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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26634
LeCROY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2507777
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
700 CHESTNUT RIDGE ROAD
CHESTNUT RIDGE, NEW YORK 10977
(Address of principal executive office) (Zip Code)
(845) 425-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES X NO
------- -------
The number of shares outstanding of the registrant's Common Stock, as of
August 18, 2004, was 11,977,004 shares. The aggregate market value of shares of
Common Stock held by non-affiliates as of the last business day of the
registrant's most recently completed second fiscal quarter was $154,797,533.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the 2004 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
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1
LeCROY CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2004
TABLE OF CONTENTS
FORM 10-K ITEM NUMBER: Page No.
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PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 13
Item 3. Legal Proceedings.......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 14
Item 6. Selected Consolidated Financial Data....................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.................................. 37
Item 8. Financial Statements and Supplementary Data................................................ 38
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....... 66
Item 9A. Controls and Procedures.................................................................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 67
Item 11. Executive Compensation..................................................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 67
Item 13. Certain Relationships and Related Transactions............................................. 68
Item 14. Principal Accounting Fees and Services..................................................... 68
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 69
Signatures................................................................................. 73
LeCroy(R), WaveMaster(R), WavePro(R), WaveRunner(R) and WaveSurfer(TM) are
our trademarks. All other trademarks, servicemarks or tradenames referred to in
this Annual Report on Form 10-K are the property of their respective owners.
2
PART I
ITEM 1. BUSINESS.
OUR COMPANY
LeCroy Corporation (the "Company," "LeCroy," "us," "we" or "our") was
founded in 1964 and is incorporated in the State of Delaware. Our principal
executive offices and manufacturing facilities are located at 700 Chestnut Ridge
Road, Chestnut Ridge, New York 10977 and our telephone number is (845) 425-2000.
Our website is located at www.lecroy.com. We sell our products and provide
service worldwide through wholly-owned subsidiaries and representatives.
We are a leading, worldwide provider of oscilloscopes as well as a provider
of related test and measurement equipment and currently operate as one business
segment in the Test and Measurement market. Our oscilloscopes are tools used by
designers and engineers to measure and analyze complex electronic signals in
order to develop high-performance systems, to validate electronic designs and to
improve time to market. We currently offer four families of oscilloscopes, which
address different solutions to the markets we serve: WaveMaster, our highest
performance product family; WavePro, which is targeted at the mid- to
high-performance sector; WaveRunner, designed for the mid-performance sector;
and WaveSurfer, designed for the lower-end of the performance sector of the
market.
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 that our products offer the strongest
value proposition in these markets by providing advanced analysis capabilities
coupled with innovative and proprietary technology features. We believe
designers in all of these markets are developing products which rely on
increasingly complex electronic signals to provide the features and performance
their customers require. Our customers include leading original equipment
manufacturers, or OEMs, such as BAE Systems, IBM, Maxtor, Raytheon, Robert
Bosch, Seagate, Samsung and Siemens VDO.
MARKET OVERVIEW
TEST AND MEASUREMENT MARKET
Test and measurement equipment is used in the design, development,
manufacture, deployment and operation of electronic products and systems. This
equipment is required to verify functionality and performance of new product
designs and to ensure compliance to industry standards and overall product
quality. These instruments are used across all electronic equipment industries,
including computer, semiconductor, communications, consumer, automotive,
defense, and video. In addition, test and measurement instruments are utilized
to install, maintain and monitor wireless and wireline communications and
broadcast networks. Test and measurement equipment aid in the research and
development of new products, testing of products in production, and maintenance
and service of products in the field.
According to Prime Data, Inc., an independent market research firm tracking
the Test and Measurement industry, the market for this equipment exceeded $5.5
billion in 2003. Certain segments of the Test and Measurement industry have
historically experienced greater volatility than the overall industry because of
their exposure to certain end markets, such as communications, that experienced
rapid growth in the late 1990s, followed by rapid declines.
Growth in the Test and Measurement market is driven by improvements in
electronic systems performance, growth in the electronics market and emerging
technologies and standards. Designers in a wide variety of industries are being
constantly driven to increase the performance of their products and to add new
features and capabilities. These improvements rely upon advanced semiconductor
technology and require the design of faster, more powerful and complex
electronic systems. As a result, the underlying technological advances in
communications and electronic signals are increasing exponentially in complexity
and speed. This is driving the demand for analysis tools that allow designers
and manufacturers of these devices to improve new product cycle time. With each
advancement in technology, engineers designing next generation technologies and
products must contend with both a reduced margin for error and a progressively
more difficult task of fully characterizing new product design.
3
While the overall market for test and measurement equipment is made up of
hundreds of different types of instruments and measurement tools, the largest
single product category is oscilloscopes. Prime Data estimates that
oscilloscopes represented approximately $840 million of the overall $5.5 billion
market in 2003.
OSCILLOSCOPE MARKET
Oscilloscopes are the primary instrument utilized by engineers for testing
and analyzing electronic signals. According to Prime Data, the oscilloscope
market is expected to reach $934 million in 2004. Historically, the oscilloscope
segment of the Test and Measurement industry has experienced less volatility
than the industry as a whole because of its widespread use across many
applications and end markets. Thorough testing of complex electronic signals
requires a measurement tool capable of physically attaching to the signal of
interest, capturing data with high resolution for long periods of time and
supporting detailed signal analysis while providing additional insight into data
characteristics and signal trends over time. The entire system must also
maintain the correct shape of the signal, a concept called signal integrity. An
oscilloscope utilizes a graphical display device that allows an engineer to view
an electronic signal. The most basic display of an oscilloscope plots a signal's
voltage versus time (typically in billionths and trillionths of a second),
providing a user insight into the performance of an electronic circuit. In many
cases, a user is trying to either verify that the circuit is behaving as
designed or measure the signal to gain a basic understanding of signal
performance.
Today's oscilloscopes are digital devices which capture electronic signals
and convert the voltage values to digital representations, which are stored in
computer memory, allowing the instrument not only to display the signal on a
screen, but also to analyze the signal's characteristics. The ability of an
oscilloscope to conduct in-depth analysis of a complex electronic signal's
characteristics and trends is referred to as wave shape analysis, which is
increasingly important as signals become more complex.
The three primary specifications of an oscilloscope are its bandwidth, or
capacity to capture a signal of a particular speed; sample rate, or number of
data points that can be captured within a specific time; and memory length, or
the number of points per channel. Higher bandwidths allow capture of higher
speed signals, increased sample rate improves resolution, and longer memory
allows capture of longer, more complex signals. The merit of a specific
oscilloscope depends on the combination of these specifications. Oscilloscopes
with bandwidths ranging from 20 MHz up to 8.0 GHz are currently available.
Generally, the prices of oscilloscopes increase as the primary specifications
increase. We believe the oscilloscope market can be generally divided into four
major categories:
o High-end oscilloscopes. The largest part of the market, which we believe
currently accounts for slightly more than half of the market based on
revenues generated, is comprised of instruments with the ability to
capture and analyze signals above 300 MHz up to the highest available
real-time bandwidths. These instruments generally sell from $4,000 up to
$100,000, depending on their capabilities.
o Lower-end oscilloscopes. We believe about one-third of the market's
revenue comes from products which generally sell for below $5,000, and
include less-complex instruments with the ability to capture and analyze
signals from 20 MHz to 300 MHz.
o Handheld oscilloscopes. The lowest end of the market includes a variety
of handheld oscilloscopes which we believe currently comprises less than
10% of the overall market. Selling prices for these handheld instruments
are generally between $1,000 and $3,000.
o Sampling oscilloscopes. For certain high signal speed applications, such
as optical communications, instruments with bandwidths of up to 50 GHz
or more are required. At these speeds, real-time oscilloscopes do not
have the ability to track the signal shape in real-time and take samples
quickly enough to be effective. We believe this category currently
comprises less than 10% of the overall market, but because of their
ability to provide extremely high bandwidths, sampling oscilloscopes can
range in price generally from $50,000 to $100,000.
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OUR COMPETITIVE STRENGTHS
We are a leading, worldwide provider of oscilloscopes as well as a provider
of related test and measurement equipment used by electronic designers and
engineers to measure and analyze complex electronic signals. Our key competitive
strengths include:
Technology leadership. We are a recognized technology leader in the Test and
Measurement industry and continue to leverage our core strengths to develop new
and innovative products for the changing requirements of the markets we serve.
Most recently, we have focused on incorporating our internally developed
operating system and our advanced methodology for enabling high-speed signal
acquisition into our entire product line. We believe this has allowed us to
transform general purpose oscilloscopes into application-specific analysis
tools, providing a competitive advantage to our products. These, and our other
core technologies, are currently protected by 37 U.S. patents, with 42 other
U.S. patents pending.
Broad product portfolio. Our WaveMaster, WavePro, WaveRunner and WaveSurfer
oscilloscopes encompass 23 different models, which are designed to analyze
electronic signals ranging from 200 MHz to 6 GHz. We believe our breadth of
product offerings, coupled with our ability to create application-specific
analysis tools, address the specific needs of design engineers in many
industries.
Leading customer relationships. Our major customers are leaders in a range
of industries, including computers and semiconductors, data storage devices,
automotive and industrial, and military and aerospace. Our ability to work with
innovative, industry-leading customers allows us to continuously refine our
products to better address the needs of the latest technologies.
Global sales and distribution. We have a global sales force and distribution
structure covering North America, Europe/Middle East and Asia/Pacific. Each of
these regions is a major contributor to our revenue and provided between
approximately 30% and 40% of our revenues in the last three fiscal years. We
currently have direct sales personnel in 12 countries and operate in 53 smaller
markets through regional managers, distributors and sales representatives. We
believe that our sales force is recognized by our customers for their technical
expertise and often work in tandem with design engineers to create solutions to
complex applications.
Experienced management team. Our management team has a long and successful
track record in the Test and Measurement industry with an average of 15 years of
experience in the industry. Our management team has overseen the introduction of
eight new products over the past two years and has restructured our operations,
enhancing our focus on our core markets while developing our ongoing business
strategy, which encourages product innovation.
