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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition from __________ to __________.
Commission File Number 0-26634
LECROY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-2507777
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
700 CHESTNUT RIDGE ROAD
CHESTNUT RIDGE, NEW YORK 10977
(Address of Principal Executive Office) (Zip Code)
(845) 425-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark ("X") whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO | |
Indicate by check mark ("X") whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |X| NO | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JANUARY 31, 2005
---------------------------------- ---------------------------------
Common stock, par value $.01 share 12,318,702
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LECROY CORPORATION
FORM 10-Q
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2004
(Unaudited) and June 30, 2004................................ 3
Condensed Consolidated Statements of Operations (Unaudited) for
the Three and Six Months ended December 31, 2004 and 2003.... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Six Months ended December 31, 2004 and 2003.......... 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) ...................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 44
Item 4. Controls and Procedures....................................... 46
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 47
Item 4. Submission of Matters to a Vote of Security Holders........... 48
Item 6. Exhibits....................................................... 49
Signature ............................................................. 52
LeCroy(R), Wavelink(TM), WaveMaster(R), WavePro(R), WaveRunner(R),
WaveSurfer(TM), MAUI(TM) and CATC(TM) are our trademarks, among others not
referenced in this document. All other trademarks, servicemarks or tradenames
referred to in this Form 10-Q are the property of their respective owners.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LECROY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
IN THOUSANDS, EXCEPT PAR VALUE AND SHARE DATA 2004 2004
- ------------------------------------------------------------------------------------- ------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 16,933 $ 28,566
Marketable securities............................................................ -- 9,534
Accounts receivable, net......................................................... 27,575 24,675
Inventories, net................................................................. 26,485 21,978
Other current assets............................................................. 10,339 11,921
----------- -----------
Total current assets........................................................... 81,332 96,674
Property and equipment, net.......................................................... 19,636 19,778
Goodwill............................................................................. 81,594 1,874
Other non-current assets............................................................. 14,066 11,467
----------- -----------
TOTAL ASSETS......................................................................... $ 196,628 $ 129,793
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases............................. $ 8,105 $ 107
Accounts payable................................................................. 15,692 12,097
Accrued expenses and other current liabilities................................... 20,118 14,554
----------- -----------
Total current liabilities...................................................... 43,915 26,758
Long-term debt....................................................................... 43,306 --
Deferred revenue and other non-current liabilities................................... 1,354 1,427
----------- -----------
Total liabilities.............................................................. 88,575 28,185
Stockholders' equity:
Common stock, $.01 par value (authorized 45,000,000 shares; 12,210,993 and
11,973,830 shares issued and outstanding as of December 31, 2004 and June
30, 2004, respectively).......................................................... 122 120
Preferred stock, $.01 par value (authorized 5,000,000 shares; none issued and
outstanding as of December 31, 2004 and June 30, 2004)........................... -- --
Additional paid-in capital......................................................... 107,116 98,421
Warrants to purchase common stock.................................................. 2,165 2,165
Accumulated other comprehensive income............................................. 2,040 434
Deferred stock compensation........................................................ (9,800) (6,509)
Retained earnings.................................................................. 6,410 6,977
----------- -----------
Total stockholders' equity........................................................... 108,053 101,608
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $ 196,628 $ 129,793
=========== ===========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
LECROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 2004 2003 2004 2003
- -------------------------------------------------------------- ------------ ------------ ------------- ------------
(13 weeks) (13 weeks) (27 weeks) (26 weeks)
Revenues:
Test and measurement products............................ $39,243 $27,019 $71,559 $51,624
Service and other........................................ 3,545 2,752 6,734 5,566
------------ ------------ ------------- ------------
Total revenues...................................... 42,788 29,771 78,293 57,190
Cost of revenues............................................. 22,182 12,691 36,955 24,491
------------ ------------ ------------- ------------
Gross profit........................................ 20,606 17,080 41,338 32,699
Operating expenses:
Selling, general and administrative...................... 15,044 10,335 27,354 20,254
Research and development................................. 8,800 3,781 13,536 7,465
------------ ------------ ------------- ------------
Total operating expenses............................ 23,844 14,116 40,890 27,719
Operating (loss) income ..................................... (3,238) 2,964 448 4,980
Other (expense) income, net.............................. (29) 80 (61) (242)
------------ ------------ ------------- ------------
(Loss) income before income taxes............................ (3,267) 3,044 387 4,738
(Benefit from) provision for income taxes................ (398) 1,126 954 1,753
------------ ------------ ------------- ------------
Net (loss) income............................................ (2,869) 1,918 (567) 2,985
Redemption of convertible preferred stock.................... - - - 7,665
------------ ------------ ------------- ------------
Net (loss) income applicable to common stockholders.......... $(2,869) $ 1,918 $ (567) $(4,680)
============ ============ ============= ============
Net (loss) income per common share
applicable to common stockholders:
Basic.......................................... $ (0.25) $ 0.18 $ (0.05) $ (0.45)
Diluted........................................ $ (0.25) $ 0.18 $ (0.05) $ (0.45)
Weighted average number of common shares:
Basic.......................................... 11,655 10,498 11,633 10,456
Diluted........................................ 11,655 10,690 11,633 10,456
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
LeCROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31,
IN THOUSANDS 2004 2003
- ------------------------------------------------------------------------------------------ ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................................................... $ (567) $ 2,985
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Write-off of acquired in-process research and development............................... 2,190 --
Depreciation and amortization........................................................... 3,683 3,133
Stock-based compensation................................................................ 1,112 14
Amortization of debt issuance costs..................................................... 163 40
Deferred income taxes................................................................... 162 1,280
Recognition of SAB 101 deferred license revenue......................................... (648) (648)
Loss on disposal of property and equipment, net......................................... 67 63
Tax benefit from exercise of stock options.............................................. 142 --
Write-off of inventory.................................................................. 2,723 350
Write-off of intangible assets.......................................................... 1,500 --
Change in operating assets and liabilities, net of assets acquired and liabilities
assumed in an acquisition:
Accounts receivable..................................................................... 531 2,901
Inventories............................................................................. (2,980) 2,152
Other current and non-current assets.................................................... 340 (1,859)
Accounts payable, accrued expenses and other liabilities................................ 3,045 99
----------- ----------
Net cash provided by operating activities................................................. 11,463 10,510
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................................................... (1,424) (1,727)
Proceeds from sale of marketable securities............................................. 9,534 --
Business acquisition costs, net of acquired cash........................................ (80,345) --
Purchase of intangible assets........................................................... -- (150)
----------- ----------
Net cash used in investing activities..................................................... (72,235) (1,877)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings and capital leases.............................................. (52) (5,047)
Borrowings under line of credit......................................................... 50,000 10,000
Redemption of convertible preferred stock............................................... -- (23,000)
Debt issuance costs..................................................................... (1,378) --
Payments related to common stock offering............................................... (7) --
Proceeds from employee stock purchase and option plans.................................. 993 1,509
Payment of seller-financed intangible assets............................................ (314) (250)
----------- ----------
Net cash provided by (used in) financing activities....................................... 49,242 (16,788)
----------- ----------
Effect of exchange rate changes on cash................................................... (103) 395
----------- ----------
Net (decrease) in cash and cash equivalents............................................. (11,633) (7,760)
Cash and cash equivalents at beginning of the period.................................... 28,566 30,851
----------- ----------
Cash and cash equivalents at end of the period.......................................... $ 16,933 $ 23,091
=========== ==========
Supplemental Cash Flow Disclosure
Cash paid during the period for:
Interest.............................................................................. $ 261 $ 64
Income taxes.......................................................................... 771 110
Non-cash investing and financing activities:
Acquisition of seller-financed intangible assets........................................ $ 1,331 --
Issuance of LeCroy stock options for business acquisition............................... 3,166 --
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements
include all the accounts of LeCroy Corporation and its wholly-owned subsidiaries
(collectively, the "Company" or "LeCroy", unless otherwise indicated). These
condensed consolidated financial statements are unaudited and should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2004.
The condensed consolidated balance sheet as of June 30, 2004 has been derived
from these audited consolidated financial statements. Certain reclassifications
have been made to prior-year amounts to conform to the current-period
presentation. All material inter-company transactions and balances have been
eliminated.
The Company's condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles and
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"), which require management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the revenues and expenses reported during
the period. The most significant of these estimates and assumptions relate to
the allowance for doubtful accounts, allowance for excess and obsolete
inventory, warranty accrual, stock-based compensation, intangible asset
valuation, including goodwill, determining if and when impairments have
occurred, and the assessment of the valuation of deferred income taxes and
income tax reserves. These estimates and assumptions are based on management's
judgment and available information and, consequently, actual results could
differ from these estimates.
