LECROY CORP - 10-Q Quarterly Report

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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.

Indicate by check mark (“X”) whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


				December 31,		June 30,
In thousands, except par value and share data				2003		2003

				(Unaudited)
ASSETS
Current assets:
		Cash and cash equivalents		$	23,091	$	30,851
		Accounts receivable, net			18,521		20,523
		Inventories, net			23,098		24,720
		Other current assets			12,688		10,012

			Total current assets		77,398		86,106
Property and equipment, net					19,387		20,021
Other assets					13,693		16,025

TOTAL ASSETS				$	110,478	$	122,152

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
		Short-term debt and current portion of long-term debt		$	5,098	$	94
		Accounts payable			10,802		10,937
		Accrued expenses and other liabilities			12,742		12,244

			Total current liabilities		28,642		23,275
Deferred revenue and other non-current liabilities					2,106		3,028

			Total liabilities		30,748		26,303
Redeemable convertible preferred stock, $.01 par value (authorized 5,000,000 shares of preferred stock; 0 and 500,000 shares issued and outstanding designated as redeemable convertible preferred stock; liquidation value, $0 and $15,735 at December 31, 2003 and June 30, 2003, respectively)					—		15,335
Stockholders’ equity:
	Common stock, $.01 par value (authorized 45,000,000 shares; 10,548,465 and 10,412,562 shares issued and outstanding as of December 31, 2003 and June 30, 2003, respectively)				105		104
	Additional paid-in capital				74,933		79,864
	Warrants to purchase common stock				2,165		2,165
	Accumulated other comprehensive income (loss)				609		(1,598	)
	Retained earnings (deficit)				1,918		(21	)

Total stockholders’ equity					79,730		80,514

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY				$	110,478	$	122,152

The accompanying notes are an integral part of these condensed consolidated financial statements.


				Three months ended					Six months ended
				December 31,					December 31,

In thousands, except per share data				2003		2002			2003			2002

Revenues:
	Oscilloscopes and related products			$	27,019	$	24,382		$	51,624		$	46,855
	Service and other				2,752		2,255			5,566			4,773

		Total revenues			29,771		26,637			57,190			51,628
Cost of sales (see Note 4)					12,807		15,007			24,654			27,397

		Gross profit			16,964		11,630			32,536			24,231
Operating expenses:
	Selling, general and administrative (see Note 4)				10,219		9,363			20,092			20,053
	Research and development (see Note 4)				3,781		4,358			7,465			8,870

		Total operating expenses			14,000		13,721			27,557			28,923
Operating income (loss)					2,964		(2,091	)		4,979			(4,692	)
	Other income (expense), net				80		(47	)		(242	)		(151	)

Income (loss) before income taxes					3,044		(2,138	)		4,737			(4,843	)
	Provision for (benefit from) income taxes				1,126		(791	)		1,752			(1,792	)

Net income (loss)					1,918		(1,347	)		2,985			(3,051	)
Charges related to convertible preferred stock					—		517			—			1,032
Redemption of convertible preferred stock					—		—			7,665			—

Net income (loss) applicable to common stockholders				$	1,918	$	(1,864	)	$	(4,680	)	$	(4,083	)

Net income (loss) per common share applicable to common stockholders:
			Basic	$	0.18	$	(0.18	)	$	(0.45	)	$	(0.40	)
			Diluted	$	0.18	$	(0.18	)	$	(0.45	)	$	(0.40	)
Weighted average number of common shares:
			Basic		10,498		10,340			10,456			10,332
			Diluted		10,690		10,340			10,456			10,332

The accompanying notes are an integral part of these condensed consolidated financial statements.


		Six months ended
		December 31,

In thousands		2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	2,985		$	(3,051	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization		3,133			3,464
	Deferred income taxes		1,280			(1,871	)
	Recognition of deferred license revenue		(648	)		(648	)
	Impairment of intangible assets		—			2,030
	Loss on disposal of property and equipment		63			—
Change in operating assets and liabilities:
	Accounts receivable		2,901			3,327
	Inventories		2,502			4,556
	Other current and non-current assets		(1,819	)		398
	Accounts payable, accrued expenses and other liabilities		113			(4,744	)

Net cash provided by operating activities			10,510			3,461

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment		(1,727	)		(1,482	)
	Purchase of intangible assets		(150	)		(1,010	)

Net cash used in investing activities			(1,877	)		(2,492	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Repayment of borrowings		(5,047	)		(45	)
	Borrowings under line of credit		10,000			—
	Redemption of convertible preferred stock		(23,000	)		—
	Proceeds from employee stock purchase and option plans		1,509			245
	Repayment of seller-financed acquisition of intangible assets		(250	)		—

Net cash (used in) provided by in financing activities			(16,788	)		200

Effect of exchange rate changes on cash			395			(618	)

	Net (decrease) increase in cash and cash equivalents		(7,760	)		551
	Cash and cash equivalents at beginning of the period		30,851			27,322

	Cash and cash equivalents at end of the period	$	23,091		$	27,873

Supplemental Cash Flow Disclosure
Cash paid during the period for:
	Interest	$	64		$	55
	Income taxes		110			217

The accompanying notes are an integral part of these condensed consolidated financial statements.

LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The accompanying interim condensed consolidated financial statements include all the accounts of LeCroy Corporation (the “Company” or “LeCroy”) and its wholly-owned subsidiaries. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003. The condensed consolidated balance sheet as of December 31, 2003 has been derived from these audited consolidated financial statements. Certain reclassifications have been made to prior-year amounts to conform to the current-year presentation. All material inter-company transactions and balances have been eliminated.

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions. 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. Examples include the allowance for doubtful accounts, allowance for excess and obsolete inventory, intangible asset valuation, determining if and when impairments have occurred, and the assessment of the valuation of deferred income taxes and income tax reserves. These estimates and assumptions are based on management’s judgment and available information and, consequently, actual results could differ from these estimates.

These unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of the financial position and the results of operations for the interim periods. Interim period operating results may not be indicative of the operating results for a full year. The operations of the U.S. parent company, LeCroy Corporation, have a period ending on the Saturday closest to December 31 (December 27, 2003 and December 28, 2002). Each of these fiscal periods represented a 13-week period. The condensed consolidated financial statement period-end references are stated as December 31.

The Company accounts for stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations. No stock-based employee and director compensation cost for the stock option plans is reflected in the Company’s Condensed Consolidated Statements of Operations, as all options granted under those plans had 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 the market value on the date of grant. The fair value of restricted stock is charged to Stockholders’ Equity and amortized to expense over the requisite vesting periods.

The following table illustrates the effect on net income (loss) and net income (loss) per common share applicable to common stockholders as if the Company had applied the fair value recognition provisions for stock-based employee compensation of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.”

LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)


		Three months ended						Six months ended
		December 31,						December 31,

		2003			2002			2003			2002

		In thousands
Net income (loss), as reported		$	1,918		$	(1,347	)	$	2,985		$	(3,051	)
Add: stock-based compensation expense included in reported net income (loss), net of income taxes			4			6			9			11
Deduct: stock-based compensation expense determined under fair value based method for all awards, net of income taxes			(1,166	)		(945	)		(1,858	)		(1,792	)

Pro forma net income (loss)			756			(2,286	)		1,136			(4,832	)
Charges related to convertible preferred stock			—			517			7,665			1,032

Pro forma net income (loss) applicable to common stockholders		$	756		$	(2,803	)	$	(6,529	)	$	(5,864	)

Net income (loss) per common share applicable to common stockholders:
	Basic, as reported	$	0.18		$	(0.18	)	$	(0.45	)	$	(0.40	)
	Diluted, as reported	$	0.18		$	(0.18	)	$	(0.45	)	$	(0.40	)
	Basic, pro forma	$	0.07		$	(0.27	)	$	(0.62	)	$	(0.57	)
	Diluted, pro forma	$	0.07		$	(0.27	)	$	(0.62	)	$	(0.57	)

Revenue is recognized when products are shipped or services are rendered to customers, net of allowances for anticipated returns. The Company’s revenue-earning activities generally involve delivering or producing goods, and revenues are considered to be earned when the Company has completed the process by which it is entitled to such revenues. The following criteria are used for revenue recognition; pervasive evidence of an arrangement exists, delivery has occurred, selling price is fixed or determinable and collection is reasonably assured. Revenues from service contracts are recognized ratably over the contract period. A deferral is recorded for post-contract support and any other further deliverables included within the sales contract agreement. This deferral is earned and accordingly, recognized as contract elements are completed.

In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements,” which summarizes certain of the SEC Staff’s views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. Under SAB 101, which the Company adopted in fiscal 2001, certain previously recognized license fee revenue was deferred and recognized in future periods over the terms of the agreements. The adoption of SAB 101 was recorded as of the beginning of fiscal 2001 and resulted in a non-cash charge for the cumulative effect of an accounting change of $4.4 million, net of a tax benefit of $2.7 million. The deferred revenue is being amortized into revenue over 5.5 years, the remaining terms of the license agreements. The Company recognized pre-tax deferred license fee revenue of $0.3 million and $0.6 million during the three and six months ended December 31, 2003 and 2002, respectively. Such license fees were included in Service and other revenue in the Condensed Consolidated Statements of Operations. As of December 31, 2003, the remaining balance of pre-tax deferred license fee revenue was $2.6 million, $1.3 million of which was included in Accrued expenses and other liabilities and the remaining $1.3 million of which was included in Deferred revenue and other non-current liabilities on the Condensed Consolidated Balance Sheet.

The Company recognizes software license revenue in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position 98-9, “Modifications of SOP 97-2 with Respect to Certain Transactions” (“SOP 98-9”). Revenues from perpetual software license agreements are recognized upon shipment of the software if evidence of an arrangement exists, pricing is fixed and determinable, and collectibility is probable. If an acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company allocates revenue on software arrangements involving multiple elements to each element based on the relative fair values of the elements. The determination of fair value of each element in multiple element-arrangements is based on vendor specific objective evidence (“VSOE”). The Company analyzes all of the elements and determines if there is sufficient VSOE to allocate revenue to maintenance included in multiple element-arrangements. Accordingly, assuming all other revenue recognition criteria are met, revenue is recognized upon delivery using the residual method in accordance with SOP 98-9, where the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. The revenue allocated to licenses generally is recognized upon delivery of the products. The revenue allocated to maintenance is generally recognized ratably over the term of the support agreement. The Company did not recognize any software license revenue during the three and six months ended December 31, 2003 and 2002, respectively.

LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)

During the fourth quarter of fiscal 2003, the Company adopted a plan to consolidate its probe development activities into its Chestnut Ridge, New York facility. In connection with this plan, the Company closed its Beaverton, Oregon facility and recorded lease termination costs of $0.3 million and a charge for severance of $0.6 million ($0.1 million of which was recorded in Cost of sales, $0.6 million was recorded in Selling, general and administrative expense and $0.2 million was recorded in Research and development expense). As of December 31, 2003, $0.7 million of the total $0.9 million has been paid and $0.2 million remains in Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet. Lease termination costs under this plan will be paid by the end of the third quarter of fiscal 2006 and severance will be paid by the end of the fourth quarter of fiscal 2004.

During the second quarter of fiscal 2003, the Company recorded a $2.1 million charge for the impairment of technology, manufacturing and distribution rights and a $0.2 million charge for a related future royalty payment, both of which are recorded in Cost of sales. The impairment resulted from the Company’s strategic decision to exit certain older product lines and to make significant changes to its manufacturing strategy to further improve operating efficiency.

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 $2.7 million ($0.1 million of which was recorded in Cost of sales, $2.1 million was recorded in Selling, general and administrative expense and $0.5 million was recorded in Research and development expense in the Condensed Consolidated Statement of Operations). As of December 31, 2003, $2.2 million of the total $2.7 million has been paid and $0.5 million remains in Accrued expenses and other liabilities in the Condensed Consolidated Balance Sheet. Severance and other related amounts under this plan will be paid by the end of first quarter of fiscal 2005.

The Company took steps during fiscal 2002 to reduce its expenses in response to the continued weakness in the technology sector of the economy. In connection with these workforce reductions, the Company recorded a $4.2 million charge ($1.0 million recorded in Cost of sales, $3.0 million in Selling, general and administrative expense and $0.2 million in Research and development expense) for severance and related expenses, including costs associated with the succession of the Company’s Chief Executive Officer during the second quarter of fiscal 2002. Of the $4.2 million total charge, $4.0 million was initially credited to Accrued expenses and other liabilities and $0.2 million, representing a non-cash expense for the amendment of employee stock options, was credited to Additional paid-in capital. Cumulative through December 31, 2003, $3.9 million of the total $4.0 million has been paid and $0.1 million of unused restructuring reserve was credited to Selling, general and administrative expense in the fourth quarter of fiscal 2003. As of December 31, 2003, the 2002 restructuring plan was completed.

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, which are not accounted for as hedges, are recorded on the Condensed Consolidated Balance Sheet at fair value. The changes in fair value of these contracts are highly inversely correlated to changes in the value of certain of the Company’s foreign denominated assets and liabilities. The net gains or (losses) resulting from changes in the fair value of these derivatives and on transactions denominated in other than their functional currencies were $0.1 million for the three and six months ended December 31, 2003 and ($0.2) and ($0.4) million for the three and six months ended December 31, 2002, respectively, and are included in Other income (expense), net in the Condensed Consolidated Statements of Operations. At December 31, 2003 and June 30, 2003, the notional amounts of the Company’s open foreign exchange forward contracts, all with maturities of less than six months, were approximately $7.4 million and $6.7 million, respectively.

LeCROY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(UNAUDITED)


DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		13-2507777 (I.R.S. Employer Identification No.)

700 CHESTNUT RIDGE ROAD CHESTNUT RIDGE, NEW YORK (Address of Principal Executive Office)		10977 (Zip Code)


CLASS	OUTSTANDING AT JANUARY 26, 2004

Common stock, par value $.01 share		10,680,311


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
EXHIBIT INDEX
Ex-10.49 Professional Services Agreement
EX-31.1 302 Certification (CEO)
EX-31.2 302 Certification (CFO)
EX-32.1 906 Certification (CEO)
EX-32.2 906 Certification (CFO)


		Page No.

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of December 31, 2003 (Unaudited) and June 30, 2003		3
	Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months ended December 31, 2003 and 2002		4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months ended December 31, 2003 and 2002		5
	Notes to Condensed Consolidated Financial Statements (Unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		31
Item 4.	Submission of Matters to a Vote of Security Holders		32
Item 6.	Exhibits and Reports on Form 8-K		32
Signature			33

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