OUR STRATEGY
In order to enhance our position as a leading provider of oscilloscopes, our
objective is to grow our company and our market share in the markets in which we
operate. Currently, we serve the market for oscilloscopes that analyze complex
signals ranging from 200 MHz to 6 GHz. We believe that our products offer the
strongest value proposition in these markets by providing advanced analysis
performance at a highly competitive price. We intend to leverage our technical
expertise to target additional customers for our core WaveMaster, WavePro,
WaveRunner and WaveSurfer products. In addition, we intend to pursue the
following business strategies to expand our business:
Expand our addressable portion of the oscilloscope market. We have
development efforts underway and expect to introduce new products over the next
year to address customer needs for oscilloscope solutions in market sectors such
as sampling oscilloscopes and lower bandwidth oscilloscopes. We believe that the
advanced hardware and software technologies incorporated into our core products
can be adapted to address additional sectors of the large and diverse
oscilloscope market where we have not historically focused. By constantly
working to broaden our product portfolio to address additional sectors of this
market, we believe we will be able to offer a more comprehensive suite of
products to a larger customer base, while maintaining the technology
differentiation that we have already developed in our core markets.
5
Create solutions for specific applications. We have developed differentiated
solutions that address our end users' specific requirements through our advanced
analysis programs. These programs, which are based on our proprietary software
architecture and operating system, support our suite of analysis tools. For
example, we provide specialized solutions that address the complex signal
analysis requirements specific to the disk drive industry and others that
address the analysis of specialized serial data signals of many widely-used
protocols for computers, network servers and communications equipment. We also
have application specific solutions for engineers who design and test power
supplies and controller area network bus, or CAN bus, (automotive) electronics.
Engineers can easily customize our oscilloscopes with these analyzers and we
intend to develop and offer additional analyzers.
Leverage our technology to offer additional products for use in the Test and
Measurement market. We believe that we can leverage our core strengths in signal
acquisition in connection with our internally designed hardware and proprietary
software platforms to address additional areas within the Test and Measurement
market. While we have not yet commenced development in these areas, we intend to
use our in-house design and analysis capabilities as well as potential
acquisitions to develop additional products.
PRODUCTS AND SERVICES
OVERVIEW
We currently offer four major oscilloscope families: WaveMaster, WavePro,
WaveRunner and WaveSurfer. Each oscilloscope model is capable of capturing and
analyzing electronic signals at different bandwidth and performance points in
the market. Each oscilloscope family is also offered with a selection of general
software packages that expand its capabilities and allow customization of the
operation and measurements of the specific product. The key features of our
oscilloscope families are as follows:
NUMBER
PRODUCT OF BANDWIDTH MAXIMUM SAMPLING RATE U.S. LIST MARKET
FAMILY MODELS RANGE AND MEMORY LENGTH PRICE RANGE INTRODUCTION
- ------------- ------ --------- --------------------- ----------- ------------
WaveMaster 7 3 - 6 GHz 20 billion samples per second; $42,490 - $93,740 January 2002
8000 Series...... 100 million points
WavePro 4 1 - 3 GHz 20 billion samples per second; $18,500 - $39,500 January 2003
7000 Series...... 48 million points
WaveRunner 5 350 MHz - 2 GHz 10 billion samples per second; $8,990 - $25,990 October 2003
6000 Series...... 24 million points
WaveSurfer 6 200 - 500 MHz 2 billion samples per second; $4,190 - $8,490 April 2004
400 Series....... 2 million points
ANALYZERS AND APPLICATION SOFTWARE
Our general-purpose oscilloscope products are tailored with proprietary
software and hardware to create application specific analyzers which function as
industry-specific oscilloscopes for use in:
o Data storage applications -- Disk Drive Analyzer products, DDA5000
series and DDA3000 series, using WaveMaster and WavePro platforms;
o Serial data applications -- Serial Data Analyzer products, SDA3000
series, SDA5000 series and the SDA6000 series, based on the WaveMaster
platform;
o Automotive applications -- Hardware and software applications based on
the WaveRunner platform for use in understanding serial communications
in automobiles and industrial systems; and
o Power measurement applications -- Software applications based on the
WaveRunner platform for use in a variety of industries.
We also offer other application software packages to enhance the performance
of our oscilloscopes in the areas of optical recording, pulse mask testing, disk
drive head testing, ethernet, universal serial bus signal testing and jitter
analysis that range in price from $1,000 to $9,000.
6
OTHER PRODUCTS AND SERVICES
We offer our customers a variety of complementary probes and accessory
products. Probes provide the critical physical electrical or optical connection
from the customer's circuit to the oscilloscope. We believe our WaveLink high
frequency differential probes provide the high bandwidth performance necessary
to measure serial data signals in the expanding serial data communications
market. We also offer digitizing modules from 150 MHz to 1 GHz bandwidths.
We also provide aftermarket support, repair, maintenance recalibration and a
variety of post sale upgrades and installations. We maintain major field service
centers in Chestnut Ridge, New York; Geneva, Switzerland; Tokyo, Japan; Seoul,
South Korea; and Beijing, China.
OUR CUSTOMERS AND END MARKETS
Our products are used primarily by electronic designers and engineers
principally in the research and development of new products. These end users
typically employ our oscilloscopes to validate the performance of electronic
components. We currently provide products to customers in four primary end
markets:
COMPUTER AND
SEMICONDUCTOR DATA STORAGE DEVICES AUTOMOTIVE AND INDUSTRIAL MILITARY AND AEROSPACE
------------------ ---------------------------- ------------------------- ----------------------
IBM Hitachi BMW BAE Systems
Intel Matsushita Electric Industry Continental Teves EADS
LG Electronics Maxtor Denso Lockheed Martin
Samsung Seagate Robert Bosch Raytheon
ST Microelectronics Toshiba Siemens VDO THALES
Computer and semiconductor. These markets include companies providing
components, interfaces, subsystems and complete products for high speed and
general purpose computing, network servers, and related devices and systems.
Requirements in this end market have been driven by:
o growth in the capability and complexity of devices, which now provide a
higher level of integration and functionality;
o a dramatic increase in the use of high speed serial data communications
interfaces in both the computer and semiconductor market;
o new interface standards, which enable increased interoperability and
higher levels of bandwidth between devices and peripherals, including:
PCI Express -- a high speed serial data interface for connection to high
performance subsystems, such as a graphics card, inside a computer;
Serial ATA -- a high speed serial data interface for computer disk
drives; USB 2.0 -- the latest version of the Universal Serial Bus
standard, a high speed computer peripheral expansion interface; XAUI --
a 10 Gigabit Ethernet standard that improves the routing of electrical
interconnections; and Firewire -- a high-speed serial interface for
computer peripheral expansion; and
o system-on-a-chip verification.
Data storage devices. This market includes companies that provide magnetic
and optical storage devices such as hard disk drives, removable media, tape, CDs
and DVDs. Requirements in this end market are being driven by:
o continued pressure to reduce product development life cycle time;
o increasing need to store more information on storage media, which
requires the encoding of signals to achieve higher density;
o migration of hard disk drives to portable media applications and
consumer devices, such as MP3 players and digital video recorders;
7
o evolution to perpendicular magnetic recording for higher capacity
storage; and
o adoption of faster point-to-point connections through the use of the
Serial Advanced Technology Attachment, or Serial ATA, interface
standard.
Automotive and industrial. The automotive market includes automobile OEMs,
component suppliers to automobile OEMs and industrial equipment manufacturers.
Requirements in this end market are being driven by:
o proliferation of Electronic Control Units, or ECUs, to various
automotive subsystems, such as engine control, braking, and traction
control;
o progression to networked ECUs;
o serial data topologies managing complex inbound and outbound signals;
and
o evolution to 42 V power systems to provide adequate power with lower
current.
Military and aerospace. The military and aerospace market includes companies
that provide components and systems for defense and commercial airplane
applications. Requirements in this end market are being driven by:
o applications that use complex communications signals in challenging
environments;
o extraordinarily high need for precision and reliability given the
consequences of failure; and
o need for long-term support due to long military program life.
SALES, MARKETING AND DISTRIBUTION
We maintain a direct sales force of highly trained, technically
sophisticated sales engineers who are knowledgeable in the use of oscilloscopes
and the features and advantages of our products. In addition, because of our
focus on high-performance oscilloscopes, our sales engineers are skilled in
performing product demonstrations for current and prospective customers. We
believe we have a competitive advantage in sales situations in which our sales
engineers have the opportunity to demonstrate the advantages of our
oscilloscopes. Accordingly, such demonstrations are an integral part of our
sales strategy and we deploy significant instruments to support this strategy.
We sell our oscilloscopes through our own direct sales force in the United
States, Europe, Japan, China, South Korea and Singapore, with regional sales
headquarters located in Chestnut Ridge, New York; Geneva, Switzerland; and
Tokyo, Japan. As of June 30, 2004, our direct sales force consisted of 80 sales
engineers, directed by 16 regional managers worldwide. Our direct sales force
generates the significant majority of our business. In territories where the
sales potential does not currently justify the maintenance of a direct sales
force, we use manufacturers' representatives and distributors in support of our
direct selling efforts. In addition, in Japan we maintain a strategic alliance
with Iwatsu, a communications and test and measurement company, that sells and
distributes some of our products under the "Iwatsu/LeCroy" and "Iwatsu" labels.
Finally, our new WaveSurfer line of lower-priced oscilloscopes is sold in all
regions through our direct sales force and a complementary network of buy-sell
distributors.
We support our customers through a worldwide network of specialized
applications engineers. We maintain service, repair and calibration facilities
in Chestnut Ridge, New York; Geneva, Switzerland; Seoul, South Korea; Tokyo,
Japan; and Beijing, China.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, conduct marketing programs and
seminars, issue press releases regarding new products, publish technical
articles and participate in industry trade shows and conferences.