These unaudited condensed consolidated financial statements reflect all
adjustments, consisting of normal recurring adjustments, that are, in the
opinion of management, necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented.
Interim period operating results may not be indicative of the operating results
for a full year. The Company's fiscal period ends on the Saturday closest to
December 31, which resulted in the period ending on January 1, 2005. For clarity
of presentation, the condensed consolidated financial statement period-end
references are stated as December 31.
2. ACQUISITION
On October 29, 2004, the Company completed its acquisition of 100% of the
outstanding common stock of Computer Access Technology Corporation ("CATC") via
the merger of a newly-formed, wholly-owned subsidiary of LeCroy with and into
CATC, with CATC surviving as a wholly-owned subsidiary of LeCroy (the "Merger").
CATC is a provider of advanced verification systems for existing and emerging
digital communications standards. CATC's products are used by semiconductor,
device, system and software companies at each phase of their products'
lifecycles from development through production and market deployment. CATC had
approximately 70 employees at the time of the Merger. Through the acquisition,
CATC is expected to enable LeCroy to capitalize on the increasing demand for
serial data test instruments, leverage its global, technical, direct sales force
to accelerate the growth of CATC's products, strengthen its position in the data
storage market, increase penetration into the computer market, expand gross
margins, increase operating leverage leading to expanded operating margins and
increase cash generation capabilities.
Total consideration paid to acquire CATC was approximately $130.0 million.
The Merger was recorded under the purchase method of accounting which requires
that the total consideration be allocated to the assets acquired and liabilities
assumed based on their fair values. On the effective date of the Merger, each
share of CATC common stock issued and outstanding immediately prior thereto was
canceled and converted into the right to receive $6.00 in cash. In addition,
LeCroy paid cash to the holders of CATC's outstanding, vested in-the-money stock
options and employee stock purchase plan (the "ESPP") purchase rights. Further,
6
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
LeCroy assumed CATC's outstanding unvested stock options, as well as certain
vested but unexercised stock options, by granting to CATC employees a total of
648,284 options to purchase LeCroy common stock (the "LeCroy Options"). The
LeCroy Options were recorded at their fair values using the Black-Scholes option
pricing model based on a stock price of $16.83 per share, which was the closing
price of LeCroy common stock on October 29, 2004, less the intrinsic value of
unvested options, which will be charged as compensation expense to operations as
earned by employees over their remaining vesting periods. LeCroy paid cash of
$80.3 million, net of cash acquired, using $30.3 million of cash on hand and
borrowings of $50.0 million under the Company's $75.0 million senior, secured,
five-year credit agreement entered into on October 29, 2004, with the lenders
listed therein and The Bank of New York, as administrative agent for such
lenders (the "Credit Agreement"). (See Note 15). The Merger consideration is
summarized below (in thousands):
Cash for shares $ 120,281
Cash for options and ESPP purchase rights 3,966
Fair value of stock options assumed 5,111
Unearned stock compensation on unvested
options assumed (1,945)
Transaction costs 2,564
---------
Total purchase price $ 129,977
=========
The fair value of tangible and intangible assets acquired and liabilities
assumed was established based upon the unaudited October 28, 2004 consolidated
balance sheet of CATC, as well as certain assumptions made regarding fair
values. The fair value of finished goods and work in process inventory is valued
based on estimated selling prices less direct costs to sell and a profit margin
on the selling effort. The fair value of the in-process research and development
("IPR&D"), purchased technology, trade name and purchase orders was determined
by an independent appraisal firm. The fair value of the IPR&D was based on the
total estimated costs to develop the related technologies less the costs
incurred to date for the projects, and the intangible asset values were based on
estimates of future cash flows associated with those assets. The preliminary
purchase price allocation is not yet finalized however, the Company expects to
finalize the allocation within the third quarter of fiscal 2005. The purchased
technology, trade name and purchase orders related to this acquisition are being
amortized over their estimated economic useful lives ranging from two to
twenty-nine months. The excess of the preliminary purchase price over the fair
value of the net assets acquired has been allocated to goodwill. The principle
factors that contributed to a purchase price that resulted in the recognition of
goodwill was the fair value of the going-concern element of the CATC business,
which includes the assembled workforce and their technology position within
emerging communication standards, as well as the expected synergies that will be
achieved by combining both companies. The goodwill is not deductible for tax
purposes. The preliminary allocation of purchase price as of October 29, 2004 is
summarized below (in thousands):
Cash and cash equivalents $ 46,466
Accounts receivable 2,296
Inventory 3,848
Other current assets 133
Property and equipment 663
Other non-current assets 28
In-process research and development 2,190
Purchased technology 3,080
Purchased trade name 70
Purchased purchase orders 90
Goodwill 79,720
Current liabilities assumed (5,897)
Long-term liabilities assumed (652)
Deferred tax liability (2,058)
---------
Total purchase price $ 129,977
=========
7
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table presents the details of the intangible amortizable
assets acquired in the Merger and the unamortized value as of December 31, 2004:
Weighted Accumulated
(In thousands) Average Lives Cost Amortization Net
------------- ------ ------------ ---
Amortizable intangible assets:
Purchased technology................................ 2.0 years $3,080 $ 297 $2,783
Purchased tradename................................. 1.0 year 70 12 58
Purchased purchase orders........................... 0.2 years 90 90 --
------ ----- ------
Total intangibles purchased........................... $3,240 $ 399 $2,841
====== ===== ======
Amortization expense for intangible assets acquired in the Merger was $0.4
million for the three and six month periods ended December 31, 2004.
Amortization expense for the intangible assets acquired in the Merger has been
recorded in the Condensed Consolidated Statements of Operations as follows:
Three Months Ended Six Months Ended
December 31, December 31,
---------------- ----------------
(In thousands) 2004 2003 2004 2003
---- ---- ---- ----
Cost of revenues............................ $387 $ - $387 $ -
General and administrative expense.......... 12 12
-----------------------------------------------
Total.................................... $399 $ - $399 $ -
===============================================
The amortization expense of intangible assets acquired in the Merger for
the current fiscal year to date and as estimated for the remainder of fiscal
2005 and in future years is as follows:
Amount
Fiscal Year (In thousands)
---------------- ----------------
2005 $1,315
2006 1,339
2007 586
----------------
$3,240
================
The $2.2 million allocated to IPR&D was written off during the second
quarter of fiscal 2005 in accordance with FASB Interpretation No. ("FIN") 4,
"Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method." This charge was included in research and development
expense in the Condensed Consolidated Statement of Operations.
8
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The Condensed Consolidated Statements of Operations include the results of
operations of CATC since October 29, 2004. The following (unaudited) pro forma
consolidated results of operations have been prepared as if the Merger had
occurred at the beginning of each period presented.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ----------------------
(In thousands, except per share data) 2004 2003 2004 2003
------- ------- ------- -------
Revenues ........................................................... $43,235 $33,908 $83,317 $65,322
Net (loss) income before non-recurring charges directly
attributable to the Merger, applicable to common stockholders ...... ($1,884) ($138) ($3,725) ($10,944)
Net (loss) income per share before non-recurring charges
directly attributable to the Merger- basic ......................... ($0.16) ($0.01) ($0.32) ($1.05)
Net (loss) income per share before non-recurring charges
directly attributable to the Merger - diluted ...................... ($0.16) ($0.01) ($0.32) ($1.05)
The write-off of IPR&D is excluded from the calculation of net (loss)
income and net (loss) income per share in the table shown above as the charge is
non-recurring.
The pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually would
have been achieved had the Merger been consummated as of that time, nor is it
intended to be a projection of future results.
3. STOCK PLANS AND AWARDS
The Company accounts for stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and related
interpretations.
The following table illustrates the effect on net (loss) income and net
(loss) income per common share applicable to common stockholders as if the
Company had applied the fair value recognition provisions for stock-based
employee compensation of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure."
