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 March 31, 2005
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 APRIL 30, 2005
Common stock, par value $.01 share 12,340,465
LECROY CORPORATION
FORM 10-Q
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets (Unaudited)
as of March 31, 2005 and June 30, 2004.........................3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three and Nine Months
ended March 31, 2005 and 2004..................................4
Condensed Consolidated Statements of
Cash Flows (Unaudited) for the Nine Months
ended March 31, 2005 and 2004..................................5
Notes to Condensed Consolidated
Financial Statements (Unaudited) ..............................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................24
Item 3. Quantitative and Qualitative Disclosures About Market Risk......47
Item 4. Controls and Procedures.........................................49
PART II OTHER INFORMATION
Item 1. Legal Proceedings...............................................50
Item 6. Exhibits........................................................51
Signature ..............................................................55
LeCroy(R), Wavelink(TM), WaveMaster(R), WavePro(R), WaveRunner(R),
WaveSurfer(TM), WaveExpert(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.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LECROY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
IN THOUSANDS, EXCEPT PAR VALUE AND SHARE DATA 2005 2004
- ---------------------------------------------------------------- -------- --------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 16,669 $ 28,566
Marketable securities............................................................ -- 9,534
Accounts receivable, net......................................................... 28,149 24,675
Inventories, net................................................................. 28,220 21,978
Other current assets............................................................. 9,916 11,921
----------- -----------
Total current assets........................................................... 82,954 96,674
Property and equipment, net.......................................................... 19,472 19,778
Goodwill............................................................................. 81,767 1,874
Other non-current assets............................................................. 14,130 11,467
----------- -----------
TOTAL ASSETS......................................................................... $ 198,323 $ 129,793
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases............................. $ 8,367 $ 107
Accounts payable................................................................. 14,398 12,097
Accrued expenses and other current liabilities................................... 19,470 14,554
----------- -----------
Total current liabilities...................................................... 42,235 26,758
Long-term debt....................................................................... 39,383 89
Deferred revenue and other non-current liabilities................................... 1,402 1,338
----------- -----------
Total liabilities.............................................................. 83,020 28,185
Stockholders' equity:
Common stock, $.01 par value (authorized 45,000,000 shares; 12,476,876 and
11,973,830 shares issued and outstanding as of March 31, 2005 and June 30,
2004, respectively).............................................................. 125 120
Preferred stock, $.01 par value (authorized 5,000,000 shares; none issued and
outstanding as of March 31, 2005 and June 30, 2004)............................... -- --
Additional paid-in capital......................................................... 111,034 98,421
Warrants to purchase common stock.................................................. 2,165 2,165
Accumulated other comprehensive income............................................. 1,624 434
Deferred stock compensation........................................................ (8,938) (6,509)
Retained earnings.................................................................. 9,293 6,977
----------- -----------
Total stockholders' equity..................................................... 115,303 101,608
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................... $ 198,323 $ 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
Revenues:
Test and measurement products......................... $40,879 $ 30,883 $114,564 $ 84,343
Service and other..................................... 2,011 1,947 6,619 5,677
------- -------- -------- --------
Total revenues..................................... 42,890 32,830 121,183 90,020
Cost of revenues......................................... 16,947 13,684 53,902 38,174
Gross profit........................................ 25,943 19,146 67,281 51,846
Operating expenses:
Selling, general and administrative................... 14,126 11,429 41,476 31,685
Legal settlement...................................... 1,000 - 1,000 -
Research and development.............................. 7,027 4,120 20,567 11,585
------- -------- -------- --------
Total operating expenses........................... 22,153 15,549 63,043 43,270
Operating income......................................... 3,790 3,597 4,238 8,576
Interest income....................................... 148 157 457 555
Interest expense...................................... (927) (192) (1,810) (596)
Other (expense) income, net........................... (119) 182 395 (54)
------- -------- -------- --------
Other, net.......................................... (898) 147 (958) (95)
------- -------- -------- --------
Income before income taxes............................... 2,892 3,744 3,280 8,481
Provision for income taxes............................ 10 1,385 964 3,138
------- -------- -------- --------
Net income............................................... 2,882 2,359 2,316 5,343
Redemption of convertible preferred stock................ - - - 7,665
------- -------- -------- --------
Net income (loss) applicable to common stockholders...... $ 2,882 $ 2,359 $ 2,316 $ (2,322)
======= ======== ======== ========
Net income (loss) per common share applicable
to common stockholders:
Basic........................................... $ 0.24 $ 0.22 $ 0.20 $(0.22)
Diluted......................................... $ 0.23 $ 0.21 $ 0.19 $(0.22)
Weighted average number of common shares:
Basic........................................... 11,847 10,721 11,702 10,545
Diluted......................................... 12,672 11,271 12,262 10,545
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
LECROY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
IN THOUSANDS 2005 2004
- ------------------------------------------------------------------------------------------ ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 2,316 $ 5,343
Adjustments to reconcile net income to net cash provided by operating activities:
Write-off of acquired in-process research and development............................... 2,190 --
Depreciation and amortization........................................................... 5,928 4,849
Stock-based compensation................................................................ 1,876 18