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TECHNOLOGY AND PRODUCT DEVELOPMENT
We believe we are a technology leader in the oscilloscope market. We have
developed core capabilities in the design of high-performance, high-speed signal
conditioning, sampling and analog-to-digital conversion circuitry. We believe we
are also a leader in the design of technologies related to the storage, movement
and processing of the large amounts of data produced in an oscilloscope. We have
also developed an advanced source code technology underlying our oscilloscope
operating system called MAUI as well as proprietary analysis software.
As of June 30, 2004, we employed 75 people in technology and product
development. Our efforts are focused on hardware, software and mechanical
development initiatives. Our hardware product development team is focused on
developing innovative signal conditioning, data acquisition and electrical
circuit probing technologies that allow better waveform fidelity and circuit
connection capabilities. This is accomplished through the use of advanced
integrated circuit techniques and processes, innovative design tools and
methodologies and key technology partnerships.
Our software engineering group continues to develop and advance our wave
shape analysis and measurement technologies in order to offer new and innovative
analysis tools for our customers. This group also develops application solutions
to perform specific analysis for data storage, power measurement, communications
and other markets.
From time to time, we enter into technology partnerships in order to gain
access to innovative technologies to enhance our products' capabilities and
features. During fiscal 2002, we introduced our first product incorporating
innovative signal conditioning and sampling technologies fabricated on a then
current-generation extremely high-speed silicon germanium process developed by
International Business Machines Corporation, or IBM. This technology is now
fully deployed throughout our product line.
In June 2002, we entered into a technology development agreement with IBM in
order to gain access to IBM's next-generation silicon germanium technology,
although the fabrication process was unproven at the time. This development
agreement allowed us to begin the design process of next-generation silicon
germanium prototype components, which are expected to deliver higher density,
greater speed and reduced power consumption as compared to those currently
available. Under this agreement with IBM we incurred a $4.0 million charge for
access to IBM's next-generation silicon germanium technology in the fourth
quarter of fiscal 2002. At the time of the agreement, we and IBM were in the
development stage of this technology and there was no guarantee that the
technology would function as developed or that it would be viable in production.
We have yet to introduce products utilizing this technology.
We have also entered into technology partnerships that have provided us
access to technologies that enable extremely high-speed, high-fidelity signal
capture capabilities and very high throughput data movement capabilities. We
intend to continue to develop and leverage such key partnerships in areas that
complement or enhance our own internal strengths.
MANUFACTURING AND SUPPLIERS
We have consolidated and streamlined our manufacturing and operational
activity to focus on our core expertise of oscilloscope product introduction and
development. Our WaveMaster and WavePro oscilloscopes and related products are
manufactured at our facility in Chestnut Ridge, New York. As of June 30, 2004 we
employed 54 manufacturing employees at our Chestnut Ridge facility, which
occupies an area of approximately 35,000 square feet devoted to such tasks. Our
focus on supply chain execution has allowed us to improve the cycle time
required to build our instruments as well as reduce the time required to test
and deliver products to our customers. For example, we have partnered with
manufacturing companies in the U.S. and Asia that have allowed us to design and
develop innovative products at reduced costs. This has allowed us to lower the
overall costs of our products to our customers while improving our overall
margin efficiency. Our WaveRunner 2 and WaveSurfer products are manufactured by
our strategic partner, Iwatsu, and our WaveRunner 6000 products are manufactured
by a contract manufacturer, Plexus Corporation.
9
We purchase a small number of parts from single-source suppliers. In
particular, several key integrated circuits that we use are made by IBM.
Although we have not experienced significant production delays attributable to
supply changes, we believe that, for integrated circuits in particular,
alternative sources of supply would be difficult to develop over a short period
of time. Because we have no direct control over our third-party suppliers,
interruptions or delays in the products and services provided by these third
parties may be difficult to remedy in a timely fashion. In addition, if such
suppliers are unable or unwilling to deliver the necessary parts or products, we
may be unable to redesign or adapt our technology to work without such parts or
find alternative suppliers or manufacturers. In such events, we could experience
interruptions, delays, increased costs or quality control problems.
COMPETITION
The oscilloscope market is highly competitive and characterized by rapid and
continual advances in technology. Our principal competitors in this market are
Tektronix, Inc. and Agilent Technologies, Inc. Both of our principal competitors
have substantially greater sales and marketing, development and financial
resources than we do. We believe that Tektronix, Agilent and other competitors
offer a range of products that attempt to address most sectors of the
oscilloscope market.
We believe that the principal bases of competition in the oscilloscope
market are a product's performance characterized by the confluence of bandwidth,
sample rate, memory length and processing power, its price and quality, the
vendor's name recognition and reputation, product availability and the quality
of post-sale support. We also believe that our success will depend in part on
our ability to maintain and develop the advanced technology used in our
oscilloscope products and our ability to offer high-performance products at a
favorable "price-to-performance" ratio. We believe that we currently compete
effectively with respect to each of the principal bases of competition in the
oscilloscope market in the general price range ($4,100 to $93,700) in which our
oscilloscopes are focused.
BACKLOG
Our backlog of unshipped customer orders was approximately $10.8 million and
$8.6 million as of June 30, 2004 and 2003, respectively. Backlog at June 30,
2004 and 2003 excludes $2.0 million and $3.3 million, respectively, of deferred
revenue established in connection with the adoption of the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue
Recognition in Financial Statements," in fiscal 2001. Customers may cancel
orders at any time. We believe that our level of backlog at any particular time
is not necessarily indicative of our future operating performance.
PATENTS, TRADEMARKS AND LICENSES
We currently rely on a combination of patents, trademarks and trade secret
laws, non-disclosure agreements and other intellectual property protection
methods, as well as technical expertise and continuing technological research
and development to establish and protect proprietary rights in our products. We
believe, however, that because of the rapid pace of change and advancement in
oscilloscope technology, legal intellectual property protection is and will
continue to be a less significant factor in our success than our core competency
of wave shape analysis and the experience and expertise of our personnel.
We protect significant technologies, products and processes that we consider
important to our business by, among other things, filing applications for patent
protection. Although none of our products depend exclusively on any single
patent, we believe our patents, in the aggregate, are important to our business
and contribute to our competitive advantage. We hold 19 U.S. patents (three of
which expire in 2006, one of which expires in 2009, one of which expires in
2010, three of which expire in 2011, one of which expires in 2013, one of which
expires in 2015, one of which expires in 2016, two of which expire in 2018, one
of which expires in 2019, three of which expire in 2020, one of which expires in
2021 and one of which expires in 2022) and eight foreign patents (one of which
expires in 2009, one of which expires in 2012, two of which expire in 2013, two
of which expire in 2014, one of which expires in 2016 and one of which expires
in 2017) relating to hardware and system software incorporated into our
oscilloscope product lines. We hold four U.S. patents (expiring in 2015, 2016,
2018 and 2019, respectively) and two foreign patents (expiring in 2017 and 2019,
10
respectively) relating to add-on software technology for use with oscilloscopes
sold by us. Infringement of three of these U.S. patents has been asserted
against Tektronix in the United States District Court in Oregon. For more
information on this litigation, see the "Business -- Legal Proceedings" section.
We hold ten U.S. patents (one of which expires in 2012, three of which expire in
2015, two of which expire in 2019, three of which expire in 2020 and one of
which expires in 2023) and two foreign patents (expiring in 2010 and 2013,
respectively) relating to our oscilloscope probe technology, and we hold four
U.S. patents (one of which expires in 2012, two of which expire in 2016 and one
of which expires in 2017) and one foreign patent (expiring in 2016) relating to
time to digital converters, which measure extremely short time intervals between
events. We also have 42 patent applications pending or under evaluation in the
United States, as well as additional patent applications pending or under
evaluation in various foreign jurisdictions.
We license or otherwise acquire key enabling technologies from third parties
in order to gain access to technologies that would be too expensive or too
time-consuming to develop internally or that would give us a competitive
advantage or shorten our product development time-to-market. We are currently
party to a license agreement with Perigee LLC pursuant to which we license fast
data readout technology for use in our WaveRunner 6000 Series family of
products. This license is perpetual. We also license a patent from William A.
Farnbach, which relates to the triggering characteristics of an oscilloscope.
This license extends for the term of the patent, which expires in October 2008.
In June 2002, we entered into a technology development agreement with IBM, as
described in more detail in the "Business -- Technology and Product Development"
section, in order to gain access to IBM's next-generation silicon germanium
technology. This development agreement expires in February 2005 but can be
renewed at no additional cost. Previously, this agreement was renewed at no cost
for an additional term of two years. With the exception of our technology
development agreement with IBM, the capabilities licensed or otherwise acquired
through these agreements could be developed by us, but would require
considerable time and expense.
From time to time, we license our technology to third parties. The revenue
generated from these licenses is a small percentage of our total revenue. We
generally do not actively seek out licensing opportunities, but will take
advantage of opportunities that arise in the normal course of business.
Currently, we are actively supplying oscilloscope components and software
support to Iwatsu, with whom we maintain a strategic alliance in Japan, pursuant
to long-standing joint development agreements with Iwatsu. The license contained
in our agreement with Iwatsu is perpetual.
Although we believe that our products and technologies do not infringe the
proprietary rights of third parties, third parties including our competitor
Tektronix and Sicom Systems have asserted patent infringement claims against us,
and there can be no assurance that third parties will not assert claims against
us based on the infringement or alleged infringement of any such rights. Such
claims are typically costly to defend, regardless of the legal outcome. There
can be no assurance that we would prevail with respect to any such claim, or
that a license to third party rights, if needed, would be available on
acceptable terms. In any event, patent and proprietary rights litigation can be
extremely protracted and expensive.
REGULATION
As we manufacture our products in the United States and sell our products
and purchase parts, components and sub-assemblies in a number of countries, we
are subject to legal and regulatory requirements, particularly the imposition of
tariffs and customs, in a variety of countries. Our products are also subject to
United States export control restrictions. In certain cases, we may not be
permitted to export products without obtaining an export license. U.S. export
laws also prohibit the export of our products to a number of countries deemed by
the United States to be hostile. The export of our high-performance
oscilloscopes from the United States is also subject to regulation under the
Treaty for Nuclear Non-Proliferation. We cannot be certain that the U.S.
government will approve any pending or future export license requests. In
addition, the list of products and countries for which export approval is
required, and the regulatory policies with respect thereto, could be revised.
