine profitability. If
required, an impairment charge is recorded.
Goodwill - Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," requires goodwill to be tested for
impairment annually under a two-step approach, or more frequently, if events or
changes in circumstances indicate that the asset might be impaired. Impairment
is assessed at the "reporting unit" level by applying a fair value-based test.
A reporting unit is defined as the same as or one level below the operating
segment level as described in SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
The first step is to identify if an impairment of goodwill has occurred by
comparing the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered impaired. If the carrying
amount of the reporting unit exceeds its fair value, the second step of the
goodwill test is performed to measure the amount of the impairment loss, if any.
In this second step, the "implied" fair value (as defined in SFAS No. 142) of
the reporting unit's goodwill is compared with the carrying amount of the
goodwill. If the carrying amount of the reporting unit's goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess, not to exceed the carrying amount of the goodwill.
We completed the annual impairment test required under SFAS No. 142 during the
fourth quarter of fiscal 2003 and determined that there was no impairment to our
recorded goodwill balance of $1.9 million at June 30, 2003.
Deferred Tax Assets - We have recorded $15.1 million of net deferred tax
assets on our Consolidated Balance Sheet as of June 30, 2003 for the future tax
benefit of certain expenses reported for financial statement purposes that have
not yet been deducted on our tax returns. Significant components of our deferred
tax assets are Federal, state and foreign loss and credit carryforwards,
inventory reserves and other reserves. The recognition of this deferred tax
asset is based on the assessment that it is more likely than not that we will be
able to generate sufficient future taxable income within statutory carryforward
periods to realize the benefit of these tax deductions. The factors that
management considers in assessing the likelihood of realization include the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets. Based on this
information, we have recorded a valuation allowance of $5.1 million as of June
30, 2003 to reserve for those tax assets we believe are not likely to be
realized in future periods. Adjustments to the valuation allowance may be made
in the future if it is determined that the realized amount of net operating
losses and other deferred tax assets is greater or less than the amount
recorded.
Warranty - Provisions for estimated expenses related to product warranties
are made at the time products are sold. These estimates are derived from
historical data of product reliability. The expected failure is arrived at in
terms of units, which are then converted into labor hours to which an average
fully burdened cost per hour is applied to derive the amount of accrued warranty
required. On a quarterly basis, we study trends of warranty claims and take
action to improve the quality of our products and minimize our warranty
exposure. The warranty reserve was $1.2 million at June 30, 2003 and 2002.
Management believes that the warranty reserve is appropriate; however, actual
claims incurred could differ from the original estimates, requiring adjustments
to the reserve which would be charged or credited to the Consolidated Statement
of Operations.
24
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission ("SEC") issued
SAB 101, "Revenue Recognition in Financial Statements," which summarizes certain
of the SEC Staff's views in applying accounting principles generally accepted in
the United States to revenue recognition in financial statements. Under SAB 101,
which we adopted in fiscal 2001, certain previously recognized license fee
revenue was deferred and recognized in future periods over the terms of the
agreements. The adoption of SAB 101 was recorded as of the beginning of fiscal
2001 and resulted in a non-cash charge for the cumulative effect of an
accounting change of $4.4 million, net of a tax benefit of $2.7 million. The
deferred revenue will be amortized into revenue over 5.5 years, the remaining
terms of the license agreements. We recognized pre-tax deferred license fee
revenue of $1.3 million during fiscal years 2003, 2002 and 2001. Such license
fees were included in Service and other revenue in the Consolidated Statements
of Operations. As of June 30, 2003, the remaining balance of pre-tax deferred
license fee revenue was $3.3 million.
We recognize software license revenue in accordance with American Institute
of Certified Public Accountants ("AICPA") Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position 98-9
("SOP 98-9"), "Modifications of SOP 97-2 with Respect to Certain Transactions."
Revenues from perpetual software license agreements are recognized upon shipment
of the software if evidence of an arrangement exists, pricing is fixed and
determinable, and collectibility is probable. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. We allocate revenue on software
arrangements involving multiple elements to each element based on the relative
fair values of the elements. Our determination of fair value of each element in
multiple element-arrangements is based on vendor specific objective evidence
("VSOE"). We analyze all of the elements and determine if there is sufficient
VSOE to allocate revenue to maintenance included in multiple
element-arrangements. Accordingly, assuming all other revenue recognition
criteria are met, revenue is recognized upon delivery using the residual method
in accordance with SOP 98-9, where the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as
revenue. The revenue allocated to licenses generally is recognized upon delivery
of the products. The revenue allocated to maintenance is generally recognized
ratably over the term of the support.
In accordance with SOP 97-2, we recognized $3.0 million of revenue for the
perpetual license of our MAUI Instrument Operating System technology in fiscal
2003. Maintenance fees included in the license agreement will be recognized pro
rata for each year of maintenance purchased.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal
years beginning after June 15, 2002. SFAS No. 143 addresses the accounting and
reporting requirements for legal obligations associated with the retirement of
tangible long-lived assets. In general, SFAS No. 143 requires entities to
capitalize asset retirement costs of related long-lived assets in the period in
which they meet the definition of a liability and to allocate those costs to
expense using a systematic and rational method. Our adoption of this Statement,
at the beginning of fiscal year 2003, did not have an impact on our consolidated
financial statements.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task
Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred, whereas EITF Issue No. 94-3 had recognized the liability
at the commitment date to an exit plan. SFAS No. 146 changes the timing of
liability and expense recognition related to exit or disposal activities, but
not the ultimate amount of such expenses. We adopted the provisions of SFAS No.
146 effective for exit or disposal activities initiated after December 31, 2002.
Our adoption of this Statement did not have an impact on our consolidated
financial statements.
In October 2002, the EITF issued EITF Issue No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables." This issue addresses revenue
recognition accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. This issue is effective for our fiscal
year 2004. Management believes the adoption of the provisions of EITF Issue No.
00-21 will not have a material effect on our consolidated financial statements.
25
In November 2002, the FASB issued Interpretation 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee, though it does not apply to
product warranties or to guarantees accounted for as derivatives. FIN 45 also
requires enhanced disclosures of product warranties (see Note 11 to the
Consolidated Financial Statements). The recognition provisions of FIN 45 apply
to guarantees issued or modified after December 31, 2002 and will not have a
material effect on our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This Statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition to the fair value method of accounting for stock-based employee
compensation set forth in SFAS No. 123. This Statement also amends the
disclosure provisions of SFAS No. 123 and APB No. 28, "Interim Financial
Reporting," to require disclosure in the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. We adopted the disclosure provisions
of SFAS No. 148 in the third quarter of fiscal 2003. The FASB recently indicated
that they will require stock-based employee compensation to be recorded as a
charge to earnings pursuant to standards they are currently deliberating.
Management continues to closely monitor the issuance of this standard as well as
evaluate our position with respect to current guidance.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities under SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." This Statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
discussed in SFAS No. 133, clarifies when a derivative contains a financing
component, amends the definition of an underlying to conform it to language used
in FIN 45 and amends certain other existing pronouncements. These changes are
intended to result in more consistent reporting of contracts as either
derivatives or hybrid instruments. The Statement is generally effective for
contracts entered into or modified after, and for hedging relationships
designated after, June 30, 2003. We do not expect SFAS No. 149 to have a
material effect on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Acc