Amortization of debt issuance costs..................................................... 268 51
Deferred income taxes................................................................... (592) 1,573
Recognition of deferred license revenue................................................. (972) (972)
Loss on disposal of property and equipment.............................................. 91 76
Tax benefit from exercise of stock options.............................................. 1,026 1,067
Write-off of inventory.................................................................. 2,723 525
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..................................................................... (513) (2,811)
Inventories............................................................................. (5,060) 2,741
Other current and non-current assets.................................................... 527 (1,160)
Accounts payable, accrued expenses and other liabilities................................ 1,692 1,564
----------- ----------
Net cash provided by operating activities................................................. 13,000 12,864
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................................................... (2,661) (3,861)
Net proceeds from sale of property...................................................... -- 584
Proceeds from sale of marketable securities............................................. 9,534 --
Business acquisition costs, net of acquired cash........................................ (80,402) --
Purchase of intangible assets........................................................... (100) (150)
----------- ----------
Net cash used in investing activities..................................................... (73,629) (3,427)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings and capital leases.............................................. (3,579) (6,070)
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) (285)
Proceeds from employee stock purchase and option plans.................................. 4,127 4,511
Payment of seller-financed intangible assets............................................ (449) (500)
----------- ----------
Net cash provided by (used in) financing activities....................................... 48,714 (15,344)
----------- ----------
Effect of exchange rate changes on cash................................................... 18 7
----------- ----------
Net decrease in cash and cash equivalents............................................... (11,897) (5,900)
Cash and cash equivalents at beginning of the period.................................... 28,566 30,851
----------- ----------
Cash and cash equivalents at end of the period.......................................... $ 16,669 $ 24,951
=========== ==========
Non-cash investing and financing activities:
Acquisition of seller-financed intangibles and related 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. All inter-company
transactions and balances have been eliminated.
Certain reclassifications have been made to prior-year amounts to conform to
the current-period presentation. These include reclassifications of service kit
revenue from service to product revenue, and the reclassification of certain
freight charges from Cost of revenues to Selling, general and administrative
expenses. The reclassifications do not affect the Company's results of
operations or its overall financial position.
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
March 31, which resulted in the current period ending on April 2, 2005. For
clarity of presentation, the condensed consolidated financial statement
period-end references are stated as March 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 its acquisition of
CATC, LeCroy expects 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, in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," 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
6
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 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
$80.4 million, net of cash acquired, using $30.4 million of cash on hand and
borrowings of $50.0 million under the Company's $75.0 million senior, secured,
five-year credit agreement entered into on October 29, 2004, with the lenders
listed therein and The Bank of New York, as administrative agent for such
lenders (the "Credit Agreement"). (See Note 15 - Debt). The Merger consideration
is summarized below:
(IN THOUSANDS)
Cash for shares.................................................$ 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............................................... 2,621
----------
Total purchase price............................................$ 130,034
==========
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 was based
on estimated selling prices less direct costs to sell and a reasonable 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
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 purchase price over the fair value of
the net assets acquired was 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 purchase price allocation, which is subject to further changes resulting
from incremental direct acquisition costs, is summarized below:
7
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
Cash and cash equivalents.............................$ 46,466
Accounts receivable................................... 2,296
Inventory............................................. 3,710
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.............................................. 79,893
Current liabilities assumed........................... (5,875)
Long-term liabilities assumed......................... (652)
Deferred tax liability................................ (2,058)
----------
Total purchase price..................................$ 130,034
==========
The following table presents the details of the amortizable intangible
assets acquired in the Merger and their carrying values as of March 31, 2005:
WEIGHTED ACCUMULATED
AVERAGE LIVES COST AMORTIZATION NET
------------- ----- ------------ -------
(IN THOUSANDS)
Amortizable intangible assets:
Purchased technology....................................... 2.0 years $ 3,080 $ 743 $ 2,337
Purchased tradename........................................ 1.0 year 70 30 40
Purchased purchase orders.................................. 0.2 years 90 90 --
---------- --------- ----------
Total intangibles purchased.................................. $ 3,240 $ 863 $ 2,377
========== ========= ==========
Amortization expense for intangible assets acquired in the Merger was $0.5
million and $0.9 million for the three and nine month periods ended March 31,
2005, respectively. 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- --------
2005 2005
---- -----
(13 WEEKS) (40 WEEKS)
(IN THOUSANDS)
Cost of revenues...................... $ 446 $ 833
General and administrative expense.... 18 30
----- -----
Total.............................. $ 464 $ 863
===== =====
The amortization expense of intangible assets acquired in the Merger for
fiscal 2005 and in future years is as follows:
8
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 is included in Research and development
expense in the Condensed Consolidated Statements of Operations.