EMPLOYEES
As of June 30, 2004, we had 382 full-time employees, 235 of whom work in our
Chestnut Ridge, New York facility. Our employees are not represented by a labor
union and we have not experienced any work stoppages. We believe that our
employee relations are generally satisfactory.
11
INVESTOR INFORMATION
Our Internet website address is www.lecroy.com. We make available, free of
charge on our website, by clicking on "About LeCroy" and then selecting the
"Investor Relations" link and the "SEC Filings" link, our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as soon as reasonably practicable after electronically filing such material
with, or furnishing it to, the Securities and Exchange Commission, or SEC.
EXECUTIVE OFFICERS OF THE REGISTRANT
Unless otherwise set forth, below are the name, age, position, and a brief
account of the business experience of each of our executive officers as of June
30, 2004:
NAME AGE POSITION(S)
-------- ----- --------------------------------------------------
Thomas H. Reslewic...................... 45 President; Chief Executive Officer and Director
R. Scott Bausback....................... 43 Executive Vice President, Chief Operating Officer
Conrad J. Fernandes..................... 43 Vice President, Worldwide Sales
David C. Graef.......................... 47 Vice President, Chief Technology Officer
Scott D. Kantor......................... 41 Vice President, Finance; Chief Financial Officer;
Secretary and Treasurer
__________
Thomas H. Reslewic was named to our Board of Directors in January 2002. He
joined us in 1990 and has served as President and Chief Executive Officer since
January 2002. Mr. Reslewic previously served as President from October 2000
until December 2001, and Executive Vice President and Chief Operating Officer
from February 1998 until October 2000. Mr. Reslewic has a Bachelor of Science
degree in physics from the College of the Holy Cross and a Master of Business
Administration degree from the University of Oregon.
R. Scott Bausback has served as Executive Vice President, Chief Operating
Officer since joining us in August 2001. Previously, he held a variety of sales
and marketing management positions during an 18-year tenure at Tektronix,
culminating in his role as Vice President and General Manager of Tektronix's
Communications Business Unit from September 1998 until June 2001. Mr. Bausback
has a Bachelor of Science degree in electrical engineering from Rutgers College
of Engineering and completed the YEI Executive Education program at
Kenan-Flagler Business School at the University of North Carolina at Chapel
Hill.
Conrad J. Fernandes has served as Vice President, Worldwide Sales since July
2001. Previously, Mr. Fernandes served as Vice President, International Sales
from 1999 until 2000, Director of Asia / Pacific Sales from 1994 until 1999 and
Product Marketing Manager from 1990 until 1994. Mr. Fernandes has a Bachelor of
Electronic Engineering degree and a Master of Business Administration degree
from City University of London.
David C. Graef has served as Vice President, Chief Technology Officer since
April 2003. Previously, he served as Vice President, Research and Development
from January 1999 through March 2003, Engineering Manager from June 1996 through
January 1999 and Senior Engineer from January 1989 through May 1996. Mr. Graef
has a Bachelor of Science degree in Electrical Engineering from the University
of Bridgeport.
Scott D. Kantor has served as Vice President, Finance and Chief Financial
Officer since February 2003. Previously, he served as our Vice President and
Corporate Controller since August 1999. Before joining us, Mr. Kantor was with
Sappi Fine Paper N.A., from April 1996 to August 1999, where he served as
Assistant Financial Controller and led a business process reengineering project
that resulted in the redesign of the company's financial processes in connection
with a large-scale ERP implementation. Mr. Kantor previously held accounting and
financial reporting positions at Genzyme Corporation and Costar Corporation and
was a Senior Accountant with Deloitte & Touche, LLP. Mr. Kantor has a Bachelor
of Science degree from California State University and a Master of Business
Administration degree from Boston University.
12
ITEM 2. PROPERTIES.
We own our executive offices and manufacturing facility, which is an
approximately 88,000 square foot building in Chestnut Ridge, New York. Pursuant
to our revolving credit facility with the Bank of New York, we granted the bank
a security interest in this property. In addition, we lease other office space
around the world to support our local sales and service operations and to
support our research and development activities. We believe that our facilities
are in good condition and are suitable and sufficient for our current
operations.
ITEM 3. LEGAL PROCEEDINGS.
On April 28, 2003, Tektronix filed a complaint against us in the United
States District Court for the District of Oregon claiming that we infringed on
eight of its U.S. patents. In our responsive pleading, we denied that we have
infringed, or are infringing, on any of these patents, and contend that the
patents are invalid. Four of these patents concern software user interface
features for oscilloscopes, two concern circuitry and two concern probes. On
August 5, 2003, we filed a counterclaim in the United States District Court for
the District of Oregon claiming that Tektronix is infringing on three of our
patents. We believe we have meritorious defenses and we intend to defend this
action vigorously. Discovery in this case is ongoing and the outcome cannot be
predicted.
On January 15, 2003, we were sued by 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. We 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, we 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 our 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 us 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 our responsive pleading, we have denied that we have
infringed, or are infringing, on the patent, and contend that the patent is
invalid. We intend to defend ourselves vigorously in this litigation. The
defendants in this case, including us, have filed a Motion to Dismiss for lack
of standing. The Motion contends 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 has stayed the case pending resolution of the new
Motion to Dismiss and the outcome cannot be predicted.
From time to time, we are involved in lawsuits, claims, investigations and
proceedings, including patent and environmental matters, that arise in the
ordinary course of business. There are no matters pending, including those
described above, that we expect to be material to our business, results of
operations, financial condition or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 2004, there were no matters submitted to
a vote of securities holders, through the solicitation of proxies or otherwise.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"LCRY." The following table sets forth, for the periods indicated, the high and
low closing prices per share of our common stock as reported on the Nasdaq
National Market. As of August 16, 2004, there were 247 stockholders of record of
our common stock.
HIGH LOW
------ -----
Year Ended June 30, 2003:
First Quarter...................................... $ 11.94 $ 8.20
Second Quarter..................................... 11.70 7.30
Third Quarter...................................... 13.08 8.13
Fourth Quarter..................................... 10.49 8.06
Year Ended June 30, 2004:
First Quarter...................................... $ 16.03 $ 9.73
Second Quarter..................................... 18.45 15.72
Third Quarter...................................... 23.99 18.08
Fourth Quarter..................................... 21.79 17.59
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock and do
not anticipate paying any dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to operate and expand our business.
Our payment of any future dividends will be at the discretion of our board of
directors after taking into account various factors, including our financial
condition, operating results, cash needs and growth plans. Under the terms of
our revolving credit facility, we are not permitted to declare or pay dividends
other than dividends payable solely in additional shares of our equity
securities.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of the end of each
fiscal year has been derived from our consolidated financial statements for each
of the years in the five-year period ended June 30, 2004. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes appearing elsewhere in this Annual Report
on Form 10-K and incorporated by reference herein.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
YEAR ENDED JUNE 30,
------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Oscilloscopes and related products.................. $ 113,422 $ 95,008 $ 101,077 $ 129,425 $ 110,237
Service and other(1)................................ 11,518 12,851 10,379 11,963 11,163
--------- --------- --------- ---------- ---------
Total revenues.................................... 124,940 107,859 111,456 141,388 121,400
Cost of sales(2)(5)................................... 52,594 50,989 59,717 67,559 61,323
--------- --------- --------- ---------- ---------
Gross profit........................................ 72,346 56,870 51,739 73,829 60,077
Operating expenses:
Selling, general and administrative(3)(5)........... 43,997 41,422 40,477 44,738 36,027
Research and development(4)......................... 15,760 18,226 22,006 17,682 15,165
--------- --------- --------- ---------- ---------
Total operating expenses.......................... 59,757 59,648 62,483 62,420 51,192
--------- --------- --------- ---------- ---------
Operating income (loss)............................... 12,589 (2,778) (10,744) 11,409 8,885
(Loss) gain from sale of marketable securities...... -- -- (122) -- 2,460
Other (expense) income, net......................... (11) (84) 310 (471) (276)
--------- --------- --------- ---------- ---------
Income (loss) from continuing operations before income
taxes and the cumulative effect of an accounting
change............................................. 12,578 (2,862) (10,556) 10,938 11,069
(Provision for) benefit from income taxes........... (4,653) 1,059 4,307 897 (3,498)
--------- --------- --------- ---------- ---------
Income (loss) from continuing operations
before the cumulative effect of an
accounting change .............................. 7,925 (1,803) (6,249) 11,835 7,571
Gain (loss) from discontinued operations, net of tax.. 119 129 -- (1,994) (11,009)
--------- --------- --------- ---------- ---------
Income (loss) before the cumulative effect of an
accounting change............................... 8,044 (1,674) (6,249) 9,841 (3,438)
Cumulative effect of an accounting change for
revenue recognition, net of tax................. -- -- -- 4,417 --
--------- --------- --------- ---------- ---------
Net income (loss)..................................... 8,044 (1,674) (6,249) 5,424 (3,438)
Charges related to convertible preferred stock........ -- 2,069 1,876 1,700 1,540
Redemption of convertible preferred stock............. 7,665 -- -- -- --
Cumulative effect of an accounting change
for preferred stock ............................ -- -- -- 1,848 --
--------- --------- --------- ---------- ---------
Net income (loss) applicable to common stockholders... $ 379 $ (3,743) $ (8,125) $ 1,876 $ (4,978)
========= ========= ========= ========== =========
Income (loss) per common share - basic:
Income (loss) from continuing operations
before the cumulative effect of an
accounting change applicable to common
stockholders.................................... $ 0.02 $ (0.37) $ (0.81) $ 1.20 $ 0.78
Gain (loss) from discontinued operations.......... 0.01 0.01 -- (0.24) (1.42)
Cumulative effect of an accounting change......... -- -- -- (0.74) --
Net income (loss) applicable to common
stockholders ................................... 0.04 (0.36) (0.81) 0.22 (0.64)
Income (loss) per common share - diluted:
Income (loss) from continuing operations
before the cumulative effect of an
accounting change applicable to common
stockholders.................................... $ 0.02 $ (0.37) $ (0.81) $ 1.15 $ 0.76
Gain (loss) from discontinued operations.......... 0.01 0.01 -- (0.23) (1.38)
Cumulative effect of an accounting change......... -- -- -- (0.71) --
Net income (loss) applicable to common
stockholders ................................... 0.03 (0.36) (0.81) 0.21 (0.62)
Weighted average number of common shares:
Basic............................................... 10,754 10,364 10,052 8,476 7,749
Diluted............................................. 11,074 10,364 10,052 8,847 7,977
15
AS OF JUNE 30,
-------------------------------------------------------
2004 2003 2002 2001 2000
--------- ---------- --------- --------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents and Marketable
securities, current ........................... $ 38,100 $ 30,851 $ 27,322 $ 11,449 $ 9,051
Working capital.................................. 69,916 62,831 63,265 41,610 24,129
Total assets..................................... 129,793 122,152 126,991 122,160 100,849
Total debt and capital leases.................... 196 291 375 456 11,000
Redeemable convertible preferred stock........... -- 15,335 13,266 11,390 9,692
Total stockholders' equity....................... 101,608 80,514 81,505 60,480 47,109
_______
(1) Service and other revenue in each of fiscal 2004, 2003, 2002 and 2001
includes the recognition of $1.3 million of revenue that was deferred with
the adoption of the Securities and Exchange Commission's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," as of the
beginning of fiscal 2001. Also included in service and other revenue in
fiscal 2003 is a technology license fee of $3.0 million.