9
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
------- ------ ------- -------
IN THOUSANDS, EXCEPT PER SHARE DATA
Net (loss) income, as reported........................................... ($2,869) $1,918 ($567) $2,985
Add: stock-based compensation expense included in reported
net (loss) income, net of income taxes ................................ 416 4 698 9
Deduct: stock-based compensation expense determined under
fair value-based method for all awards, net of income taxes............ (964) (1,166) (1,632) (1,858)
------- ------ ------- -------
Pro forma net (loss) income.............................................. (3,417) 756 (1,501) 1,136
Charges related to convertible preferred stock........................... -- -- -- 7,665
------- ------ ------- -------
Pro forma net (loss) income applicable to common stockholders............ ($3,417) $756 ($1,501) ($6,529)
======= ====== ======= =======
Net (loss) income per common share applicable to common stockholders:
Basic, as reported .................................................... ($0.25) $0.18 ($0.05) ($0.45)
Diluted, as reported................................................... ($0.25) $0.18 ($0.05) ($0.45)
Basic, pro forma ...................................................... ($0.29) $0.07 ($0.13) ($0.62)
Diluted, pro forma .................................................... ($0.29) $0.07 ($0.13) ($0.62)
In connection with the Merger, on October 29, 2004, the Company's Board of
Directors approved the LeCroy Corporation 2004 Employment Inducement Stock Plan
(the "2004 Plan") to promote the interests of the Company and its stockholders
by strengthening the Company's ability to attract and induce persons to become
employees of the Company, including certain of CATC's employees. The 2004 Plan
does not require stockholder approval. The initial number of shares of LeCroy
common stock that may be issued or transferred pursuant to options or restricted
stock awards granted under the 2004 Plan is 750,000 shares. On October 29, 2004,
the Company issued the following grants under the 2004 Plan: (i) 70,000 shares
of restricted common stock to certain former officers of CATC and (ii) options
to purchase an aggregate of 230,984 shares of common stock to 61 former CATC
employees who became non-officer employees of LeCroy (none of whom received an
option grant of more than 20,000 shares).
In connection with the Merger, LeCroy assumed CATC's 2000 Stock
Option/Stock Issuance Plan, Special 2000 Stock Option Plan, 2000 Stock Incentive
Plan and 1994 Stock Option Plan (collectively, the "CATC Stock Plans"). On
October 27, 2004, the Board of Directors of CATC approved technical amendments
to each of the CATC Stock Plans in anticipation of their assumption by LeCroy
pursuant to the Merger including, without limitation, amendments reflecting that
any stock option and other awards granted thereunder will be exercisable for
LeCroy common stock. Pursuant to FIN No. 44 "Accounting for Certain Transactions
Involving Stock Compensation," the unvested stock options granted by the Company
in exchange for the stock options held by the employees of CATC were considered
part of the purchase price for CATC, and the fair value of the new awards were
included in the purchase price. A portion of the intrinsic value of the unvested
awards has been allocated to unearned compensation and will be recognized as
compensation expense over the remaining future vesting period. For the three and
six months ended December 31, 2004, $83,000, net of tax, has been charged as
compensation expense in the Condensed Consolidated Statements of Operations
related to the assumed options.
With the exception of the CATC Stock Plans, no further compensation expense
related to stock options is reflected in the Company's Condensed Consolidated
Statements of Operations, as all options granted under past and existing plans
have an exercise price equal to the market value of the underlying common stock
on the date of grant. Compensation cost for restricted stock is recorded based
on its market value on the date of grant and is included in the Company's
Condensed Consolidated Statements of Operations ratably over the vesting period.
Upon the grant of restricted stock, deferred stock compensation is recorded as
an offset to additional paid-in capital and is amortized on a straight-line
basis as compensation expense over the vesting period.
10
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. REVENUE RECOGNITION
Revenue recognition. LeCroy recognizes product and service revenue, net of
allowances for anticipated returns, provided that (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred, (3) the selling price is fixed or
determinable and (4) collection is reasonably assured. Delivery is considered to
have occurred when title and risk of loss have transferred to the customer, or
when services have been provided. The price is considered fixed or determinable
when it is not subject to refund or adjustments.
The Company maintains an allowance for doubtful accounts relating to
accounts receivable estimated to be non-collectible. The Company analyzes
historical bad debts, customer concentrations, customer creditworthiness,
current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts.
Product revenue. The Company generates product revenues from the sales of
oscilloscopes and application solutions, probes, protocol verification systems
and accessories. Application solutions, which provide oscilloscopes with
additional analysis capabilities, are either delivered via compact disc
read-only memory or are already loaded in the oscilloscopes and activated via a
key code after the sale is made to the customer for such application solution.
All sales of these related products are based upon separately established prices
for these items and are recorded as revenue according to the above revenue
recognition criteria. No post-contract support is provided on the application
solutions. Revenues from these related products are included in revenues from
oscilloscopes and related products on the Condensed Consolidated Statements of
Operations. Software is embedded in the Company's oscilloscopes and protocol
verification systems, but the embedded software component is considered
incidental.
Software license revenue. The Company recognizes software license revenue
in accordance with American Institute of Certified Public Accountants Statement
of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by
Statement of Position 98-9, "Modifications of SOP 97-2 with Respect to Certain
Transactions" ("SOP 98-9").
Due to the significant software content of its protocol verification
systems products, the Company recognizes revenue on the sale of these products
in accordance with SOP 97-2 upon shipment provided there is persuasive evidence
of an arrangement, the product has been delivered, the price is fixed or
determinable and collection of the resulting receivable is probable. When the
Company has shipped a protocol verification system but certain elements to the
functionality of the product have not been delivered, revenue and the associated
cost of revenue are deferred until the remaining elements have been delivered.
Software maintenance support revenue is deferred based on its vendor specific
objective evidence of fair value ("VSOE") and recognized ratably over the
maintenance support periods. Provisions for warranty costs are recorded at the
time products are shipped. Revenues from protocol verification system products
are included in Test and measurement products in the Condensed Consolidated
Statement of Operations.
Revenues from perpetual software license agreements are recognized upon
delivery of the software if evidence of an arrangement exists, pricing is fixed
and determinable, and collectibility is probable. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. The Company allocates revenue on software
arrangements involving multiple elements to each element based on the relative
fair values of the elements. The determination of fair value of each element in
multiple element-arrangements is based on VSOE. The Company analyzes all of the
elements and determines if there is sufficient VSOE to allocate revenue to
maintenance included in multiple element-arrangements. Accordingly, assuming all
11
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
other revenue recognition criteria are met, revenue is recognized upon delivery
using the residual method in accordance with SOP 98-9, where the VSOE of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as license revenue. The revenue allocated to software
maintenance is recognized ratably over the term of the support agreement. The
revenue allocated to licenses is recognized upon delivery of the licenses.
Revenues from software license agreements are included in Service and other in
the Condensed Consolidated Statement of Operations.
Service and maintenance revenue. Service and maintenance revenues include
extended warranty contracts, software maintenance agreements and repairs and
calibrations performed on instruments after the expiration of their normal
warranty period. The Company records deferred revenue for extended warranty
contracts, software maintenance agreements and calibrations included within the
sales contract agreement. This deferred revenue is then recognized on a
straight-line basis over the related service period. When arrangements include
multiple elements, the Company uses relative fair values in accordance with
Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables," to allocate revenue to the elements and recognize
revenue when the criteria for revenue recognition have been met for each
element.
Deferred revenue. During the third quarter of fiscal 2004, the Company
began shipping its new WaveSurfer family of oscilloscopes. One component of the
Company's strategy for distributing this new family of oscilloscopes is the use
of a buy-sell distribution channel. This is the Company's initial entry into
this distribution channel and because of the associated uncertainty about
sell-through volumes the Company has determined that it is only appropriate to
recognize revenue when a WaveSurfer oscilloscope is sold by the distributors to
their customers. Until revenue is recognized, WaveSurfer oscilloscopes shipped
to distributors are included in the Company's finished goods inventory and
recorded in deferred revenue, included in accrued expenses and other current
liabilities in the accompanying Condensed Consolidated Balance Sheets.
SAB 101 "Revenue Recognition in Financial Statements." Beginning in fiscal
2001 with the adoption of the SEC's Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements," revenue from license fees
under agreements that have exclusivity clauses and, from the licensee's
perspective, have ongoing requirements or expectations that are more than
perfunctory, are recognized over the term of the related agreements. An ongoing
requirement or expectation would be considered more than perfunctory if any
party to the contract considers it to be "essential to the functionality" of the
delivered product or service or failure to complete the activities would result
in the customer receiving a full or partial refund or rejecting the products
delivered or services performed to date.
Under SAB 101 (superseded by SAB 104), certain previously recognized
license fee revenue was deferred and recognized in future periods over the terms
of the agreements. The adoption of SAB 101 was recorded as of the beginning of
fiscal 2001 and resulted in a non-cash charge for the cumulative effect of an
accounting change of $4.4 million, net of a tax benefit of $2.7 million. The
deferred revenue is being amortized into revenue over 5.5 years, the remaining
terms of the license agreements. The Company recognized pre-tax deferred license
fee revenue of $0.3 million and $0.6 million during the three and six months
ended December 31, 2004 and 2003, respectively. Such license fees were included
in service and other revenue in the Condensed Consolidated Statements of
Operations. As of December 31, 2004, the remaining balance of pre-tax deferred
license fee revenue was $1.3 million which is reflected in accrued expenses and
other current liabilities in the accompanying Condensed Consolidated Balance
Sheet.