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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
2005 2004 2005 2004
---- ---- ---- ----
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues........................................................ $42,890 $37,475 $126,207 $102,797
Net income (loss) before non-recurring charges directly
attributable to the Merger applicable to common stockholders.. $2,901 $1,761 $312 ($5,501)
Net income (loss) per share before non-recurring charges
directly attributable to the Merger- basic.................... $0.24 $0.16 $0.03 ($0.52)
Net income (loss) per share before non-recurring charges
directly attributable to the Merger - diluted................. $0.23 $0.15 $0.03 ($0.52)
The write-off of IPR&D is excluded from the calculation of net income (loss)
and net income (loss) 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. STOCKHOLDERS' EQUITY
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 income and net income
(loss) per common share applicable to common stockholders as if the Company had
applied the fair value recognition provisions for stock-based employee
compensation of 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
---- ---- ---- ----
(40 WEEKS) (39.WEEKS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported......................................... $2,882 $ 2,359 $ 2,316 $ 5,343
Add: stock-based compensation expense included in reported
net income, net of income taxes............................... 491 5 1,189 14
Deduct: stock-based compensation expense determined under
the fair value-based method for all awards, net of income taxes (1,359) (587) (2,991) (2,445)
------- -------- -------- ---------
Pro forma net income............................................ 2,014 1,777 514 2,912
Charges related to convertible preferred stock.................. -- -- -- 7,665
Pro forma net income (loss) applicable to common stockholders... $ 2,014 $ 1,777 $ 514 ($ 4,753)
======= ======== ======== =========
Net income (loss) per common share applicable to common stockholders:
Basic, as reported........................................ $0.24 $0.22 $0.20 ($0.22)
Diluted, as reported...................................... $0.23 $0.21 $0.19 ($0.22)
Basic, pro forma.......................................... $0.17 $0.17 $0.04 ($0.45)
Diluted, pro forma........................................ $0.16 $0.16 $0.04 ($0.45)
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 adoption of
the 2004 Plan did 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 or other award granted thereunder would be exercisable for LeCroy common
stock. Pursuant to FIN 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 nine months
ended March 31, 2005, $0.1 million, net of tax, and $0.2 million, net of tax,
respectively, have 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)
For the nine months ended March 31, 2005, the net adjustment to additional
paid in capital and deferred compensation, in the aggregate, was an increase of
$10.2 million, consisting of:
o $3.5 million related to the issuance of options in connection with the
Merger (net of related amortization of deferred compensation since the
Merger),
o $4.8 million from the exercise of stock options and related tax
benefits,
o $1.6 million related to the issuance of restricted shares to employees
and related compensation expense, and
o $0.3 million from the employee stock purchase plan.
4. 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 revenue from the sales of
oscilloscopes and application solutions, protocol verification systems, probes
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. 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. Provisions for
warranty costs are recorded at the time products are shipped. Revenues from
these related products are included in revenues from Test and measurement
products in the Condensed Consolidated Statements of Operations. Certain
software is embedded in the Company's oscilloscopes, 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 collectibility is probable. When the Company ships a protocol
verification system but certain elements relating to the functionality of the
product are not delivered, revenue and the associated cost of revenue are
deferred until the remaining elements are 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 Statements of Operations.
11
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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
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 perpetual software license agreements are included in Service and
other in the Condensed Consolidated Statements of Operations.
Service and other revenue. Service and other revenue includes 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 product revenue. During the third quarter of fiscal 2004, the
Company began shipping the WaveSurfer oscilloscope product line. One component
of the Company's strategy for distributing this product line is the use of a
buy-sell distribution channel. This was 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 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.
Deferred license revenue. 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 terms 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.
Beginning in fiscal 2001 with the adoption of the SEC's Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements,"
(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 $1.0 million during the three and nine months ended March 31, 2005
and 2004, respectively. Such license fees are included in Service and other
revenue in the Condensed Consolidated Statements of Operations. As of March 31,
2005, the remaining balance of pre-tax deferred license fee revenue was $1.0
million which is reflected in Accrued expenses and other current liabilities in
the accompanying Condensed Consolidated Balance Sheets.