(2) Included in cost of sales in fiscal 2003 is $2.3 million of asset impairment
charges and a $0.1 million charge for severance. In fiscal 2002, we recorded
a $1.0 million charge for severance and $3.6 million of excess and obsolete
inventory charges related to the cost of inventory associated with
discontinued product lines and inventory levels that had been deemed to be
in excess of forecasted requirements. In fiscal 2001, cost of sales includes
$0.1 million in severance-related charges.
(3) Included in selling, general and administrative expense in fiscal 2004 is
the reversal of an unused 2002 restructuring reserve of $0.1 million. In
fiscal 2003, we recorded a $0.3 million charge related to the cost of
closing our Beaverton, Oregon facility and a $2.4 million charge for
severance, partially offset by the reversal of an unused 2002 restructuring
reserve of $0.1 million. In fiscal 2002, we recorded $3.0 million in
severance-related charges. In fiscal 2001, we recorded a charge for
severance of $0.7 million, partially offset by the reversal of an unused
1999 restructuring reserve of $0.2 million. In fiscal 2000, we reversed $2.0
million of a restructuring reserve established in fiscal 1999.
(4) Research and development in each of fiscal 2003, 2002 and 2001 includes
severance-related charges of $0.7 million, $0.2 million and $0.1 million,
respectively, and in fiscal 2002, a $4.0 million technology access fee paid
to IBM.
(5) Certain prior year amounts have been reclassified from cost of sales to
selling, general and administrative expense to conform to the fiscal 2004
presentation. These reclassifications had no impact on previously reported
net income (loss).
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
other financial information and consolidated financial statements and related
notes appearing elsewhere in this Form 10-K and the documents incorporated by
reference herein. 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-K and the documents incorporated by reference herein.
We utilize fiscal years that end on the Saturday nearest to June 30. For
clarity of presentation, we have described all fiscal years as if they end on
June 30.
OVERVIEW
We develop, manufacture, sell and license oscilloscopes and related test and
measurement equipment. Our oscilloscopes are tools used by designers and
engineers to measure and analyze complex electronic signals in the development
of high-performance systems, to validate electronic designs and to improve time
to market. We currently offer four families of oscilloscopes which address
different solutions to the markets we serve: WaveMaster, our highest performance
product family; WavePro, which is targeted at the mid- to high- performance
sector; WaveRunner, designed for the mid-performance sector; and WaveSurfer,
designed for the lower-end of the performance sector of the market. We were
founded in 1964 to develop, manufacture and sell high performance signal
analysis tools to scientists engaged in high energy physics research and, in
1985, we introduced our first oscilloscope using our core competency of
designing signal acquisition and digitizing technology.
We generate revenue in a single segment within the Test and Measurement
market, primarily from the sale of our oscilloscopes, probes, accessories, and
applications solutions, and to a lesser extent, our extended warranty contracts
and repairs and calibrations we perform on our instruments after the expiration
of their warranties. Revenue is recognized when products are shipped or services
are rendered to customers net of allowances for anticipated returns. We defer
revenue on shipments of our new WaveSurfer family of oscilloscopes until sold by
the distributor to their customers ("sell-through method"). We sell our products
into a broad range of end markets, including computer and semiconductor, data
storage devices, automotive and industrial, and military and aerospace markets.
We believe designers in all of these markets are developing products which rely
on increasingly complex electronic signals to provide the features and
performance their customers require. Our customers include leading original
equipment manufacturers, or OEMs, such as BAE Systems, IBM, Maxtor, Raytheon,
Robert Bosch, Seagate, Samsung and Siemens VDO.
We deploy a direct sales model and employ a highly skilled global sales
force where it makes economic sense to do so. We supplement our direct sales
force with a combination of manufacturers' representatives and distributors in
areas where demand levels do not justify direct distribution by us. We segment
the world into four areas - North America, Europe / Middle East, Japan and Asia
/ Pacific. In North America we sell our products direct in the United States. In
Europe, we sell our products direct in Switzerland, Germany, Italy, France, the
United Kingdom and Sweden. We sell our products direct in Japan and in Asia /
Pacific. We sell our products direct in South Korea, Singapore and in five
regions in China. During the third quarter of fiscal 2004, we began shipping our
new WaveSurfer family of lower bandwidth oscilloscopes. One component of our
strategy for selling this new family of oscilloscopes is the use of a
complementary network of distributors.
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 Asia / Pacific,
we transact business in Korean won, Hong Kong dollars, Singapore dollars and
U.S. dollars. For a discussion of our foreign currency exchange rate exposure,
see Item 7A of this Part II entitled "Quantitative and Qualitative Disclosure
About Market Risk" of this Form 10-K.
17
We have historically experienced lower sales activity during our first
fiscal quarter than in other fiscal quarters which, we believe, is due
principally to the lower level of orders and general market activity during the
summer months, particularly in Europe.
Cost of sales represents manufacturing costs, which primarily comprise
materials, labor and factory overhead. Gross margins represent revenues less
cost of sales. Additional factors integral to gross margins earned are our
products mix, as the average selling prices of our products range from $5,000 to
$80,000, and the effect of foreign currencies, as approximately two-thirds of
our revenues are derived overseas, much of which are denominated in local
currencies while manufacturing costs are U.S. dollar denominated.
Selling, general and administrative expenses consist of salaries and related
overhead costs for sales, marketing and administrative, personnel, legal,
accounting and other professional services.
Research and development expenses consist primarily of salaries and related
overhead costs associated with employees engaged in research, design and
development activities, as well as the cost of masks, wafers and other materials
and related test services and equipment used in the development process.
RESTRUCTURING AND ASSET IMPAIRMENT
In response to the economic downturn in 2002 and 2003, we took steps to
change our manufacturing strategy, discontinue older product lines and reduce
our operating expenses in an effort to better position our business for the long
term. The resultant charges, net taken to accomplish these efforts, were:
YEAR ENDED
--------------
JUNE 30,
--------------
(IN THOUSANDS) 2003 2002
-------- ---------
Charges for:
Impaired intangible assets....................... $ 2,280 $ --
Severance and related costs...................... 163 1,035
-------- ---------
Cost of sales.................................... $ 2,443 $ 1,035
======== =========
Charges for:
Severance and related costs...................... $ 670 $ 185
-------- ---------
Research and development........................ $ 670 $ 185
======== =========
Charges for:
Severance and related costs...................... $ 2,382 $ 3,020
Plant closure - lease termination costs.......... 286 --
Unused restructuring reserve..................... (78) --
-------- ---------
Selling, general and administrative............ $ 2,590 $ 3,020
======== =========
Totals ........................................ $ 5,703 $ 4,240
======== =========
No similar charges were incurred in fiscal 2004. However, we credited $0.1
million of unused fiscal 2002 restructuring reserves to selling, general and
administrative expense.
In fiscal 2003, faced with continued difficulties in the marketplace, we
implemented a new management operating system designed to improve processes in
sales, order management, customer relationship management and financial
performance management. In connection with the implementation of the new
management operating system, we made significant business decisions which
resulted in a restructuring charge of $3.5 million. Included in this charge were
the effects of closing down our Beaverton, Oregon facility and a worldwide
workforce reduction of 65 employees.
The annualized first year improvement to income from operations from reduced
salary and related expenses was approximately $5.6 million. The annual savings
achievable in rent expense due to the elimination of the Oregon facility is
approximately $0.1 million. As of June 30, 2004, we have paid $3.0 million of
the total $3.2 million in severance and other related expenses and $0.2 million
of the total $0.3 million in plant closing costs.
18
During fiscal 2003 and 2004, $2.2 million and $0.8 million, respectively, of
severance was paid. Cash payments for severance and other related expenses in
fiscal 2005, 2006 and 2007 will be $0.1 million, $44,000 and approximately
$8,000, respectively. Severance and other related expenses will be substantially
paid by the end of second quarter of fiscal 2006. According to the lease
agreement on the Oregon facility which continues through the third quarter of
fiscal 2006, we will pay $87,000 in fiscal 2005 and $53,000 in fiscal 2006.
During fiscal 2003, we 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. The impairment resulted from our strategic
decision to exit certain older product lines and to make significant changes to
our manufacturing strategy to improve further our operating efficiency. We
estimated the fair value of the impaired asset based on the present value of
forecasted future cash inflows using a discount rate commensurate with our
weighted average cost of capital.
In response to the continued weakness in the technology sector of the
economy, in fiscal 2002, we recorded a $4.2 million charge for severance and
other related expenses. The annualized first year improvement to income from
operations from reduced salary and related expenses was estimated to be
approximately $3.5 million on a pre-tax basis, which was substantially achieved.