5. RESTRUCTURING
During the second quarter of fiscal 2005, as a result of the Merger, the
Company adopted a plan to restructure its organization and streamline its
product strategy. In connection with the adoption of this plan, the Company
recorded a charge for severance and other related expenses in the second quarter
of fiscal 2005 of $0.6 million, all recorded in selling, general and
administrative expense. The implementation of this plan resulted in headcount
12
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
reductions of six employees or approximately 2% of the workforce as compared to
June 30, 2004. As of December 31, 2004, $0.2 million has been paid and $0.4
million remains in accrued expenses and other current liabilities in the
Condensed Consolidated Balance Sheet. Severance and other related amounts under
this plan will be paid by the end of the second quarter of fiscal 2007.
During the fourth quarter of fiscal 2003, the Company adopted a plan to
consolidate its probe development activities into its Chestnut Ridge, New York
facility. In connection with this plan, the Company closed its Beaverton, Oregon
facility and recorded lease termination costs of $0.3 million and a charge for
severance of $0.6 million ($0.1 million of which was recorded in cost of
revenue, $0.6 million of which was recorded in selling, general and
administrative expense and $0.2 million of which was recorded in research and
development expense). The implementation of this plan resulted in headcount
reductions of 27 employees or approximately 7% of the workforce as compared to
June 30, 2002. Final payments for severance under this plan occurred in the
fourth quarter of fiscal 2004. On November 8, 2004 the Company entered into a
Lease Termination Agreement and made a final payment of $0.1 million releasing
us from any future obligations under the Beaverton, Oregon facility lease. This
amount had been previously accrued.
During the first quarter of fiscal 2003, the Company adopted a plan to
scale down fixed infrastructure due to the difficult economic environment and to
implement new management operating systems designed to improve processes in
sales, order management, customer relationship management and financial
performance management. In connection with the adoption of this plan, the
Company recorded a charge for severance and other related expenses in the first
quarter of fiscal 2003 of $2.6 million ($2.1 million of which was recorded in
selling, general and administrative expense and $0.5 million of which was
recorded in research and development expense). The plan implemented during
fiscal 2003 resulted in improved operating efficiencies and headcount reductions
of 38 employees or approximately 9% of the workforce as compared to June 30,
2002. As of December 31, 2004, $2.5 million of the total $2.6 million has been
paid and $0.1 million remains in accrued expenses and other current liabilities
in the Condensed Consolidated Balance Sheet. Severance and other related amounts
under this plan will be paid by the end of the second quarter of fiscal 2006.
6. DERIVATIVES
The Company enters into foreign exchange forward contracts to minimize the
risks associated with foreign currency fluctuations on assets or liabilities
denominated in other than the functional currency of the Company or its
subsidiaries. These foreign exchange forward contracts are not accounted for as
hedges in accordance with SFAS No. 133, "Accounting for Derivative Investments
and Hedging Activities"; therefore, any changes in fair value of these contracts
are recorded in other income (expense), net in the Condensed Consolidated
Statements of Operations. These foreign exchange forward contracts are recorded
on the Condensed Consolidated Balance Sheets at fair value. The changes in fair
value of these contracts are inversely correlated to changes in the value of
certain of the Company's foreign currency-denominated assets and liabilities.
The net gains resulting from changes in the fair value of these derivatives
and on transactions denominated in other than their functional currencies were
$0.6 million and $0.1 million for the three-month periods ended December 31,
2004 and 2003, respectively, and $0.5 million and $0.1 million for the six-month
periods ended December 31, 2004 and 2003, respectively. These amounts are
included in other expense, net in the Condensed Consolidated Statements of
Operations and include gross gains of $0.6 million and $0.1 million in the
three-month periods ended December 31, 2004 and 2003, respectively, and $0.2
million and $0.6 million for the six-month periods ended December 31, 2004 and
2003, respectively. At December 31, 2004 and June 30, 2004, the notional amounts
of the Company's open foreign exchange forward contracts, all with maturities of
less than six months, were approximately $8.0 million and $8.2 million,
respectively.
13
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
As required by the terms of the Company's Credit Agreement, on January 26,
2005 the Company entered into a Master Agreement with Manufacturers & Traders
Trust Co. ("M&T Bank"), intended to hedge against certain fluctuations in
interest rates during the term of the Credit Agreement. See Note 20 - Subsequent
Events below for a further description.
7. COMPREHENSIVE (LOSS) INCOME
The following table presents the components of comprehensive (loss) income:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- -------------------
2004 2003 2004 2003
---- ---- ---- ----
In thousands
Net (loss) income ............................. ($2,869) $1,918 ($567) $2,985
Unrealized loss on marketable securities..... -- -- (3) --
Plus: reclassification adjustment for
realized losses inc1uded in net (loss)....... 16 -- 16 --
Foreign currency translation gains........... 1,690 1,738 1,586 2,207
------- ------ ------ ------
Comprehensive (loss) income ................... ($1,163) $3,656 $1,032 $5,192
======= ====== ====== ======
The Company's investments in marketable debt securities are classified as
available-for-sale and are reported at fair value based on quoted market prices.
Unrealized gains and losses, net of taxes, are reported as a component of
stockholders' equity. Realized gains and losses on investments are included in
other (expense) income, net on the Condensed Consolidated Statements of
Operations when realized. Management has the ability, if necessary, to liquidate
any of these investments in order to meet its liquidity needs within the normal
operating cycle. Accordingly, all investments in debt securities are classified
as current assets. In the second quarter of fiscal 2005 all marketable debt
securities were liquidated.
8. ACCOUNTS RECEIVABLE, NET
The Company has agreements with two of its customers, who are also vendors,
which provide the Company with the legal right to offset outstanding accounts
receivable balances against outstanding accounts payable balances. At December
31, 2004 and June 30, 2004, the Company netted approximately $1.4 million and
$0.6 million, respectively, of accounts receivable against accounts payable on
the Condensed Consolidated Balance Sheets related to these agreements.
9. INVENTORIES, NET
Inventories, including demonstration units in finished goods, are stated at
the lower of cost (first-in, first-out method) or market. Inventories consist of
the following:
DECEMBER 31, JUNE 30,
2004 2004
------------ ---------
In thousands
Raw materials.......................... $ 10,001 $ 6,617
Work in process........................ 3,075 4,544
Finished goods......................... 13,409 10,817
--------- ---------
$ 26,485 $ 21,978
========= =========
14
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The value of demonstration units included in finished goods was $10.0
million and $8.0 million at December 31, 2004 and June 30, 2004, respectively.
The Company's demonstration units are held for sale and are sold regularly in
the ordinary course of business through its normal sales distribution channels
and existing customer base.
In the second quarter of fiscal 2005, as a result of the Merger the Company
reviewed the long-term product support policies in place at LeCroy and at CATC
prior to the Merger with an aim toward developing one policy to best serve
customers. In connection with the resultant change in policy, as well as changes
in the Company's product support strategy, the Company took a $2.7 million
non-cash charge to cost of revenue in the Condensed Consolidated Statement of
Operations for the write-off of excess parts.
10. OTHER CURRENT ASSETS
Other current assets consist of the following:
DECEMBER 31, JUNE 30,
2004 2004
----------- ----------
In thousands
Deferred tax assets, net..................................................... $ 5,499 $ 7,400
Other receivables............................................................ 406 511
Prepaid probes and accessories............................................... 473 818
Value-added tax.............................................................. 929 595
Other........................................................................ 3,032 2,597
----------- ----------
$ 10,339 $ 11,921
=========== ==========
11. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
DECEMBER 31, JUNE 30,
2004 2004
----------- ----------
In thousands
Land, building and improvements.............................................. $ 14,760 $ 14,640
Furniture, machinery and equipment........................................... 29,181 25,073
Computer software and hardware............................................... 15,824 17,637
----------- ----------
59,765 57,350
Less: Accumulated depreciation and amortization.............................. (40,129) (37,572)
----------- ----------
$ 19,636 $ 19,778
=========== ==========
Depreciation and amortization expense was $1.3 million and $1.2 million for
the three-month periods ended December 31, 2004 and 2003. Depreciation and
amortization for the six-month periods ended December 31, 2004 and 2003 was $2.5
million and $2.5 million, respectively.
12. OTHER NON-CURRENT ASSETS
Other assets consist of the following:
DECEMBER 31, JUNE 30,
2004 2004
----------- ----------
In thousands
Intangibles, net............................................................... $ 7,852 $ 5,802
Deferred tax assets, net....................................................... 4,451 4,771
Other.......................................................................... 1,763 894
----------- ----------
$ 14,066 $ 11,467
=========== ==========
15
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Under SFAS No. 142 "Goodwill and Other Intangible Assets," goodwill is not
amortized but reviewed for impairment annually or more frequently if certain
indicators arise. The Company completed the annual impairment test required
under SFAS No. 142 during the fourth quarter of fiscal 2004 and determined that
there was no impairment to its recorded goodwill balances. No impairment
indicators arose during the first half of fiscal 2005.
The following table reflects the gross carrying amount and accumulated
amortization of the Company's goodwill and intangible assets included in other
non-current assets on the Condensed Consolidated Balance Sheets as of the dates
indicated:
Weighted December 31, June 30,
Average Lives 2004 2004
-------------- ------------ --------
(As of In thousands
December 31,
2004)
Amortizable intangible assets:
Technology, manufacturing and distribution rights.......... 3.6 years $ 11,809 $ 8,897
Patents and other intangible assets........................ 3.5 years 902 661
Effect of currency translation on intangible assets........ 211 148
Accumulated amortization................................... (5,070) (3,904)
--------- ----------
Net carrying amount.......................................... $ 7,852 $ 5,802
========= ==========
Non-amortizable intangible assets:
Goodwill................................................. $ 81,594 $ 1,874
========= ==========
Amortization expense for those intangible assets with finite lives was $1.2
million and $0.7 million for the six months ended December 31, 2004 and 2003,
respectively. The cost of technology, manufacturing and distribution rights
acquired is amortized primarily on the basis of the higher of units shipped over
the contract periods through June 2008 or on a straight-line basis over the
estimated economic life of the asset. Management estimates intangible assets
amortization expense on a straight-line basis in fiscal 2005 through 2008 will
approximate $3.3 million, $2.8 million, $2.1 million, and $0.8 million,
respectively.
During the six months ended December 31, 2004, the Company purchased a
license for approximately $1.0 million for the use of electronic design
automation software, as well as, a license for approximately $0.4 million for
the ability to use certain computer aided design software tools. Both assets
have an amortization period of three years.
As part of the Merger, we purchased technology, the CATC trade name and
purchase orders at their fair value of $3.2 million.
In the second quarter of fiscal 2005, as a result of a change in the
Company's organization stemming from the Merger and a subsequent change in our
low to mid-range oscilloscope manufacturing strategy, the Company took a $1.5
million non-cash charge for the write-off of an intangible asset.
13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
December 31, June 30,
2004 2004
------------ ----------
In thousands
Compensation and benefits............................... $ 6,251 $ 5,022
Income taxes............................................ 3,950 2,938
Deferred license fee revenue, current portion........... 1,296 1,296
Warranty................................................ 1,372 1,247
Deferred revenue, current portion....................... 2,926 1,606
Retained liabilities from discontinued operations....... 160 160
Other................................................... 4,163 2,285
--------- ----------
$ 20,118 $ 14,554
========= ==========
16
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
14. WARRANTIES AND GUARANTEES
The Company provides a warranty on its products, typically extending three
years after delivery and accounted for in accordance with SFAS No. 5,
"Accounting for Contingencies." Estimated future warranty obligations related to
products are provided by charges to operations in the period that the related
revenue is recognized. These estimates are derived from historical data of
product reliability. The expected failure rate is arrived at in terms of units,
which are then converted into labor hours to which an average fully burdened
cost per hour is applied to derive the amount of accrued warranty required. On a
quarterly basis, the Company studies trends of warranty claims and performance
of specific products and adjusts its warranty obligation through charges or
credits to operations.
The following table is a reconciliation of the changes in the Company's
aggregate product warranty liability during the three and six months ended
December 31, 2004 and 2003:
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------- ------------
2004 2003 2004 2003
---- ---- ---- ----
IN THOUSANDS
Balance at beginning of period............................. $1,241 $1,241 $1,247 $1,235
Accruals for warranties entered into during the period... 451 366 868 639
Warranty costs incurred during the period................ (425) (363) (848) (630)
Warranty liability assumed in the Merger................. 105 -- 105 --
------ ------ ------ ------
Balance at end of period................................... $1,372 $1,244 $1,372 $1,244
====== ====== ====== ======
In connection with an agreement to license the Company's MAUI Instrument
Operating System technology entered into by the Company during the third quarter
of fiscal 2003, the Company agreed to indemnify the licensee against losses
arising from any third party claim against the licensee to the extent such claim
arose directly out of the infringement of a U.S. or Japanese patent by any
LeCroy software components delivered under the license agreement. As of December
31, 2004, there have been no claims under such indemnification provisions.
As is customary in the Test and Measurement industry, and as provided for
by local law in the U.S. and other jurisdictions, the Company's standard terms
of sale provide remedies to customers, such as defense, settlement, or payment
of a judgment for intellectual property claims related to the use of the
Company's products. Such indemnification provisions are accounted for in
accordance with SFAS No. 5, "Accounting for Contingencies." To date, there have
been no claims under such indemnification provisions.
15. DEBT
On October 29, 2004, LeCroy entered into a $75.0 million senior, secured,
five-year credit agreement with the lenders listed therein and The Bank of New
York, as administrative agent for such lenders (the "Credit Agreement"), which
replaced LeCroy's existing credit facility with The Bank of New York that was
entered into on October 11, 2000 and subsequently amended. BNY Capital Markets,
Inc. acted as sole lead arranger and sole book runner in connection with
syndicating the credit facility. The terms of the Credit Agreement provide
LeCroy with a $50.0 million term loan (the "Term Loan") and a $25.0 million
revolving credit facility (the "Revolver"), which includes a $1.0 million
17
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
swingline loan subfacility and a $1.0 million letter of credit subfacility. The
performance by LeCroy of its obligations under the Credit Agreement is secured
by all of the assets of LeCroy and its domestic subsidiaries, and is guaranteed
by LeCroy's domestic subsidiaries. The proceeds under the Term Loan have been
used fully to finance the acquisition of CATC and pay transaction expenses
related to the Merger. Proceeds from the Revolver may be used for general
corporate purposes, including the financing of working capital requirements,
capital expenditures and acquisitions.
Borrowings under the Credit Agreement bear interest at variable rates equal
to, at the Company's election, (1) the higher of (a) the prime rate or (b) the
federal funds rate plus 0.5%, plus an applicable margin of between 0.00% and
1.50% based on the Company's leverage ratio, as defined in the Credit Agreement,
or (2) the London Interbank Offering Rate ("LIBOR") plus an applicable margin of
between 1.25% and 2.75% based on the Company's leverage ratio. In addition, the
Company must pay commitment fees on unused borrowings during the term of the
Credit Agreement at rates between 0.375% and 0.5% dependent upon its leverage
ratio.
As part of the Credit Agreement, the Company is required to comply with
certain financial covenants, measured quarterly, including a minimum interest
coverage ratio, minimum total net worth, maximum leverage ratio, minimum fixed
charge coverage ratio and limitations on capital expenditures. As of December
31, 2004, the Company was in compliance with its financial covenants under the
Credit Agreement.
Outstanding borrowings of $50.0 million under the Term Loan are required to
be repaid quarterly through October 2009, beginning March 31, 2005, based on an
annualized amortization rate starting at 15% in calendar year 2005 and
increasing 250 basis points per year during the term of the Credit Agreement.
Additionally, the Company incurred approximately $1.4 million of
transactions fees associated with the Credit Agreement, which have been deferred
and will be amortized over the life of the Credit Agreement using the effective
interest method for the Term Loan and the straight-line method for the Revolver.
Transaction fees of approximately $87,000 from the previously amended credit
facility were charged to interest expense in the second fiscal quarter of 2005.
At December 31, 2004, unamortized fees of $0.4 million were included in Accrued
expenses and other current liabilities, and $0.9 million were included in
Deferred revenue and other non-current liabilities in the Condensed Consolidated
Balance Sheet.
16. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999 (the "Closing"), the Company completed a private placement
of 500,000 shares of its redeemable convertible preferred stock for proceeds of
$10.0 million. The shares of preferred stock were entitled to a 12% cumulative
dividend on the original purchase price of $10.0 million, with redemption rights
beginning on June 30, 2004 at the sole discretion of the holders of such shares.
On September 27, 2003, the Company repurchased from the holders of its
redeemable convertible preferred stock all 500,000 issued and outstanding shares
for $23.0 million in cash. In connection with the repurchase of preferred stock,
the Company recorded a charge of approximately $7.7 million to stockholders'
equity representing the premium paid to the holders of its preferred stock ($1.0
million charged to retained earnings and $6.7 million charged to additional
paid-in capital) and recognized transaction costs of $0.4 million included in
other expense, net in the Condensed Consolidated Statement of Operations. In
accordance with the SEC's position published in EITF Topic No. D-42 relating to
induced conversions of preferred stock, the Company recorded the $7.7 million
premium paid to purchase the preferred stock as a charge to arrive at net loss
applicable to common stockholders in fiscal 2004.
The Company and the holders of its preferred stock agreed that the final
repurchase of preferred stock would be negotiated as though the transaction had
occurred at the beginning of the first quarter of fiscal 2004. As a result, the
Company accounted for the transaction as though no dividends had accrued in
fiscal 2004 and that the charge for the value originally attributed to the
warrants at the point of issue that remained unaccreted at the time of
redemption was accelerated and combined with the redemption premium to reflect
the total charge related to the redemption of convertible preferred stock in the
Condensed Consolidated Statement of Operations.
18
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
17. COMMITMENTS AND CONTINGENCIES
On April 28, 2003, Tektronix, Inc. ("Tektronix") filed a complaint against
the Company in the United States District Court for the District of Oregon
claiming that the Company infringed on eight of Tektronix' U.S. patents. In the
Company's responsive pleading, the Company denied that it has infringed, or is
infringing, any of these patents, and contends that the patents are invalid.
Four of these patents concern software user interface features for
oscilloscopes, two concern circuitry and two concern probes. On August 5, 2003,
the Company filed a counterclaim in the United States District Court for the
District of Oregon claiming that Tektronix is infringing three of the Company's
patents. On November 30, 2004, the Company filed a Motion for Summary Judgment
of Noninfringement for one of the eight Tektronix patents. In response,
Tektronix filed a Cross-motion for Summary Judgment of Infringement for the same
Tektronix patent. The parties await a ruling by the Court on these motions. The
Company believes it has meritorious defenses and intends to defend this action
vigorously. Discovery in this case is ongoing and the outcome cannot be
predicted.
On January 15, 2003, LeCroy was sued by Sicom Systems ("Sicom") in the
United States District Court for the District of Delaware for patent
infringement of a U.S. patent relating to the graphical display of test limits.
LeCroy answered the complaint denying infringement and asserted a counterclaim
alleging the invalidity of the patent and that Sicom had abused the judicial
process by bringing a baseless patent infringement claim. On July 16, 2003,
LeCroy filed a Motion to Dismiss Sicom's case, contending that Sicom did not
have standing to bring the litigation. On November 20, 2003, the Court granted
LeCroy's Motion to Dismiss. On December 18, 2003, Sicom filed a Notice of Appeal
to the United States Court of Appeals for the Federal Circuit. On December 30,
2003, Sicom filed a new patent infringement lawsuit against LeCroy in the United
States District Court for the District of Delaware. Tektronix and Agilent
Technologies are also co-defendants in this new litigation. The complaint in
this new case is essentially the same as the complaint filed by Sicom on January
15, 2003, except that Sicom now states that it entered into an amendment to its
license agreement with the Canadian government on December 19, 2003, and that
Sicom now has the exclusive right to bring suit for infringement of the patent
in the United States. On January 5, 2004, Sicom filed a Notice and Order of
Dismissal of Appeal of its appeal to the Court of Appeals for the Federal
Circuit and the Order was entered on the following day. In LeCroy's responsive
pleading, LeCroy denied that it has infringed, or is infringing, the patent, and
contends that the patent is invalid. The defendants in this case, including us,
filed a Motion to Dismiss for lack of standing contending that Sicom's amended
license agreement with Canada does not cure the standing defects that caused the
Court to dismiss the original lawsuit. The court granted the Defendants' Motion
on October 5, 2004, dismissing the case with prejudice. On October 28, 2004,
Sicom filed a Notice of Appeal to the United States Court of Appeals for the
Federal Circuit from the September 30, 2004 order granting the Company's motion
to dismiss and the related memorandum opinion dated October 5, 2004. The appeal
is ongoing and the outcome cannot be predicted. LeCroy intends to defend itself
vigorously in this litigation.
From time to time, the Company is involved in lawsuits, claims,
investigations and proceedings, including patent and environmental matters,
which arise in the ordinary course of business. There are no matters pending,
including those described above, that the Company expects to be material to its
business, results of operations, financial condition or cash flows.
18. EARNINGS PER COMMON SHARE
The following is a presentation of the numerators and the denominators of
the basic and diluted net (loss) income per share computations for the three and
six months ended December 31, 2004 and 2003:
19
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
2004 2003 2004 2003
---- ---- ---- ----
In thousands
Numerator:
Net (loss) income......................................... ($2,869) $1,918 ($567) $2,985
Redemption of convertible preferred stock................. -- -- -- 7,665
--------------------------------------------------------
Net (loss) income applicable to common stockholders....... ($2,869) $1,918 ($567) ($4,680)
========================================================
Denominator:
Weighted average shares outstanding:
Basic............................................... 11,655 10,498 11,633 10,456
Employee stock options and other.................... -- 192 -- --
--------------------------------------------------------
Diluted............................................. 11,655 10,690 11,633 10,456
========================================================
As defined in SFAS No. 128, "Earnings per Share," the computation of
diluted net (loss) income per common share for the three months ended December
31, 2004 and 2003 does not include approximately 3.8 million and 0.4 million,
respectively, and the six months ended December 31, 2004 and 2003 does not
include approximately 3.8 million and 1.9 million, respectively, of common stock
options and restricted shares, as the effect of including such awards would have
been antidilutive to earnings per share.
During the second quarter of fiscal 2005, the Company issued additional
stock options and restricted stock in connection with the Merger (see Note 3 --
Stock Plans and Awards).
19. INCOME TAXES
The effective income tax rate for the second quarter of fiscal 2005 was a
(12.2%) benefit compared to a 37% tax rate in the second quarter of fiscal 2004.
The (12.2%) effective rate differs from the prior year effective tax rate
principally due to nondeductible purchased in-process R&D charges associated
with the Merger.
On October 22, 2004, the American Jobs Creation Act (the "Act") was signed
into law. The Act includes a provision for the deduction of 85% of certain
foreign earnings that are repatriated, as defined in the Act. The Company has
elected to apply this provision to certain repatriations of qualifying earnings
in fiscal year 2005. The Company elected to repatriate $22.1 million pursuant to
its approved domestic reinvestment plan. The income tax effect recognized under
the repatriation provision was approximately $1.2 million which was
substantially offset by the release of a tax reserve related to a favorable
foreign tax audit settlement during the three-month period ended December 31,
2004.
20. SUBSEQUENT EVENTS
On January 27, 2005, the Company entered into a Master Agreement with M&T
Bank that governs certain interest rate swap transactions the Company is
required to enter into pursuant to the terms of the Credit Agreement. The Credit
Agreement obligates the Company to enter into one or more hedging agreements
covering the interest payable with respect to at least 50% of the outstanding
principal amount of the Term Loan for a period of at least three years. In
connection with the Master Agreement, the Company entered into an interest rate
swap transaction effective January 31, 2005 and continuing through January 31,
2008. In accordance with the interest rate swap transaction, the Company will
pay quarterly interest on the notional amount at a fixed annualized rate of
3.87% to M&T Bank, and will receive interest quarterly on the same notional
amount at the three-month LIBOR rate in effect at the beginning of each
quarterly reset period; except for the initial period which covers the two
months ending March 31, 2005 at a LIBOR rate of 2.64%. The initial notional
amount is $25.0 million and will reset quarterly to 50% of the outstanding
principal balance of the Term Debt.
20
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
21. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." SFAS No. 151 requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, SFAS No. 151 requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. The provisions of SFAS No.
151 will apply to inventory costs beginning in fiscal year 2007. The adoption
of SFAS No. 151 is not expected to have a significant effect on the consolidated
financial statements of LeCroy.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29." The guidance in Accounting
Principles Board ("APB") Opinion No. 29, "Accounting for Nonmonetary
Transactions," is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The
guidance in APB Opinion No. 29, however, included certain exceptions to that
principle. SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 will be applied prospectively
to nonmonetary asset exchange transactions in fiscal year 2006. The adoption of
SFAS No. 153 is not expected to have a significant effect on the consolidated
financial statements of LeCroy.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS No. 123R"). This new pronouncement requires compensation cost
relating to share-based payment transactions to be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. SFAS No. 123R covers a wide range of share-based
compensation arrangements including stock options, restricted stock plans,
performance-based awards, stock appreciation rights, and employee stock purchase
plans. SFAS No. 123R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, SFAS No. 123 permitted entities to
continue to apply the guidance in APB Opinion No. 25, as long as the footnotes
to financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. LeCroy will be required to adopt
the provisions of SFAS No. 123R in the first quarter of fiscal year 2006.
Management is currently evaluating the requirements of SFAS No. 123R. The
adoption of SFAS No. 123R is expected to have a significant effect on the
consolidated financial statements of LeCroy. See Note 3 to the Condensed
Consolidated Financial Statements for the pro forma impact on net income (loss)
and income (loss) per share from calculating stock-related compensation cost
under the fair value alternative of SFAS No. 123. However, the calculation of
compensation cost for share-based payment transactions after the effective date
of SFAS No. 123R may be different from the calculation of compensation cost
under SFAS No. 123, but such differences have not yet been quantified.
In December 2004, the FASB issued two FASB staff positions (FSP): FSP No.
109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, for
the Tax Deduction Provided to U.S.-Based Manufacturers by the American Jobs
Creation Act of 2004"; and FSP No. 109-2, "Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004." FSP No. 109-1 clarifies that the tax deduction for
domestic manufacturers under the American Jobs Creation Act of 2004 (the "Act")
21
LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
should be accounted for as a special deduction in the period earned in
accordance with SFAS No. 109, "Accounting for Income Taxes." FSP FAS 109-2
provides enterprises more time (beyond the financial-reporting period during
which the Act took effect) to evaluate the Act's impact on the enterprise's plan
for reinvestment or repatriation of certain foreign earnings for purposes of
applying SFAS No. 109. The FSPs went into effect upon being issued and did not
have a significant effect on the consolidated financial statements of LeCroy.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the other financial information and consolidated financial statements and
related notes appearing elsewhere in this Form 10-Q. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of a variety of factors, including those discussed in
"Risk Factors" and elsewhere in this Form 10-Q.
We utilize fiscal quarters that end on the Saturday nearest to March 31,
June 30, September 30, and December 31. For clarity of presentation, we have
described all periods as if they end at the end of the calendar quarter.
OVERVIEW
We were founded in 1964 to develop, manufacture and sell high performance
signal analysis tools to scientists engaged in high energy physics research. In
1985 we introduced our first oscilloscope using our core competency of designing
signal acquisition and digitizing technology.
Presently, we develop, manufacture, sell and license oscilloscopes,
protocol verification systems and other related test and measurement equipment.
Our oscilloscopes are tools used by designers and engineers to measure and
analyze complex electronic signals in order to develop high-performance systems,
to validate electronic designs and to improve time to market. We currently offer
four families of oscilloscopes, which address different solutions to the markets
we serve: WaveMaster, our highest performance product family; WavePro, which is
targeted at the mid- to high-performance sector; WaveRunner, designed for the
mid-performance sector; and WaveSurfer, designed for value-oriented users in the
low-performance bandwidth sector of the market. Our protocol verification
systems are used to reliably and accurately monitor communications traffic and
diagnose operational problems in a variety of communications devices to ensure
that they comply with industry standards. Our protocol verification systems are
used by designers and engineers whose products are in the development stage,
production stage, and deployed in the field.
We generate revenue in a single segment within the Test and Measurement
market, primarily from the sale of our oscilloscopes, protocol verification
systems, probes, accessories, and applications solutions, and to a lesser
extent, our extended warranty and software maintenance contracts and repairs and
calibrations we perform on our instruments after the expiration of their
warranties. Revenue is recognized when products are shipped or services are
rendered to customers net of allowances for anticipated returns. We defer
revenues on shipments to buy-sell distributors of our new WaveSurfer family of
oscilloscopes until sold by the distributors to their end customers. We sell our
products into a broad range of end markets, including computer and
semiconductor, data storage devices, automotive and industrial, and military and
aerospace markets. We believe designers in all of these markets are developing
products which rely on increasingly complex electronic signals to provide the
features and performance their customers require. Our customers include leading
original equipment manufacturers, or OEMs, such as BAE Systems, IBM, Maxtor,
Raytheon, Robert Bosch, Seagate, Samsung and Siemens VDO.
We deploy a direct sales model and employ a highly skilled global sales
force where it makes economic sense to do so. We supplement our direct sales
force with a combination of manufacturers' representatives and distributors in
areas where demand levels do not justify direct distribution by us. We segment
the world into four areas - North America, Europe/Middle East, Japan and
Asia/Pacific. In North America we primarily sell our products directly in the
United States. In Europe/Middle East, we sell our products directly in
Switzerland, Germany, Italy, France, the United Kingdom and Sweden. In Japan, we
sell our products directly. In Asia/Pacific, we sell our products directly in
South Korea, Singapore and five regions in China. During the third quarter of
fiscal 2004, we commenced shipping our new WaveSurfer family of lower bandwidth
oscilloscopes, which are being distributed through a combination of a buy-sell
distribution channel and our direct channel.
23
Generally, we transact revenues and pay our operating expenses in the local
currencies of the countries in which we have a direct distribution presence or
other operations, with limited exceptions, most notably in China where our sales
and operating expenses are denominated in U.S. dollars. In Europe/Middle East,
we transact business in Euros, Swiss francs, British pounds, Swedish krona and
U.S. dollars. In Japan, we transact business in Japanese yen. In South Korea, we
transact business in Korean won and in Singapore, we transact business in both
U.S. dollars and Singapore dollars. For a discussion of our foreign currency
exchange rate exposure, see Item 3 of this Part I entitled "Quantitative and
Qualitative Disclosure About Market Risk" below.
We have, at times, historically experienced lower levels of demand during
our first fiscal quarter than in other fiscal quarters which, we believe, have
been principally due to the lower level of general market activity during the
summer months, particularly in Europe.
Cost of revenue represents manufacturing and service costs, which primarily
comprise materials, labor and factory overhead. Gross margins represent revenues
less cost of revenue. Additional factors integral to gross margins earned on our
products are mix, as the list prices of our products range from $4,000 to
$94,000, and foreign currencies, as approximately two-thirds of our revenues are
derived overseas, much of which is denominated in local currencies while
manufacturing costs are U.S. dollar denominated.
Selling, general and administrative expenses consist of salaries and
related overhead costs for sales, marketing and administrative personnel as well
as legal, accounting and other professional services.
Research and development expenses consist primarily of salaries and related
overhead costs associated with employees engaged in research, design and
development activities, as well as the cost of masks, wafers and other materials
and related test services and equipment used in the development process.
Our results of operations and financial condition are affected by a variety
of factors. As discussed below, we believe the most significant recurring
factors are the economic strength of the technology markets into which we sell
our products, our ability to timely develop competitive products, and the
actions of our competitors.
The economics of the technology markets we serve tend to be cyclical.
Consequently, our sales are largely dependent on the health and growth of
technology companies. For example, in the late 1990's through 2001, our business
expanded along with the prosperity of the technology markets. From early 2001 to
2003, revenues decreased along with the contraction of the technology industry
overall. As a result, revenues from sales decreased 8% from the end of fiscal
year 2000 through fiscal year 2002. Beginning in fiscal year 2003 and continuing
to the present, our revenues have significantly increased concurrently with the
recovery of the technology industry and, we believe, specifically as a result of
key product introductions.
In response to market fluctuations, we continually assess and adopt
programs aimed at positioning us for long-term success. These programs may
include streamlining operations, discontinuing older and less profitable product
lines, and reducing operating expenses from time to time. As an example, in
fiscal 2003 we implemented a restructuring plan intended to reduce costs and
more effectively address the allocation of product development resources. For a
more detailed discussion of our restructuring efforts in fiscal 2003, see the
Section entitled "Restructuring and Asset Impairment," below.
In addition, we face significant competition in our target markets. We
believe that in order to successfully continue to compete in our target markets,
we need to timely anticipate, recognize and respond to changing market demands
by providing products that serve our customers' needs as they arise and at a
price acceptable to the market. We believe that we compete favorably with our
competition in each of these areas. Consequently, we are constantly reviewing
our product strategy and invest time, resources and capital in development
projects we deem most likely to succeed.
In furtherance of our drive to meet our customers' changing demands, we
also look outside our organization for opportunities to expand our markets.
Accordingly, on October 29, 2004, we completed the acquisition of Computer
Access Technology Corporation ("CATC") to complement our expanding serial data
portfolio. The acquisition of CATC is described more fully in Item 1, Note 2,
entitled "Acquisition," and below.
24
ACQUISITION
On October 29, 2004, we completed our acquisition of CATC via the merger of
a newly-formed, wholly-owned subsidiary of LeCroy with and into CATC, with CATC
surviving as a wholly-owned subsidiary of LeCroy (the "Merger"). CATC is a
provider of advanced verification systems for existing and emerging digital
communications standards. CATC's products are used by semiconductor, device,
system and software companies at each phase of their products' lifecycles from
development through production and market deployment. CATC reported $17.7
million in revenues for the trailing 12 months ended June 30, 2004 and had
approximately 70 employees. Through the acquisition, CATC is expected to enable
LeCroy to capitalize on the increasing demand for serial data test instruments,
leverage its global, technical, direct sales force to accelerate the growth of
CATC's products, strengthen its position in the data storage market, increase
penetration into the computer market, expand gross margins, increase operating
leverage leading to expanded operating margins and increase cash generation
capabilities.
Total consideration paid to acquire CATC was approximately $130.0 million.
The Merger was recorded under the purchase method of accounting which requires
that the total consideration be allocated to the assets acquired and liabilities
assumed based on their fair values. On the effective date of the Merger, each
share of CATC common stock issued and outstanding immediately prior thereto was
canceled and converted into the right to receive $6.00 in cash. In addition,
LeCroy paid cash to the holders of CATC's outstanding, vested in-the-money stock
options and employee stock purchase plan (the "ESPP") purchase rights. Further,
LeCroy assumed CATC's outstanding unvested stock options, as well as certain
vested but unexercised stock options, by granting to CATC employees options to
purchase LeCroy common stock (the "LeCroy Options"). The LeCroy Options were
recorded at their fair values using the Black-Scholes option pricing model based
on a stock price of $16.83 per share, which was the closing price of LeCroy
common stock on October 29, 2004, less the intrinsic value of unvested options,
which will be charged as compensation expense to operations as earned by
employees over their remaining vesting periods. LeCroy paid cash of $80.3
million, net of cash acquired, using $30.3 million of cash on hand and
borrowings of $50.0 million under the Company's $75.0 million senior, secured,
five-year credit agreement entered into on October 29, 2004, with the leners
listed therein and The Bank of New York, as administrative agent for such
lenders (the "Credit Agreement"). The Merger consideration is summarized below
(in thousands):
Cash for shares $ 120,281
Cash for options and ESPP purchase rights 3,966
Fair value of stock options assumed 5,111
Unearned stock compensation on unvested options
assumed (1,945)
Transaction costs 2,564
----------
Total purchase price $ 129,977
==========
The fair value of tangible and intangible assets acquired and liabilities
assumed was established based upon the unaudited October 28, 2004 consolidated
balance sheet of CATC, as well as certain assumptions made regarding fair
values. The fair value of finished goods and work in process inventory is valued
based on estimated selling prices less direct costs to sell and a profit margin
on the selling effort. The fair value of the in-process research and development
("IPR&D"), purchased technology, trade name and purchase orders was determined
by an independent appraisal firm. The fair value of the IPR&D was based on the
total estimated costs to develop the related technologies less the costs
incurred to date for the projects, and the intangible asset values were based on
estimates of future cash flows associated with those assets. The preliminary
purchase price allocation is not yet finalized however, the Company expects to
finalize the allocation within the third quarter of fiscal 2005. The excess
of the preliminary purchase price over the fair value of the net assets acquired
has been allocated to goodwill. The purchased technology, trade name and
purchase orders related to this acquisition are being amortized over their
estimated economic useful lives ranging from two to twenty-nine months. The
preliminary allocation of purchase price as of October 29, 2004 is summarized
below (in thousands):
25
Cash $ 46,466
Accounts receivable 2,296
Inventory 3,848
Other current assets 133
Fixed assets 663
Other assets 28
In-process research and development 2,190
Purchased technology 3,080
Purchased trade name 70
Purchased purchase orders 90
Goodwill 79,720
Current liabilities assumed (5,897)
Long-term liabilities assumed (652)
Deferred tax liability (2,058)
---------
Total purchase price $ 129,977
=========
The following table presents the details of the amortizable intangible
assets acquired in the Merger and the unamortized value as of December 31, 2004:
Weighted Accumulated
(In thousands) Average Lives Cost Amortization Net
Amortizable intangible assets: ------------- ----- ------------ ---
Purchased technology.................................... 2.0 years $ 3,080 $ 297 $ 2,783
Purchased tradename..................................... 1.0 year 70 12 58
Purchased purchase orders............................... 0.2 years 90 90 -
-------- ---------- --------
Total intangibles purchased............................... $ 3,240 $ 399 $ 2,841
======== ========== ========
Amortization expense for intangible assets acquired in the Merger was $0.4
million for the three and six month periods ended December 31, 2004.
Amortization expense for the intangible assets acquired in the Merger has been
recorded in the Condensed Consolidated Statement of Operations as follows:
Three months ended Six months ended
December 31, December 31,
(In thousands) 2004 2004
------------ ------------
Cost of revenues ...................... $387 $387
General and administrative expense .... 12 12
----------------------------------------
Total .............................. $399 $399
========================================
The amortization expense of intangible assets acquired in the Merger for
the current fiscal year to date and as estimated for the remainder of fiscal
2005 and in future years is as follows:
Amount
Fiscal Year (in thousands)
--------------- ----------------
2005 $1,315
2006 1,339
2007 586
----------------
$3,240
================
26
The $2.2 million allocated to IPR&D was written off during the second
quarter of fiscal 2005 in accordance with FASB Interpretation No. 4,
"Applicability of FASB Statement No. 2 to Business Combinations Accounted for by
the Purchase Method." This charge was included in research and development
expense in the Condensed Consolidated Statement of Operations for the three and
six months ended December 31, 2004.
RESTRUCTURING AND ASSET IMPAIRMENT
In response to the continued economic downturn in 2003, we took steps to
change our manufacturing strategy, discontinue older product lines and reduce
our operating expenses in an effort to better position our business for the long
term. Additionally, in connection with the Merger, we took steps to change our
organization as well as implement a change in our low to mid-range oscilloscope
manufacturing strategy. The resultant charges taken to accomplish these efforts
were:
Six Months ended
December 31,
Year Ended June 30, (unaudited)
------------------- -----------
2004 2003 2004 2003
---- ---- ---- ----
Charges for:
Impaired intangible assets .................... $ - $2,280 $ 1,500 $2,280
Severance and related costs ................... - 163 - 90
------- ------ ------- ------
Cost of sales ............................ $ - $2,443 $ 1,500 $2,370
======= ====== ======= ======
Charges for:
Severance and related costs ................... $ - $ 670 $ - $ 522
------- ------ ------- ------
Research and development ................ $ - $ 670 $ - $ 522
======= ====== ======= ======
Charges for:
Severance and related costs ................... $ - $2,382 $ 629 $2,042
Plant closure ................................. - 286 - -
Unused restructuring reserve .................. - (78) - -
------- ------ ------- ------
Selling, general and administrative ..... $ - $2,590 $ 629 $2,042
======= ====== ======= ======
In connection with the fiscal 2003 restructuring, $3.4 million of the total
$3.5 million severance, plant closure and related reserve has been paid as of
December 31, 2004. Severance and other related amounts of $0.1 million will be
paid by the end of the second quarter of fiscal 2006. Additionally, on November
8, 2004 we entered into a Lease Termination Agreement and made a final payment
of $0.1 million releasing us of any future obligations under the Beaverton,
Oregon facility lease. This amount was previously accrued.
No similar restructuring charges were incurred in fiscal 2004.
During the second quarter of fiscal 2005, as a result of the Merger, the
Company adopted a plan to restructure its organization and fine tune its product
strategy. In connection with the adoption of this plan, the Company recorded a
charge for severance and other related expenses in the second quarter of fiscal
2005 of $0.6 million, all recorded in selling, general and administrative
expense. The implementation of this plan resulted in headcount reductions of six
employees or approximately 2% of the workforce as compared to June 30, 2004. As
of December 31, 2004, $0.2 million of severance has been paid and $0.4 million
remains in accrued expenses and other current liabilities in the Condensed
Consolidated Balance Sheet. Severance and other related amounts under this plan
will be paid by the end of the second quarter of fiscal 2007. Additionally, in
the second quarter of fiscal 2005, as a result of a change in our organization
stemming from the Merger and a subsequent change in our low to mid-range
oscilloscope manufacturing strategy, the Company took a $1.5 million non-cash
charge to cost of revenue for the write-off of a technology asset.
CRITICAL ACCOUNTING POLICIES
The preparation of our Condensed Consolidated Financial Statements in
conformity with U.S. generally accepted accounting p