12
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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
reductions of six employees or approximately 2% of the workforce as compared to
June 30, 2004. As of March 31, 2005, $0.3 million has been paid and $0.3 million
remains in Accrued expenses and other current liabilities on the Condensed
Consolidated Balance Sheets. Severance and other related amounts under this plan
will be paid in full 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
revenues, $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
the Company from any future rental 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 March 31, 2005, $2.5 million of the total $2.6 million has been paid
and $0.1 million remains in Accrued expenses and other current liabilities on
the Condensed Consolidated Balance Sheets. Severance and other related amounts
under this plan will be paid in full by the end of the second quarter of fiscal
2006.
6. DERIVATIVE INSTRUMENTS
The Company accounts for qualifying derivatives and hedging activities in
accordance with SFAS No. 133, "Accounting for Derivative Investments and Hedging
Activities," as amended ("SFAS 133"), which requires that all derivative
instruments be recorded on the balance sheet at their respective fair values.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument is dependent upon whether the derivative has been
designated and qualifies as part of a hedging relationship and further, on the
type of hedging relationship. A hedge is regarded as highly effective and
qualifies for hedge accounting if, at inception and throughout its life, it is
expected that changes in the cash flows of the hedged item are almost fully
offset by the changes in the fair value of changes in cash flows of the hedging
instrument and actual effectiveness is within a range of 80 percent to 125
percent.
13
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
For derivative instruments that are designated and qualify as a cash flow
hedge (such as the Company's interest rate variable-to-fixed swap agreement
discussed below), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income (loss) and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. Any ineffective portion of the gain or loss on the
derivative instrument is recorded in the results of operations immediately.
A cash flow hedge ceases to be highly effective as a hedge when the hedge
expires, is sold, terminated, or exercised; when the hedged item matures or is
sold or repaid; or when a forecasted transaction is no longer deemed highly
probable. At this time the hedge accounting would be discontinued, and the gain
or loss would be recognized in the results of operations immediately.
For derivative instruments not designated as hedging instruments (such as
the Company's foreign currency forward exchange agreements discussed below), the
gain or loss is recognized in the results of operations immediately.
The Company does not use derivative financial instruments for trading or
other speculative purposes and does not enter into fair value hedges.
At March 31, 2005, the Company has the following derivative instruments
related to its various hedging programs:
Interest Rate Swaps Designated as Cash Flow Hedges
As required by the terms of the Credit Agreement (See Note 15), on January
27, 2005 the Company entered into a Master Agreement with Manufacturers &
Traders Trust Co. ("M&T Bank"), the purpose of which is to hedge against rising
interest rates during the term 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,
corresponding with the repayment terms of the Credit Agreement. The swap
agreement is designated as a cash flow hedge under SFAS 133, and is being
utilized to moderate the Company's exposure to interest rate fluctuations on its
underlying variable rate long-term debt. In accordance with the interest rate
swap transaction, the Company pays quarterly interest on the notional amount at
a fixed annualized rate of 3.87% to M&T Bank, and receives 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
covered the two months ending March 31, 2005, in which the Company received
interest at a LIBOR rate of 2.64%. The initial notional amount was $25.0 million
and resets quarterly to 50% of the outstanding principal balance with respect to
the original amortization schedule as set forth in the Credit Agreement. The net
interest expense incurred on the swap during the three months ended March 31,
2005 was approximately $50,000. The notional amount as of March 31, 2005 was
approximately $24.1 million. The fair value of the interest rate swap as of
March 31, 2005, is $0.2 million and approximates the amount that the Company
would have received from M&T Bank if the Company had canceled the transaction at
March 31, 2005. The fair value is recorded in Other current assets and
Accumulated other comprehensive income in the Condensed Consolidated Balance
Sheets as of March 31, 2005.
Other Hedges
The Company may enter into short-term forward exchange agreements to
purchase foreign currencies at set rates in the future. These foreign currency
forward exchange agreements are used to limit exposure to fluctuations in
foreign currency exchange rates for all significant planned purchases of fixed
assets or commodities that are denominated in currencies other than the
subsidiaries' functional currency. Subsidiaries may also use forward exchange
agreements to offset the foreign currency risk for receivables and payables not
denominated in, or indexed
14
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
to, their functional currencies. The Company records
these short-term forward exchange agreements on the balance sheet at fair value
and changes in the fair value are recognized in current earnings.
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 133; therefore, any changes in fair value of
these contracts are recorded in Other (expense) income, 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.
There was a net loss resulting from changes in the fair value of these
derivatives and on transactions denominated in other than their functional
currencies of $0.1 million for the three months ended March 31, 2005, compared
to a net gain of $0.1 million for the comparable prior year period. There were
net gains resulting from changes in the fair value of these derivatives and on
transactions denominated in other than their functional currencies of $0.4
million and $0.3 million for the nine months ended March 31, 2005 and 2004,
respectively. These amounts are included in Other (expense) income, net in the
Condensed Consolidated Statements of Operations and include gross gains of zero
and $0.2 million for the three months ended March 31, 2005 and 2004,
respectively, and $0.6 million and $0.4 million for the nine months ended March
31, 2005 and 2004, respectively. At March 31, 2005 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.
7. COMPREHENSIVE INCOME
The following table presents the components of comprehensive income, net of
tax:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------- ---------
2005 2004 2005 2004
---- ---- ---- -----
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
(IN THOUSANDS)
Net income.................................................. $2,882 $2,359 $2,316 $5,343
Unrealized loss on marketable debt securities............... -- -- (3) --
Reclassification adjustment for realized losses
included in net income...................................... -- -- 16 --
Change in fair value of derivative instruments.............. 150 -- 150 --
Foreign currency translation (losses) gains................. (647) (432) 939 1,775
------ ------ ------ ------
Comprehensive income........................................ $2,385 $1,927 $3,418 $7,118
====== ====== ====== ======
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 in 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 quarter ended December 31, 2004, all marketable debt
securities were liquidated and there was no activity for the three months ended
March 31, 2005.
15
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 March 31,
2005 and June 30, 2004, the Company netted approximately $3.0 million and $0.6
million, respectively, of accounts receivable against accounts payable on the
Condensed Consolidated Balance Sheets related to these agreements.
The allowance for doubtful accounts was approximately $0.5 million and $0.4
million as of March 31, 2005 and June 30, 2004, respectively, and is entirely
related to trade accounts receivables.
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:
MARCH 31, JUNE 30,
2005 2004
--------- ----------
(IN THOUSANDS)
Raw materials............................ $ 10,859 $ 6,617
Work in process.......................... 3,234 4,544
Finished goods........................... 14,127 10,817
--------- ----------
$ 28,220 $ 21,978
========= ==========
The value of demonstration units included in finished goods was $10.3
million and $8.0 million at March 31, 2005 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 quarter ended December 31, 2004, 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 recorded a $2.7
million non-cash charge to Cost of revenues in the Condensed Consolidated
Statements of Operations for the write-off of excess parts. There were no such
activities in the quarter ended March 31, 2005.
10. OTHER CURRENT ASSETS
Other current assets consist of the following:
MARCH 31, JUNE 30,
2005 2004
---------- ----------
(IN THOUSANDS)
Deferred tax assets, net................. $ 5,500 $ 7,400
Other receivables........................ 638 511
Prepaid probes and accessories........... 408 818
Value-added tax.......................... 435 595
Other.................................... 2,935 2,597
---------- ----------
$ 9,916 $ 11,921
========== ==========
16
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
11. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
MARCH 31, JUNE 30,
2005 2004
----------- -----------
(IN THOUSANDS)
Land, building and improvements.......... $ 15,195 $ 14,640
Furniture, machinery and equipment....... 29,402 25,073
Computer software and hardware........... 16,100 17,637
----------- -----------
60,697 57,350
Less: accumulated depreciation and amorti (41,225) (37,572)
----------- -----------
$ 19,472 $ 19,778
=========== ===========
Depreciation and amortization expense was $1.3 million and $1.4 million for
the three months ended March 31, 2005 and 2004, respectively, and was $3.9
million and $3.8 million for the nine months ended March 31, 2005 and 2004,
respectively.
12. OTHER NON-CURRENT ASSETS
Other non-current assets consist of the following:
MARCH 31, JUNE 30,
----------- -----------
2005 2004
(IN THOUSANDS)
Intangibles, net......................... $ 6,839 $ 5,802
Deferred tax assets, net................. 5,556 4,771
Other.................................... 1,735 894
--------- ----------
$ 14,130 $ 11,467
========= ==========
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 nine months 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 MARCH 31, JUNE 30,
AVERAGE LIVES 2005 2004
-------------- --------- ---------
(AS OF MARCH 31, (IN THOUSANDS)
2005)
Amortizable intangible assets:
Technology, manufacturing and distribution rights.......... 3.6 years $ 11,827 $ 8,897
Patents and other intangible assets........................ 3.5 years 812 661
Effect of currency translation on intangible assets........ 178 148
Accumulated amortization................................... (5,978) (3,904)
--------- ----------
Net carrying amount.......................................... $ 6,839 $ 5,802
========= ==========
Non-amortizable intangible assets:
Goodwill................................................... $ 81,767 $ 1,874
========= ==========
17
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Amortization expense for those intangible assets with finite lives was $0.9
million and $0.3 million for the three months ended March 31, 2005 and 2004,
respectively, and $2.1 million and $1.0 million for the nine months ended March
31, 2005 and 2004, 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 that intangible assets amortization expense on a straight-line basis
in fiscal 2005 through 2008 will approximate $3.3 million, $2.7 million, $2.0
million, and $0.8 million, respectively.
During the nine months ended March 31, 2005, the Company purchased a
license for approximately $1.0 million for the use of electronic design
automation software, a license for approximately $0.2 million for the ability to
use certain computer aided design software tools, and increased an existing
license by $0.1 million for the use of embedded memory macro technology. The
assets for the design software licenses have an amortization period of three
years based on the terms of the license agreements. The asset for the use of the
embedded memory technology has an amortization period of five years based on the
terms of the license agreement.
As part of the Merger, LeCroy 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 the
Company's 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:
MARCH 31, JUNE 30,
2005 2004
--------- ----------
(IN THOUSANDS)
Compensation and benefits............................. $ 5,694 $ 5,022
Income taxes.......................................... 3,253 2,938
Legal settlement...................................... 1,000 --
Deferred license fee revenue, current portion......... 989 1,296
Warranty.............................................. 981 1,247
Deferred revenue, current portion..................... 3,585 1,606
Retained liabilities from discontinued operations..... 160 160
Other................................................. 3,808 2,285
--------- ----------
$ 19,470 $ 14,554
========= ==========
14. WARRANTIES AND GUARANTEES
The Company provides a warranty on its products, typically extending three
years after delivery. 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 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 nine months ended
March 31, 2005 and 2004:
18
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ -----------------
2005 2004 2005 2004
----- ---- ---- ----
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
(IN THOUSANDS)
Balance at beginning of period............................. $1,372 $1,243 $ 1,247 $1,235
Accruals for warranties entered into during the period.. 24 345 892 983
Warranty costs incurred during the period............... (415) (342) (1,263) (972)
Warranty liability assumed in the Merger................ -- -- 105 --
------ ------ ------- ------
Balance at end of period .................................. $ 981 $1,246 $ 981 $1,246
====== ====== ======= ======
During the quarter ended March 31, 2005, the Company's management revisited
labor and cost estimates utilized in its existing warranty model in light of the
Company's recent new product introductions, and determined that the actual labor
and cost estimates to repair the warranty units were lower than previously
estimated given the Company's success in reducing the time and costs necessary
to fix the newer models currently under warranty. As a result of this evaluation
and conclusion the Company changed the labor and cost estimates used to
calculate the warranty accrual as of March 31, 2005. This change in estimate was
recorded in the current period and reduced the accrual required by approximately
$350,000, resulting in a $24,000 net charge for warranties entered into during
the quarter ended March 31, 2005.
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 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 March 31, 2005, 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 when a loss becomes
probable and estimable. 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
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 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. As of March 31, 2005, the Company has not
borrowed against the Revolver.
19
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 Revolver borrowings during the term
of the Credit Agreement at rates between 0.375% and 0.5% dependent upon its
leverage ratio.
Under 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 March 31, 2005,
the Company was in compliance with its financial covenants under the Credit
Agreement.
Beginning March 31, 2005, outstanding borrowings of $50.0 million under the
Term Loan are required to be repaid quarterly through October 2009, based on an
annualized amortization rate starting at 15% in calendar year 2005 and
increasing 250 basis points per year during the remaining term of the Credit
Agreement. As of March 31, 2005, the Company has repaid $3.5 million of the
principal balance of this loan.
The Company incurred approximately $1.4 million of transaction fees in
connection with entering into the Credit Agreement, which have been deferred and
are being 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 March 31, 2005, unamortized fees of $0.5 million were included in Other
current assets, and $0.8 million were included in Other non-current assets on
the Condensed Consolidated Balance Sheets.
As required by the terms of the Credit Agreement, the Company entered into
an interest rate swap transaction effective January 31, 2005 (see Note 6).
In addition to the above U.S.-based credit facilities, the Company maintains
certain short-term foreign credit facilities, principally with two Japanese
banks totaling 150 million yen (approximately $1.4 million as of March 31,
2005). No amounts were outstanding under these facilities as of March 31, 2005.
The Company's Swiss subsidiary, LeCroy S.A., also has an overdraft facility
totaling 1.0 million Swiss francs (approximately $0.8 million as of March 31,
2005). As of March 31, 2005, there were no amounts outstanding under this
facility.
16. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999, 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) income, net in the Condensed Consolidated Statements 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
20
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 Statements of Operations.
17. COMMITMENTS AND CONTINGENCIES
On April 28, 2003, Tektronix, Inc. ("Tektronix") filed a complaint against
the Company in the United States District Court for the District of Oregon
claiming that the Company infringed on eight of Tektronix' U.S. patents. In the
Company's responsive pleading, the Company denied that it has infringed, or is
infringing, any of these patents, and contends that the patents are invalid. The
Company furthermore filed a counterclaim on August 5, 2003, claiming Tektronix
is infringing three of the Company's patents. On April 11, 2005, all claims
related to two of the Tektronix patents were voluntarily dismissed from the
Tektronix complaint and the Company's counterclaim. All claims related to one of
the Company's patents were also voluntarily dismissed from the Company's
counterclaim. On November 30, 2004, the Company filed a Motion for Summary
Judgment of Noninfringement concerning one of the six Tektronix patents. In
response, Tektronix filed a Cross-Motion for Summary Judgment of Infringement by
the Company concerning the same patent. By order dated May 4, 2005, the court
granted the Company's Motion for Summary Judgment of Noninfringement and denied
Tektronix' Cross-Motion for Summary Judgment of Infringement. On May 11, 2005,
Tektronix and the Company entered into an agreement settling all claims and
counterclaims between the parties in connection with their respective patents.
As part of the settlement agreement, the Company recorded $1.0 million in legal
expenses for the three months and nine months ended March 31, 2005.
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 other matters
pending 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 income (loss) per share computations for the three and
nine months ended March 31, 2005 and 2004:
21
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------- -----------------
2005 2004 2005 2004
---- ---- ---- ----
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
(IN THOUSANDS)
Numerator:
Net income............................................. $2,882 $2,359 $2,316 $5,343
Redemption of convertible preferred stock.............. -- -- -- 7,665
------ ------ ------ -------
Net income (loss) applicable to common stockholders.... $2,882 $2,359 $2,316 ($2,322)
====== ====== ====== =======
Denominator:
Weighted average shares outstanding:
Basic............................................. 11,847 10,721 11,702 10,545
Employee stock options and other.................. 825 550 560 --
------ ------ ------ -------
Diluted........................................... 12,672 11,271 12,262 10,545
====== ====== ====== =======
As defined in SFAS No. 128, "Earnings per Share," the computation of diluted
net income (loss) per common share for the three months ended March 31, 2005 and
2004 does not include approximately 0.6 million and 0.8 million, respectively,
and the nine months ended March 31, 2005 and 2004 does not include approximately
0.6 million and 2.7 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 quarter ended December 31, 2004, the Company issued additional
stock options and restricted stock in connection with the Merger. (See Note 3.)
19. INCOME TAXES
The effective income tax rate for the third quarter of fiscal 2005 was 0.4%
compared to a 37.0% tax rate for the third quarter of fiscal 2004. The lower
effective tax rate comprises an annualized effective tax rate of 35% which is
offset in the quarter ended March 31, 2005 by two discrete tax benefits
aggregating $950,000 associated with the reversal of a prior year valuation
allowance related to a favorable conclusion to a tax audit and a fiscal 2004
provision-to-return adjustment determined when the Company filed its fiscal 2004
tax returns.
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 during the
quarter ended December 31, 2004, 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
months ended December 31, 2004.
20. REVENUES BY GEOGRAPHIC AREA
The Company develops, manufactures, sells and licenses oscilloscopes,
protocol verification systems and other related test and measurement equipment.
The Company's 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. Revenues
are attributed to countries based on customer ship-to addresses. Revenues by
geographic area are as follows:
22
LECROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2005 2004 2005 2004
---- ---- ---- ----
(13 WEEKS) (13 WEEKS) (40 WEEKS) (39 WEEKS)
(IN THOUSANDS)
North America.......................................... $ 15,260 $ 9,644 $ 39,494 $ 28,575
Europe/Middle East..................................... 11,497 10,396 36,626 27,501
Japan.................................................. 5,101 5,667 15,925 12,381
Asia/Pacific........................................... 11,032 7,123 29,138 21,563
--------- -------- --------- ---------
Total................................................ $ 42,890 $ 32,830 $ 121,183 $ 90,020
========= ======== ========= =========
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 Company is
currently assessing the impact of the adoption of SFAS No. 151 on its results of
operations and financial condition.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29." The guidance in 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 Company is currently assessing the impact of the adoption of SFAS
No. 153 on its results of operations and financial condition.
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.
23
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. Through the quarter
ended March 31, 2005, we offered four families of oscilloscopes, which address
different solutions for the markets we serve: WaveMaster, one of our high
performance product families; 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 development and production and also for products
deployed in the field. On April 4, 2005, we launched a fifth family of
oscilloscopes, the WaveExpert, which is our highest performance oscilloscope,
targeted at design engineers requiring a high bandwidth, accurate, fast and
flexible sampling oscilloscope.
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. To a lesser extent, we
also generate revenue from the sales of our extended warranty and software
maintenance contracts and repairs and calibrations on our instruments after
their warranties expire. Revenue is recognized when products are shipped or
services are rendered to customers net of allowances for anticipated returns. We
defer revenues on shipments of our WaveSurfer product line to buy-sell
distributors until the units are sold by the distributors to their end
customers. We sell our products into a broad range of end markets, including the
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, such as BAE Systems, IBM,
Maxtor, Raytheon, Robert Bosch, Seagate, Samsung and Siemens VDO.
We employ a direct sales model utilizing 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. 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 WaveSurfer product line, which is being distributed
through a combination of a buy-sell distribution channel and our direct channel.
24
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.
Historically, we have, at times, experienced lower levels of demand during
our first fiscal quarter than in other fiscal quarters which, we believe, has
been principally due to the lower level of general market activity during the
summer months, particularly in Europe.
Cost of revenues represents manufacturing and service costs, which primarily
comprise materials, labor and factory overhead. Gross margins represent revenues
less cost of revenues. Additional factors integral to gross margins earned on
our products are mix, as the list prices of our products range from $4,000 to
$105,000, 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 identify market demands and develop
competitive products to meet those demands, the announcements and actions of our
competitors and our ability to enter into new markets and broaden our presence
in existing markets.
Our sales are largely dependent on the health and growth of technology
companies whose operations tend to be cyclical. Consequently, demand for our
products tends to coincide with the increase or decrease in capital spending in
the technology industry. For example, in the late 1990s through 2001, our
business expanded along with the prosperity of the technology markets. From
early 2001 to 2003, demand for our products decreased along with the contraction
of the technology industry overall. As a result, our revenues decreased 8% from
the end of fiscal year 2000 through fiscal year 2002. Beginning in fiscal year
2003 our revenues have significantly increased concurrently with the recovery of
the technology industry.
We believe our ongoing strategy of quickly identifying opportunities and
customer needs in fundamental technology markets and capitalizing on those
opportunities through well-planned, efficient and timely key product
introductions has also contributed to our recent increase in revenues. For
instance, in October 2003, in anticipation of renewed but tentative capital
spending in the technology industry, we introduced our WaveRunner 6000 family of
oscilloscopes, a unique software platform built upon a solid hardware platform
designed to take advantage of demand for mid-tier competitively priced, powerful
oscilloscopes. To date, sales of WaveRunner 6000 oscilloscopes have exceeded our
expectations.
In addition, in response to fluctuations in the technology markets we
target, 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 efficiently allocate
product development resources. For a more detailed discussion of our
restructuring efforts in fiscal 2003, see the Section entitled "Restructuring
and Asset Impairment," below. Moreover, in connection with the acquisition of
Computer Access Technology Corporation ("CATC"), we adopted a plan to
restructure our operations and streamline our product strategy. Further details
of this restructuring are described in the Section entitled "Acquisition,"
below.
25
We face significant competition in our target markets. We believe that in
order to continue to compete successfully, we need to timely anticipate,
recognize and respond to changing market demands by providing products that
serve our customers' needs as they arise at prices 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 development 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 CATC to
complement our expanding portfolio of serial data test solutions. The
acquisition of CATC is described more fully below.
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 our acquisition of CATC, we expect to
capitalize on the increasing demand for serial data test instruments, leverage
our global, technical, direct sales force to accelerate the growth of CATC's
products, strengthen our 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, we
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,
we 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. We paid cash of $80.4
million, net of cash acquired, using $30.4 million of cash on hand and
borrowings of $50.0 million under our $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"). 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 2,621
----------
Total purchase price $ 130,034
==========
26
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 was
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 excess
of the purchase price over the fair value of the net assets acquired was
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 purchase price
allocation, which could be subject to further changes resulting from incremental
direct acquisition costs, is summarized below:
(IN THOUSANDS)
Cash $ 46,466
Accounts receivable 2,296
Inventory 3,710
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 79,893
Current liabilities assumed (5,875)
Long-term liabilities assumed (652)
Deferred tax liability (2,058)
-----------
Total purchase price $ 130,034
===========
The following table presents the details of the amortizable intangible
assets acquired in the Merger and their carrying value as of March 31, 2005:
WEIGHTED ACCUMULATED
AVERAGE LIVES COST AMORTIZATION