In connection with this restructuring, we reduced our workforce by 69 employees.
Included in these amounts are costs associated with the succession of our Chief
Executive Officer in the second quarter of fiscal 2002.
Of the $4.2 million recorded, $0.2 million represented a non-cash expense
for the amendment of employee stock options. The remaining $4.0 million was paid
in cash in fiscal 2002, 2003 and 2004 in the amounts of $1.9 million, $1.8
million and $0.2 million, respectively. We credited $0.1 million of unused
restructuring reserves to selling, general and administrative expense in the
second quarter of fiscal 2004.
These restructuring charges represent our best efforts to respond to the
current demands in our industry. However, these and future cost reductions, or
other benefits expected from the restructuring, may be insufficient to align our
operations with customer demand and the changes affecting our industry, or may
be more costly or extensive than currently anticipated.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial position and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Our significant accounting policies are described in
Note 1 to the consolidated financial statements. The preparation of these
consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and the disclosure
of contingent assets and liabilities at the date of the consolidated financial
statements and the reported revenues and expenses during the period. The
accounting policies that we believe are the most critical in understanding and
evaluating our reported financial results include the following:
Revenue Recognition. We enter into agreements to sell products, services,
and other arrangements that include combinations of products and services.
Revenue from product sales, net of allowances for anticipated returns, is
recognized provided that persuasive evidence of an arrangement exists, delivery
has occurred, the price is fixed or determinable, and collectibility is
reasonably assured. Delivery is considered to have occurred when title and risk
of loss have transferred to the customer. We defer revenue on shipments of our
new WaveSurfer family of oscilloscopes until sold by the distributor to their
customers ("sell-through method"). For sales that include customer-specified
acceptance criteria, revenue is recognized after the acceptance criteria have
been met. Revenue from services is deferred and recognized over the contractual
period or as services are rendered and accepted by the customer. When
arrangements include multiple elements, we use relative fair values to allocate
revenue to the elements and recognize revenue when the criteria for revenue
recognition have been met for each element. The amount of revenue recognized is
affected by our judgments as to whether an arrangement includes multiple
elements and if so, whether objective and reliable evidence of fair value exists
for those elements. Changes to the elements in an arrangement and the ability to
establish objective and reliable evidence of fair value for those elements could
affect the timing of the revenue recognition.
19
Allowance for Doubtful Accounts. We maintain an allowance for doubtful
accounts relating to the portion of the accounts receivable which we estimate is
non-collectible. We analyze historical bad debts, customer concentrations,
customer creditworthiness, current economic trends and changes in customer
payment patterns when evaluating the adequacy of the allowance for doubtful
accounts. The allowance for doubtful accounts, which includes the allowance for
anticipated returns, was approximately $0.4 million at June 30, 2004 and 2003.
Changes in the overall economic environment or in the financial condition of our
customers may require adjustments to the allowance for doubtful accounts which
could have a material adverse effect on our financial condition, results of
operations and cash flows.
Allowance for Excess and Obsolete Inventory. We assess the valuation of our
inventory on a quarterly basis and provide an allowance for the value of
estimated excess and obsolete inventory. Our marketing department plays a key
role in our inventory review process by providing updated sales forecasts,
managing product rollovers and working with our manufacturing department to
maximize recovery of excess inventory. Based upon management's forecast,
inventory items no longer expected to be used in the future are considered
obsolete and the difference between an inventory's quantity and its forecasted
usage are classified as excess. The allowance for excess and obsolete inventory
was $2.5 million and $2.1 million at June 30, 2004 and 2003, respectively. If
actual market conditions are less favorable than those projected by management,
additional inventory allowances for excess or obsolete inventory may be
required.
Deferred Tax Assets. We have recorded $12.2 million of net deferred tax
assets as of June 30, 2004 for the future tax benefits of certain expenses
reported for financial statement purposes that have not yet been deducted on our
tax returns. Significant components of our deferred tax assets are federal,
state and foreign net operating loss and credit carryforwards, inventory
reserves and other reserves. The recognition of this deferred tax asset is based
on the assessment that it is more likely than not that we will be able to
generate sufficient future taxable income within statutory carryforward periods
to realize the benefit of these tax deductions. The factors that management
considers in assessing the likelihood of realization include the forecast of
future taxable income and available tax planning strategies that could be
implemented to realize the deferred tax assets. Based on this information, we
have recorded a valuation allowance of $5.3 million as of June 30, 2004 to
reserve for certain tax credits and foreign net operating loss carryforwards due
to the uncertainty surrounding the utilization of these deferred tax assets.
Adjustments to the valuation allowance may be made in the future if it is
determined that the realizable amount of net operating losses and other deferred
tax assets is greater or less than the amount recorded. Such adjustments may be
material to our results of operations when made.
Valuation of Long-Lived and Intangible Assets. We assess the recoverability
of our long-lived assets and intangible assets with finite lives (including
technology, manufacturing and distribution rights) whenever events or changes in
circumstances indicate that the carrying values may not be recoverable. When
such events or changes in circumstances occur, we assess the recoverability of
long-lived assets by determining whether the carrying values of such assets will
be recovered through undiscounted expected future cash flows. If the
undiscounted cash flows are less than the carrying amounts, an impairment loss
is recorded to the extent that the carrying amounts exceed the fair value.
Factors which could trigger an impairment review include the following:
significant underperformance by us relative to historical or projected operating
results; significant changes in the manner of our use of the assets or the
strategy for the overall business; and significant negative industry or economic
trends. We recognized an intangible asset impairment of $2.3 million in fiscal
2003. We estimated the fair value of the impaired asset based on the present
value of forecasted future cash inflows using a discount rate commensurate with
our weighted average cost of capital.
The cost of technology, manufacturing and distribution rights acquired is
amortized primarily on the basis of the higher of units shipped over the
contract periods or on a straight-line basis not to exceed three years.
Management assesses the recoverability of these rights on the basis of actual
and forecasted production units as well as the average selling price and
standard costs of the related products after the amortization of the rights to
determine profitability. If required, an impairment charge is recorded as
described above.
20
Goodwill. Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," requires goodwill to be tested for
impairment annually under a two-step approach, or more frequently, if events or
changes in circumstances indicate that the asset might be impaired. Impairment
is assessed at the "reporting unit" level by applying a fair value-based test. A
reporting unit is defined as the same as or one level below the operating
segment level as described in SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." We have one reporting unit for the purposes
of SFAS No. 142.
The first step is to identify if an impairment of goodwill has occurred by
comparing the fair value of a reporting unit with its carrying amount, including
goodwill. If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is not considered impaired. If the carrying
amount of the reporting unit exceeds its fair value, the second step of the
goodwill test is performed to measure the amount of the impairment loss, if any.
In this second step, the "implied" fair value (as defined in SFAS No. 142) of
the reporting unit's goodwill is compared with the carrying amount of the
goodwill. If the carrying amount of the reporting unit's goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess, not to exceed the carrying amount of the goodwill.
We completed the annual impairment test required under SFAS No. 142 during the
fourth quarter of fiscal 2004 after completion of our annual financial operating
plan and determined that there was no impairment to our recorded goodwill
balance of $1.9 million at June 30, 2004. We use a fair value-based test using
our market capitalization to estimate our fair value. There were no impairment
indicators during the fiscal year ended June 30, 2004.
Warranty. Provisions for estimated expenses related to product warranties
are made at the time products are sold. These estimates are derived from
historical data of product reliability. The expected failure is arrived at in
terms of units, which are then converted into labor hours to which an average
fully burdened cost per hour is applied to derive the amount of accrued warranty
required. On a quarterly basis, we study trends of warranty claims and take
action to improve the quality of our products and minimize our warranty
exposure. The warranty reserve was $1.2 million at June 30, 2004 and June 30,
2003. Management believes that the warranty reserve is appropriate; however,
actual claims incurred could differ from the original estimates, requiring
adjustments to the reserve.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of our
total revenues for the fiscal years indicated:
YEAR ENDED JUNE 30,
------------------------
2004 2003 2002
------ ------ ------
Revenues:
Oscilloscopes and related products................. 90.8% 88.1% 90.7%
Service and other.................................. 9.2 11.9 9.3
----- ----- -----
Total revenues.................................. 100.0 100.0 100.0
Cost of sales........................................ 42.1 47.3 53.6
----- ----- -----
Gross margin.................................... 57.9 52.7 46.4
Operating expenses:
Selling, general and administrative................ 35.2 38.4 36.3
Research and development........................... 12.6 16.9 19.7
----- ----- -----
Total operating expenses........................ 47.8 55.3 56.0
Operating income (loss).............................. 10.1 (2.6) (9.6)
Other (expense) income, net........................ -- (0.1) 0.1
----- ----- -----
Income (loss) from continuing operations before
income taxes....................................... 10.1 (2.7) (9.5)
Provision for (benefit from) income taxes............ 3.8 (1.0) (3.9)
----- ----- -----
Income (loss) from continuing operations ............ 6.3 (1.7) (5.6)
Gain from discontinued operations, net of tax...... 0.1 0.1 --
----- ----- -----
Net income (loss).................................... 6.4 (1.6) (5.6)
Charges related to convertible preferred stock....... 6.1 1.9 1.7
----- ----- -----
Net income (loss) applicable to common stockholders.. 0.3% (3.5)% (7.3)%
===== ===== =====
21
COMPARISON OF FISCAL YEARS 2004 AND 2003
Total revenues were $124.9 million in fiscal 2004 compared to $107.9 million
in fiscal 2003, an increase of 15.8%, or $17.1 million. Revenues from
oscilloscopes and related products increased 19.4%, or $18.4 million, in fiscal
2004. This increase in revenues was primarily due to a 23% increase in total
oscilloscope units shipped due to increased customer demand and to higher
average selling prices, the combined effect of which contributed $16.7 million
to the increase, and a $3.1 million increase in probes and accessories. This
increase in revenues was partially offset by a $2.6 million decrease in sales of
discontinued product lines, distributed products and components.
Service and other revenues consist primarily of service revenue and license
and maintenance fees. Service revenue increased by 24.2%, or $1.8 million, from
$7.3 million in fiscal 2003 compared to $9.1 million in fiscal 2004. We did not
recognize any software license revenue during fiscal 2004 compared to fiscal
2003 when we recognized a $3.0 million license of our proprietary MAUI
Instrument Operating System technology. Service and other revenue in each of
fiscal 2004 and 2003 includes the recognition of $1.3 million of revenue that
was deferred with the adoption of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," as of the beginning of fiscal 2001.
The effect of foreign currency contributed approximately $4.5 million to the
increase in total revenues during fiscal 2004 as compared to fiscal 2003. Our
geographic breakdown of revenues by area in total dollars and as a percentage of
total revenues is as follows:
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
------------------- -------------------
(IN THOUSANDS) 2004 2003 2004 2003
-------- -------- ------ ------
North America............... $ 38,276 $ 32,394 North America............ 30.6% 30.0%
Europe / Middle East........ 37,716 31,171 Europe / Middle East..... 30.2 28.9
Japan....................... 19,574 17,038 Japan.................... 15.7 15.8
Asia / Pacific.............. 29,374 27,256 Asia / Pacific........... 23.5 25.3
-------- -------- ----- -----
Total revenues............ $124,940 $107,859 Total revenues......... 100.0% 100.0%
======== ======== ===== =====
Gross margin was 57.9% in fiscal 2004 compared to 52.7% in fiscal 2003.
Included in cost of sales in fiscal 2003 is a $2.1 million charge for the
impairment of technology, manufacturing and distribution rights, a $0.2 million
charge for a future royalty payment and a $0.1 million charge for severance
expense. The impairment and royalty cost resulted from our strategic decision to
exit certain older product lines and to make significant changes to our
manufacturing strategy to improve operating efficiency. Additionally, included
in gross margin in fiscal 2003 was the positive effect of the $3.0 million in
license revenues included in service and other revenues on the Consolidated
Statement of Operations. The increase in gross margin in fiscal 2004 was
primarily due to higher margins and higher average selling prices on our
high-performance WaveMaster and mid-performance WaveRunner oscilloscopes, lower
manufacturing costs resulting from continued improvements in operational
efficiency, positive impact of foreign currency fluctuations on revenues while
cost of sales are predominately in U.S. dollars, restructuring savings of $0.4
million and the ongoing benefit of our shift to a direct sales model in China
and Singapore.
Selling, general and administrative expense increased by 6.2%, or $2.6
million, from $41.4 million in fiscal 2003 to $44.0 million in fiscal 2004.
Selling, general and administrative expense in fiscal 2003 includes $2.4 million
of severance charges and $0.3 million of plant closing costs partially offset by
the reversal of an unused 2002 restructuring reserve of $0.1 million. This
increase was primarily due to increased variable selling costs related to higher
revenues and the impact of foreign currencies, certain legal and compliance
expenses and expenses related to performance bonuses that were suspended in the
first three quarters of fiscal 2003 due to the weakness in the technology sector
of the economy and in LeCroy sales. Selling costs increased by $3.8 million and
general and administrative costs increased by $1.4 million, net of restructuring
savings of approximately $3.5 million, partially offset by the decrease in net
restructuring charges of $2.6 million in fiscal 2004 compared to the same period
in the prior year. As a percentage of total revenues, selling, general and
administrative expense was 35.2% in fiscal 2004, compared with 38.4% in fiscal
2003. This decrease as a percentage of total revenues was primarily due to our
ability to leverage selling infrastructure over the increased revenues in fiscal
2004. In fiscal 2005, we expect selling, general and administrative expense will
increase when compared to fiscal 2004 due to increased variable selling costs on
higher forecasted revenues, the non-cash compensation expense associated with
restricted stock grants under our new long-term incentive program and our
intention to continue to defend ourselves vigorously in lawsuits filed against
us.
22
Research and development expense decreased by 13.5%, or $2.5 million, from
$18.2 million in fiscal 2003 to $15.8 million in fiscal 2004. The decrease was
primarily due to cost savings realized from the consolidation of our probe
development activities into our Chestnut Ridge, New York facility at the end of
the fourth quarter of fiscal 2003, the full benefit of cost reduction
initiatives taken in fiscal 2003 of approximately $1.7 million, a $0.7 million
charge for severance in fiscal 2003 and the timing of certain project specific
engineering expenses. As a percentage of total revenues, research and
development expense decreased from 16.9% in fiscal 2003 to 12.6% in fiscal 2004,
which reflects our ability to leverage expenses over the higher sales base in
fiscal 2004 which is consistent with our long-term operating model of spending
13% of sales on product development. In fiscal 2005, we intend to continue to
invest a substantial percentage of our revenues in our research and development
efforts. We have development efforts underway and expect to introduce new
products over the next year to address customer needs for solutions in market
sectors such as ultra-wide band and lower bandwidth oscilloscopes. We believe
that our advanced hardware and software technologies incorporated into our core
products can be adapted to address additional sectors of the large and diverse
test and measurement market where we have not historically focused.
Other (expense) income, net, which consists primarily of net interest income
and foreign exchange gains or losses, was an expense of ($11,000) and ($84,000)
in fiscal 2004 and fiscal 2003, respectively. Included in other (expense)
income, net in fiscal 2004, was $0.4 million in transaction costs related to the
repurchase of our redeemable convertible preferred stock and higher interest
expense due to borrowings under our revolving line of credit, partially offset
by foreign exchange gains of $0.3 million on transactions denominated in other
than the functional currency of us or our subsidiaries. In fiscal 2003, foreign
exchange losses of $0.4 million were partially offset by net interest income of
$0.2 million.
In fiscal 2004, we recorded a tax provision of $4.7 million, compared to a
tax benefit of $1.1 million in fiscal 2003. The Company's effective tax rate was
37.0% in fiscal 2004 and fiscal 2003.
In fiscal 2004 and 2003, we recorded $0.1 million gains on sales of
discontinued operations in the Consolidated Statements of Operations, net of
income tax provisions, for the reversal of unused accrued discontinued
operations reserves. In addition, the gain on sale of discontinued operations in
fiscal 2003 includes the sale of the residual assets and business of Digitech
Industries, Inc. ("Digitech").
On September 27, 2003, we redeemed all 500,000 issued and outstanding shares
of our redeemable convertible preferred stock from the holders ("Holders") for
$23.0 million in cash (the "Redemption"). In accordance with the Securities and
Exchange Commission's position published in an Emerging Issues Task Force
("EITF") Topic No. D-42 relating to induced conversions of preferred stock, we
recorded the $7.7 million premium paid to purchase the preferred stock as a
charge to arrive at net income applicable to common stockholders in fiscal 2004.
LeCroy and the Holders agreed that the Redemption would be transacted as of
the beginning of the first quarter of fiscal 2004. As a result, we accounted for
the Redemption as though no dividends had accrued in fiscal 2004 and that the
unaccreted value attributed to the warrants at the point of issue was
accelerated and combined with the redemption premium to reflect the total charge
related to the Redemption in the Consolidated Statement of Operations.
In fiscal 2003, charges related to our redeemable convertible preferred
stock, comprising the dividend on the preferred stock and the accretion for the
value of fully exercisable warrants granted in connection with the private
placement of the preferred stock, were $2.1 million.
COMPARISON OF FISCAL YEARS 2003 AND 2002
Total revenues were $107.9 million in fiscal 2003 compared to $111.5 million
in fiscal 2002, a decrease of 3.2%, or $3.6 million. The decrease in revenue was
due to a 5.8% decrease in total oscilloscope units shipped in fiscal 2003. The
positive impact of foreign currency offset approximately $5.0 million of the
decrease in total revenues during fiscal 2003 as compared to fiscal 2002.
23
Revenues from oscilloscopes and related products decreased 6.0%, or $6.1
million, in fiscal 2003. Lower sales of approximately $16.0 million from
discontinued and older product lines, OEM/distributed products and components
were partially offset by increased sales of approximately $10.9 million for our
application-specific Serial Data Analyzer and Disk Drive Analyzer versions of
our high-end WaveMaster product line of oscilloscopes and increased sales of
probes and accessory products.
Revenues from service and other revenue increased 23.8%, or $2.5 million, in
fiscal 2003 primarily due to a $3.0 million agreement to license our MAUI
Instrument Operating System technology and a $0.8 million increase in service
revenue. Revenues from high-energy physics products included in service and
other revenue declined by $1.4 million, or 100%, in fiscal 2003 as a result of
our decision in December 2001 to discontinue this product line. Service and
other revenue in each of fiscal 2003 and 2002 includes the recognition of $1.3
million of revenue that was deferred with the adoption of SAB 101 as of the
beginning of fiscal 2001.
Our geographic breakdown of revenues by area in total dollars and as a
percentage of total revenues is as follows:
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
------------------ -------------------
(IN THOUSANDS) 2003 2002 2003 2002
------ ------ ------ ------
North America.............. $ 32,394 $ 33,052 North America.............. 30.0% 29.6%
Europe / Middle East....... 31,171 33,056 Europe / Middle East....... 28.9 29.7
Japan...................... 17,038 22,050 Japan...................... 15.8 19.8
Asia / Pacific............. 27,256 23,298 Asia / Pacific............. 25.3 20.9
-------- -------- ----- -----
Total revenues........... $107,859 $111,456 Total revenues........... 100.0% 100.0%
======== ======== ===== =====
Gross margin was 52.7% in fiscal 2003 compared to 46.4% in fiscal 2002.
Included in cost of sales in fiscal 2003 is a $2.1 million charge for the
impairment of technology, manufacturing and distribution rights, a $0.2 million
charge for a future royalty payment and a $0.1 million charge for severance
expense. The impairment and royalty cost resulted from our strategic decision to
exit certain older product lines and to make significant changes to our
manufacturing strategy to improve operating efficiency. Included in cost of
sales in fiscal 2002 is a $1.0 million charge for severance and a charge of $3.6
million to increase our allowance for excess and obsolete inventory. This
inventory charge relates to the cost of inventory associated with discontinued
product lines and inventory levels that had been deemed to be in excess of
forecasted requirements. The increase in gross margin in fiscal 2003 resulted
from the $3.0 million technology license included in service and other revenue,
favorable margins on our high-end WaveMaster product line of oscilloscopes, more
favorable product margins on the existing base of products due to higher average
selling prices of our high-end products, increased operational efficiency,
positive impact of foreign currency fluctuations on revenues while cost of sales
are predominately in U.S. dollars and improved cost structure.
Selling, general and administrative expense increased by 2.3%, or $0.9
million, from $40.5 million in fiscal 2002 to $41.4 million in fiscal 2003.
Selling, general and administrative expense in fiscal 2003 includes $2.4 million
of severance charges and $0.3 million of plant closing costs partially offset by
the reversal of an unused 2002 restructuring reserve of $0.1 million. Selling,
general and administrative expense in fiscal 2002 includes $3.0 million of
severance charges. This increase in selling, general and administrative expense
is attributable to increased fixed selling costs of approximately $2.0 million
as a result of the conversion, in the fourth quarter of fiscal 2002, of the U.S.
sales force from partial coverage by manufacturers' representatives to full
coverage by our direct sales force, the impact of foreign currencies,
establishing a direct presence in Singapore and the opening of two new offices
in China. This increase was partially offset by lower general and administrative
expenses of approximately $0.6 million due to improvements in our cost structure
and a $0.4 million incremental decrease in restructuring charges in fiscal 2003.
As a percentage of total revenues, selling, general and administrative expense
was 38.4% in fiscal 2003, compared with 36.3% in fiscal 2002. This increase as a
percentage of total revenues was primarily due to our inability to leverage
higher costs of fixed infrastructure over the lower sales base.
Research and development expense decreased by 17.2%, or $3.8 million, from
$22.0 million in fiscal 2002 to $18.2 million in fiscal 2003. Included in
research and development in fiscal 2003 and 2002 are severance charges of $0.7
million and $0.2 million, respectively, and in fiscal 2002 a $4.0 million
24
technology access fee to IBM. We are using the access to this next-generation
silicon germanium technology acquired from IBM to develop components that are
expected to deliver higher density, greater speed and reduced power consumption
than those currently available. Such components will be used in future
high-speed oscilloscopes. As a percentage of sales, research and development
expense decreased from 19.7% in fiscal 2002 to 16.9% in fiscal 2003. This
decrease as a percentage of total revenues was primarily due to the technology
access fee purchased in fiscal 2002, partially offset by increased severance
charges. Despite the effects of the difficult economy, we maintained our
commitment to product development in fiscal 2003 as evidenced by the successful
execution of our product strategy of leveraging our high-end silicon germanium
acquisition technology and our MAUI operating system, which had been deployed in
our WaveMaster product line, into our WavePro product line as well.
Other (expense) income, net, which consists primarily of net interest income
and foreign exchange gains or losses, was an expense of ($0.1) million in fiscal
2003, compared to income of $0.2 million in fiscal 2002. The decrease in income
in fiscal 2003 was primarily due to a $0.3 million increase in foreign exchange
losses on transactions denominated in other than the functional currency of us
or our subsidiaries and lower net interest income earned on our cash balances
due to lower interest rates. Other (expense) income, net in fiscal 2002, is
partially offset by a $0.1 million loss from the sale of marketable securities.
In fiscal 2003, we recorded a tax benefit of $1.1 million, or an effective
tax rate of (37.0%), compared to a tax benefit of $4.3 million, or an effective
tax rate of (40.8%), in fiscal 2002. The effective tax rate in fiscal 2002 was
based on an estimated annual effective tax rate of approximately 37.0%,
increased by the release of a $0.4 million tax reserve related to a favorable
audit settlement in the first quarter of fiscal 2002.
In fiscal 2003, we recorded a $0.1 million gain on sale of discontinued
operations in the Consolidated Statements of Operations, net of an income tax
provision, for the reversal of unused accrued discontinued operations reserves
and the sale of the residual assets and business of Digitech.
Charges related to our redeemable convertible preferred stock, comprising
the preferred stock dividend and the accretion for the value of fully
exercisable warrants granted in connection with the private placement of the
preferred stock, were $2.1 million and $1.9 million in fiscal 2003 and 2002,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities at June 30, 2004 improved to $38.1 million
compared to $30.9 million at June 30, 2003.
Net cash provided by operating activities increased by $13.6 million, from
$6.7 million in fiscal 2003 to $20.3 million in fiscal 2004. This increase was
primarily due to the $9.7 million improvement in net income, the $4.6 million
incremental increase in the utilization of deferred tax assets, the tax benefit
of $1.2 million from the exercise of stock options and reduced cash payments for
accounts payable, accrued expenses and other liabilities in fiscal 2004,
partially offset by the $7.3 million incremental increase in accounts
receivable. The increase in accounts receivable was primarily due to a $5.2
million increase in shipments in the fourth quarter of fiscal 2004 as compared
to the same period in the prior year and increased shipments to Asia where
collection terms run longer.
Net cash (used in) investing activities was ($16.6) million in fiscal 2004
compared to ($3.9) million in fiscal 2003. This increase was primarily due to
the purchase of $9.6 million of marketable securities, an incremental increase
of $3.2 million in capital expenditures and a $0.5 million net increase of
acquisition of technology licenses, partially offset by the net proceeds of $0.6
million from the sale of property during fiscal 2004. The increase in capital
expenditures in fiscal 2004 was primarily due to $2.2 million of capital
improvements to our principal office and manufacturing facility and increased
capital spending on furniture, machinery and equipment.
Net cash (used in) provided by financing activities was ($6.2) million in
fiscal 2004 compared to $0.5 million in fiscal 2003. The decrease in cash
provided by financing activities in fiscal 2004 versus 2003 was primarily due to
the repurchase of our preferred stock for $23.0 million partially offset by net
25
proceeds of $12.0 million from our follow-on offering of our common stock and an
increase of $4.8 million in proceeds from employee stock purchases and stock
option exercises.
On April 14, 2004, we closed an underwritten public follow-on offering of
500,000 shares of our common stock at $19.00 per share (less the underwriting
discount) raising aggregate net proceeds of approximately $8.0 million, net of
$1.1 million in offering costs and expenses. We granted the underwriters an
option to purchase up to an additional 225,000 shares of common stock included
in the offering to cover over-allotments, if any, within 30 days of the closing.
On April 27, 2004, pursuant to the exercise of this over-allotment option, we
sold an additional 225,000 shares at $19.00 per share (less the underwriting
discount), raising additional net proceeds of $4.1 million, net of expenses.
On April 23, 2004, we used proceeds from this offering to repay $4.0 million
of indebtedness outstanding under our revolving credit facility, and we intend
to use the remaining net proceeds for general corporate and working capital
purposes. We may also use a portion of the net proceeds of this offering to
acquire or invest in businesses, products, services or technologies
complementary to our current business, through mergers, acquisitions, joint
ventures or otherwise. Pending application of any of the proceeds to any
specific uses, we have invested the net proceeds of this offering in short-term,
interest-bearing investment grade marketable securities.
On November 13, 2003, we amended our existing $15.0 million revolving credit
facility with The Bank of New York. The amended agreement provides us with a
$25.0 million revolving credit facility expiring on November 30, 2006, which can
be used to provide funds for general corporate purposes and acquisitions.
Borrowings under this line bear interest at an annual rate of prime plus a
margin not to exceed 1.00%, or at the London Interbank Offering Rate (LIBOR)
plus a margin of between 1.25% and 2.25%, depending on our leverage ratio, as
such term is defined in the credit agreement. A commitment fee of 0.375% per
annum is payable on any unused amount under the facility. This revolving credit
facility is secured by a lien on substantially all of our domestic assets. As of
June 30, 2004, we are in compliance with our financial covenant requirements and
there were no borrowings outstanding under this line of credit.
We have a $2.0 million capital lease line of credit to fund certain capital
expenditures. As of June 30, 2004, we had $0.2 million outstanding under this
line of credit, $0.1 million of which was current and the remaining $0.1 million
of which was included in deferred revenue and other non-current liabilities on
the Consolidated Balance Sheet. This line of credit expires November 2005 and
outstanding borrowings bear interest at an annual rate of 12.2%.
In addition to the above U.S.-based facilities, we maintain certain
short-term foreign credit facilities, principally facilities with two Japanese
banks totaling 150 million yen ($1.4 million as of June 30, 2004). No amounts
were outstanding under these facilities as of June 30, 2004.
We believe that our cash on hand, cash flow generated by our continuing
operations and availability under our revolving credit lines will be sufficient
to fund our operations, working capital and capital expenditure requirements for
the foreseeable future and provide funds for potential acquisition
opportunities.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
Our contractual obligations and commitments include obligations associated
with our capital and operating leases, employee severance agreements and a
technology license agreement as set forth in the table below:
PAYMENTS DUE BY PERIOD AS OF JUNE 30, 2004
---------------------------------------------------------
LESS THAN MORE THAN 5
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS YEARS
--------- --------- --------- --------- -----------
(IN THOUSANDS)
Capital lease obligations................... $ 196 $ 107 $ 89 $ -- $ --
Employee severance agreements............... 200 148 44 8 --
Operating lease obligations................. 4,627 1,688 2,134 645 160
Other contractual commitments to purchase
technology................................ 250 250 -- -- --
-------- -------- -------- -------- ---------
Total....................................... $ 5,273 $ 2,193 $ 2,267 $ 653 $ 160
======== ======== ======== ======== =========
26
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative discussed in SFAS No. 133,
clarifies when a derivative contains a financing component, conforms SFAS No.
133 to language used in FASB Interpretation No. 45 and amends certain other
existing pronouncements. These changes are intended to result in more consistent
reporting of contracts as either derivatives or hybrid instruments. The
statement is generally effective for contracts entered into or modified after,
and for hedging relationships designated after, June 30, 2003. The adoption of
this statement did not have an impact on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments w