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, representatives and distributors.
We develop, manufacture, sell and license high-performance oscilloscopes and global communication protocol analyzers. Our oscilloscopes are tools used by designers and engineers to measure and analyze complex electronic signals in order to develop high-performance systems, validate electronic designs and improve time to market. We offer six families of oscilloscopes, which address different solutions for the markets we serve: WaveExpert, our line of Sampling Oscilloscopes; WaveMaster, one of our high performance product families; WavePro, which is targeted at the mid- to high-performance sector; WaveRunner, designed for the mid-performance sector; WaveSurfer, designed for value-oriented users in the low-performance bandwidth sector of the market; and WaveJet, our entry-level oscilloscope products. Our protocol analyzers are used to reliably and accurately monitor communications traffic and diagnose operational problems in a variety of communications devices to ensure that they comply with industry standards. Our protocol analyzers are used by designers and engineers whose products are in development and production and also for products deployed in the field.
We generate revenue in a single segment within the Test and Measurement market, primarily from the sale of our oscilloscopes, protocol analyzers, probes, accessories, and applications solutions. To a lesser extent, we also generate revenue from the sales of our extended warranty contracts, maintenance contracts and repairs and calibrations on our instruments after their warranties expire. Revenue is recognized when products are shipped or services are rendered to customers and other revenue recognition criteria are met, net of allowances for anticipated returns. We sell our products into a broad range of end markets, including Computer/Semiconductor/Consumer Electronics, Data Storage, Automotive/Industrial, and Military/Aerospace. 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.
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 wire-line communications and broadcast networks. This Test and Measurement equipment aids 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 $7 billion in 2005. 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 on 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 advance 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.
While the overall market for test and measurement equipment is made up of hundreds of different types of instruments and measurement tools, one of the largest single product categories is oscilloscopes. We estimate that oscilloscopes represented approximately $1.1 billion of the overall $7 billion market in 2005. In addition, protocol analyzers, an emerging product category, represented approximately $300 million in sales in 2005. Protocol analyzers address specific communications standards in the wide area network (WAN), local area network (LAN), storage area network (SAN), voice mail and computer peripheral interconnect market spaces. LeCroy presently focuses on the computer peripheral interconnect space. We believe the potential for these products lies somewhere in the $70 to $80 million range of the total protocol analyzer product category.
OSCILLOSCOPE PRODUCT CATEGORY
Oscilloscopes are the primary instrument used by engineers for testing and analyzing electronic signals. Historically, oscilloscope products within the Test and Measurement industry have experienced less volatility than the industry as a whole because of their 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. 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 utilize a computer 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, typically billions of samples per second in modern oscilloscopes; and memory length, or the number of data points that may be captured at one time. 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. Real-time oscilloscopes with bandwidths ranging from 20 Megahertz ("MHz") up to 18 Gigahertz ("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, comprises instruments with the ability to capture and analyze signals ranging from 300 MHz up to the highest available real-time bandwidths. These instruments generally sell from $4,000 up to over $100,000 depending on their capabilities.
o Lower-end oscilloscopes. We believe about one-third of the market's revenue comes from these products which include less complex instruments with the ability to capture and analyze signals ranging from 20 MHz to 300 MHz. These instruments generally sell for below $5,000.
o Handheld oscilloscopes. This includes a variety of handheld oscilloscopes which we believe currently comprise 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 100 GHz 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.
PROTOCOL ANALYZER PRODUCT CATEGORY
The demand for digital information has accelerated the need for communication among multiple electronic devices in various markets, including computers, telecommunications, networking, storage, consumer electronics, aerospace, automotive, industrial automation and medical instrumentation. This growing demand centers on the widespread need to transmit digital information. Communication among digital devices, or connectivity, occurs over a variety of physical media, such as copper wire and fiber optic cable, as well as over wireless frequencies.
Computer technology initially provided connectivity only among internal devices, such as the processor, memory and storage, and with external peripheral devices, such as the keyboard, mouse and printer. Today, computer technology also enables connectivity among multiple computing devices and across networks, such as local area networks, wide area networks, storage area networks, home area networks, personal area networks and the Internet. Telecommunications technology also enables connectivity among multiple devices, such as telephones, fax machines, pagers and personal digital assistants. Consumer electronics technology is progressively enabling connectivity among devices, such as Internet appliances, digital cameras, audio systems and televisions.
Digital devices communicate by sending electronic signals through a transmission channel according to a specified protocol. A protocol is a set of detailed rules that governs and regulates the manner in which the signals are sent, received, and interpreted. The channel and the protocol are both typically specified in a formal communications standard. For communication to be successful, each device must implement and conform to the same standard.
Early communications standards were relatively simple, typically involving low-speed communications between two simple devices connected directly by copper wire. Current standards are increasingly complex, typically involving high-speed communications among multiple sophisticated devices indirectly linked to other devices and across various physical media, including copper wire, fiber optic cables, and wireless technologies with rapidly fluctuating frequencies. As a result, standards that were specified initially in only a few pages of text may now extend to over one thousand pages. The specifications for these standards are broadly available, which facilitates interoperability of hardware and software products from different manufacturers.
A standard is typically introduced by several leading technology and infrastructure companies. These core promoter companies comprise the nucleus of independent standards groups. These groups are sometimes referred to as implementers' forums, trade associations or special interest groups which assist in the development, implementation, promotion, and compliance with the standards. As commercial interest in a standard increases, the communications standards group typically expands to include system and device manufacturers and service providers. The promoter companies typically remain closely associated with the standard throughout its lifecycle.
A standard is implemented over a lifecycle that includes three overlapping phases: development, production and market deployment. During the development phase, key component manufacturers develop and produce important building blocks such as semiconductors, embedded software, protocol stacks and device drivers which will be used by others in the industry to create products. During the production phase, system and device manufacturers apply these building blocks to construct their unique products and applications. The market deployment phase includes the introduction and sale of products and applications to end users in the market. Similarly, products associated with a particular standard follow their own unique lifecycle from development through production and deployment.
Protocol analyzers are "standard specific" tools; they enable a design engineer to analyze the "conversation" between two devices. Many distinct communications standards are emerging to meet the growing demand for digital connectivity in the Computer/Semiconductor/Consumer Electronics, Data Storage, Automotive/Industrial, and Military/Aerospace industries. The characteristics of each standard, including its principal uses, physical medium, transmission speed
and distance covered, vary greatly. Examples of existing and emerging standards in the computer peripheral interconnect space include the following:
o Bluetooth(R). The Bluetooth standard, or Bluetooth wireless technology, enables low speed, wireless connectivity among computers, telecommunication devices, such as mobile telephones, and consumer electronics devices, such as personal digital assistants and headphones. Bluetooth was introduced in 1998. The promoter group consists of Agere, Ericsson, IBM, Intel, Microsoft, Motorola, Nokia and Toshiba. Bluetooth operates through radio waves with rapidly fluctuating frequencies at speeds of up to 1 million bits (megabits) per second, or Mbps, over distances of up to 100 meters. In 2005, over 500 million Bluetooth chipsets were shipped - primarily in the handset and mobile computing markets. Bluetooth has recently been enhanced further with updates to the specification to improve the performance and usability of the interface. In March of 2006, the Bluetooth Special Interest Group announced a next generation high-speed Bluetooth wireless technology to be based on WiMedia Ultra-Wideband platform. Collaboration between the WiMedia Alliance and the Bluetooth community should help define Bluetooth technology as a key personal area network technology for today and the future.
o Ethernet. Ethernet enables high-speed connection among computers and peripheral devices in local area networks. Ethernet was introduced in 1980 by Digital Equipment Corporation, Intel, and Xerox and, in 1983, the Institute of Electrical and Electronics Engineers, Inc. (IEEE) released the first IEEE standard for Ethernet technology. Ethernet technology operates over coaxial cable, twisted pair wiring or fiber optic cable at speeds of up to 10 Mbps over distances of up to 2,000 meters. The IEEE has released newer versions of the Ethernet technology including: Fast Ethernet in 1995, which operates at speeds of up to 100 Mbps, Wireless Ethernet in 1997, that operates at speeds up to 10 Mbps, Gigabit Ethernet in 1998, which operates at speeds of up to 1 billion bits (gigabits) per second, or Gbps, and 10 Gbps Ethernet released in June 2002.
o Fibre Channel. Fibre Channel enables reliable, cost-effective information storage and delivery at very high-speeds. Fibre Channel development started in 1988 and the American National Standards Institute (ANSI) standards body approved the first revision in 1994. Fibre Channel is designed to operate at speeds of 1, 2, and 4 Gbps and gives users the option to develop storage networks with configuration choices at different price points, levels of scalability and availability. Fibre Channel is a layered protocol that supports additional storage or networking protocols such as SCSI, IP, VI, and ESCON, thus offering many choices for storage connectivity, cluster computing and network interconnect.
o IEEE 1394. The IEEE 1394 standard, commonly known as 1394, FireWire or i.Link, enables high-speed connectivity among computers, peripheral devices and consumer electronic devices, including audio systems, television sets, digital cameras, video recorders, video players and game consoles. 1394a was introduced in 1987 and was ratified by the IEEE in 1995. The promoter group includes Apple, Canon, Hewlett-Packard, IBM, Intel, Microsoft, NEC, Philips, Sony, Sun Microsystems, Texas Instruments and Yamaha. 1394a enables connectivity through copper wire at speeds of up to 400 Mbps over distances of up to four and one-half meters. This speed increases to up to 3.2 Gbps over distances of up to 100 meters in the 1394b standard approved by the IEEE in April 2002.
o InfiniBand. The InfiniBand standard enables high-speed connectivity inside computers and among computers and storage devices in complex storage area networks. InfiniBand was introduced in 1999 and is used largely in enterprise database, high performance computing (HPC) and storage applications. The promoter group consists of Dell, Hewlett-Packard, IBM, Intel, Microsoft and Sun Microsystems. InfiniBand operates over copper wire and fiber optic cable at speeds of up to 10 Gbps over distances of up to ten meters for copper wire and ten kilometers for fiber optic cable.
o PCI Express. PCI Express is an emerging standard first introduced in 2002 and is intended to enhance the Peripheral Connect Interface (PCI) architecture spanning multiple computer market segments: clients (desktop and mobile), servers (standard and enterprise), embedded computers and communication devices. PCI Express provides system original equipment manufacturers, or OEMs, and peripheral developers the ability to realize product versatility and market differentiation without the burden of maintaining obsolete interfaces or losing compatibility. The promoter group consists of Hewlett-Packard, Dell, IBM, Intel and Microsoft. PCI Express currently runs at 2.5 Gbps per
lane in each direction, providing a total bandwidth of 80 Gbps in a 16-lane configuration. The next generation of PCI Express, Generation 2 or Gen 2, will run at 5.0 Gbps per lane in each direction, providing a total bandwidth of 160 Gbps for a 16-lane configuration. Adoption of PCI Express Gen2 will begin in the first half of fiscal 2007.
o Serial ATA. The Serial ATA standard (SATA) enables high-speed, low-cost internal storage connections for desktops and mobile computers. Serial ATA was introduced in 2000 and is expected to replace Parallel ATA, the standard used to connect storage devices such as hard drives, DVD and CD drives to the motherboard. Serial ATA operates over copper wire at speeds up to 3 Gbps over distances of up to one meter. In 2006, Serial ATA volume is expected to surpass legacy Parallel ATA device shipments for the first time. Broad based adoption of Serial ATA in the storage market has led to the use of SATA in new applications including server, networked storage and consumer electronics devices.
o Serial Attached SCSI. Initiated in December 2001 by the Small Computer System Interface (SCSI) Trade Association, Serial Attached SCSI (SAS) was designed to be the logical evolution of SCSI to satisfy the data center requirements of scalability, performance, reliability and manageability, while leveraging a common low-cost electrical and physical connection interface from Serial ATA. SAS provides universal interconnect with Serial ATA, while offering logical SCSI compatibility along with the reliability, performance and manageability of parallel SCSI. SAS is positioned primarily for enterprise class storage applications. SAS allows each host to address up to 4,096 devices via expanders. SAS's flexibility allows single or multiple lane communications with devices, with a 3 Gbps four lane wide connection providing 12 Gbps total throughput. The SAS-2 specification initiated in May of 2005 will run at 6.0 Gbps per lane in each direction, providing a total bandwidth of 24 Gbps. Early adopters are expected to begin sampling 6.0 Gbps devices in the 2nd half of fiscal 2007.
o Universal Serial Bus. The Universal Serial Bus standard (USB) enables low, medium and high-speed connectivity between computers and peripheral devices, including keyboards, mice, printers, scanners, joysticks and cameras, using plug and play technology. In addition, it is becoming widely used as the replacement technology for proprietary cabling on medical and industrial control equipment. USB was introduced in 1995 and replaces the serial, parallel, mouse and keyboard ports. The specifications for the second version of USB, or USB 2.0, were released in April 2000. The promoter group for USB consists of Agere, Hewlett-Packard, Intel, Lucent, Microsoft, NEC and Philips. USB enables connectivity through copper wires at speeds of up to 480 Mbps over distances of up to five meters. USB technology continued its impressive growth in 2005 with higher shipments in MP3 players, mobile handsets, digital televisions, set top boxes and DVD recorders. Market research firm In-Stat forecasts that USB-enabled electronics device annual shipments will double from 1.4 billion in 2005 to 2.8 billion in 2010.
o Wireless USB. Certified Wireless USB is the new wireless extension to USB that combines the speed and security of wired technology with the ease-of-use of wireless technology. Certified Wireless USB will support robust high-speed wireless connectivity by utilizing the WiMedia MB-OFDM Ultra-wideband (UWB) radio platform as developed by the WiMedia Alliance. This emerging wireless technology is endorsed for use in the U.S. and Japan; with regulatory approval underway in Europe. The combination of a low-cost, low-power wireless transport with the ubiquitous USB protocol layer is expected to become a key enabler for next-generation consumer electronic devices.
LeCroy is a provider of protocol analyzers for these existing and emerging digital communications standards. Our products are used by semiconductor, device, system and software companies at each phase of their products' lifecycles from development through production and market deployment. We have expertise in the Bluetooth, Ethernet, Fibre Channel, IEEE 1394, InfiniBand, PCI Express, SCSI, Serial ATA, SAS and wireless USB standards and are actively engaged with our customers throughout their development and production processes in order to deliver solutions that meet their needs. Utilizing our easy to use, color-coded expert analysis software called CATC Trace(TM), our products generate, capture, filter and analyze high-speed communications traffic, allowing our customers to quickly discover and correct persistent and intermittent errors and flaws in their product design. Our production products are used during the manufacturing process to ensure that our customers' products comply with standards and operate with other devices, as well as assist system manufacturers to download software onto new computers.
OUR COMPETITIVE STRENGTHS
We are a leading, worldwide provider of oscilloscopes and protocol analyzers 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 oscilloscope 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 57 U.S. patents and 25 foreign patents, with approximately 47 other U.S. patents pending.
Broad product portfolio. We offer a broad range of oscilloscope and protocol analyzer products which are designed to capture and analyze a wide range of electronic signals and data packets. We believe our breadth of product offerings, coupled with our ability to create application-specific analysis tools, address the specific needs of design engineers and systems integration teams in many industries.
Leading customer relationships. Our major customers are leaders in a range of industries, including computer/semiconductor/consumer electronics, data storage, automotive/industrial, and military/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, Japan and Asia/Pacific. Each of these regions is a major contributor to our revenue and provided between approximately 14% and 32% 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. Our sales force often works 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 over 17 years of experience in the industry. Our management team has overseen the introduction of many new products over the past four 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 and protocol analyzers, our objective is to grow our company and our market share in the markets in which we operate. In addition, we may pursue strategic acquisitions that have strong adjacent market positions or complement our current product lines. Key strategic goals include:
Focus on the general purpose oscilloscope market. We have a competitive product offering and ongoing engineering development efforts underway to address customer needs for oscilloscope solutions in market sectors representing the largest and most profitable portion of the oscilloscope market.
Focus on the market for serial data test applications. The market for testing important serial data standards including PCI Express, Serial ATA, SAS, USB2.0, wireless USB and Bluetooth, is a rapidly growing market - on the order of 30% Compound Annual Growth Rates (CAGR) according to internal estimates. The primary tools associated with testing serial data links are oscilloscopes (to test the electrical signals and paths or the "physical layer") as well as specialized protocol analyzers (to observe, decode and verify that the desired data traffic and device specific messages are flowing from node to node). Our high end real-time oscilloscope and sampling oscilloscope development efforts are aimed primarily at satisfying the needs of customers in this important applications area. We believe our offering in these two primary product categories combined with an intense focus on ensuring the right capability is
available to our customers at the right time in the most important applications will allow us to continue to grow in this market segment.
PRODUCTS AND SERVICES
OSCILLOSCOPES
We currently offer five major real-time oscilloscope families: WaveMaster, WavePro, WaveRunner, WaveSurfer and WaveJet and one sampling oscilloscope family, WaveExpert. 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.
NUMBER PRODUCT OF BANDWIDTH U.S. LIST MARKET FAMILY MODELS RANGE PRICE RANGE INTRODUCTION - -------------------- ------ -------------- ----------------- ------------ WaveExpert Sampling Oscilloscope 3 Up to 100 GHz $28,000 - $90,000 April 2005 Series............... WaveMaster/SDA/DDA Series............... 22 3 - 18 GHz $47,000 - $128,000 January 2002
WavePro 7000A Series......... 7 1 - 3 GHz $20,000 - $33,000 January 2003 WaveRunner 6000A Series......... 10 350 MHz - 2 GHz $8,250 - $19,990 October 2003 WaveRunner Xi Series............ 3 400 - 600 MHz $9,250 - $11,250 January 2006 WaveSurfer Xs Series............ 4 400 - 600 MHz $5,590 - $9,690 January 2006 WaveSurfer 400 Series........... 11 200 - 500 MHz $4,490 - $8,790 April 2004 WaveJet 300 Series........... 8 100 - 500 MHz $2,890 - $7,490 January 2006
SUPPORTING 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 and DDA5000 series, using WaveMaster and WavePro platforms;
o Serial data applications -- Serial Data Analyzer products, SDA3000 series, SDA4000, SDA5000 series, SDA6000 series, SDA11000 series and the SDA18000 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 -- Hardware and software applications based on the WaveRunner and WaveSurfer platforms for use in a variety of industries.
PROTOCOL ANALYZERS
Our protocol analyzer products are advanced verification systems that assist hardware and software manufacturers in the efficient design of reliable and interoperable systems and devices. Most of these systems utilize our proprietary intuitive expert analysis software, the CATC Trace, which displays communications traffic in searchable, color-coded packets. Highlights include:
o PETracer(TM) and PETracer ML. PETracer and PETracer ML are advanced verification systems introduced in 2003. The PETracer is a high
impedance, non-intrusive analyzer, capturing, processing and analyzing 5 Gbps PCI Express traffic on a single link. The PETracer ML allows for full bi-directional decode and capture of up to 8 PCI Express links. Both analyzers are based on the UPAS 10000 platform.
o PETrainer(TM). The PETrainer, announced in 2003, is a PCI Express(TM) exerciser supporting up to 4 links. PETrainer is a critical test and verification tool intended to assist engineers in improving the reliability of their solutions, while providing advanced capabilities for stress and compliance testing. Together with the CATC PETracer and PETracer ML analyzers, the PETrainer reduces time to market by enabling users to quickly identify logic and design flaws.
o SATracer(TM). The SATracer was first introduced in 2001 for SATA 1.5 Gbps speed and the second generation was introduced in the fourth quarter of 2003 for 3 Gbps. SATracer is a non-intrusive protocol analysis system that facilitates efficient and accurate debug, test and verification of Serial ATA semiconductors, devices and systems.
o SATrainer(TM). The SATrainer, introduced in 2003, is an add-on traffic generation module for our SATracer. It allows designers and validation engineers to transmit valid and invalid traffic to emulate host or device-side SATA communications. SATrainer features error injection capabilities that permit observation of device behavior under faulty link conditions.
o SASTracer(TM). The SASTracer, our Serial Attached SCSI development product introduced in 2003, is the Company's first system that supports the advanced protocol analysis of 1.5 and 3 Gbps SAS in 1-, 2- and 4-wide configurations. The SASTracer is able to logically group multiple related bus transactions allowing developers to quickly understand complex SAS transactions. SASTracer's features were especially designed for the multiple ways in which SAS systems can be configured.
o USBTracer/Trainer(TM). The USBTracer/Trainer system, introduced in 2001, is a powerful development and test tool based on the UPAS 2500 platform. The USBTracer captures, displays and analyzes all speeds of USB bus traffic. The USBTrainer serves as a flexible USB host for the development of USB devices, hubs and integrated circuits, enabling stress/limit testing of USB designs and observation of design behavior under faulty bus conditions.
OTHER PRODUCTS AND SERVICES
We offer our customers a variety of complementary oscilloscope 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 technical support services, repairs, maintenance, recalibration and a variety of post sale upgrades and installations. We maintain field service centers in Chestnut Ridge, New York; Geneva, Switzerland; Tokyo, Japan; Seoul, South Korea; and Shanghai, China.
OUR CUSTOMERS AND END MARKETS
Our oscilloscope 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 designs and components. Our protocol analyzers are used by designers and engineers whose products are in development and production and also for products deployed in the field. These end users typically use our products to monitor communications traffic and diagnose operational problems in a variety of communications devices to ensure that they comply with industry standards. We currently provide products to customers in four primary end markets, including Computer/Semiconductor/Consumer Electronics, Data Storage, Automotive/Industrial, and Military/Aerospace. Our customers also include leading original equipment manufacturers.
Computer/Semiconductor/Consumer Electronics. 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; Wireless USB - new wireless extension to USB that combines the speed and security of wired USB with the ease of use of wireless; 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 validation.
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;
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, and Serial Attached Storage, or SAS, interface standards.
Automotive/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/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 protocol analyzers and the features and advantages of our products. In addition, because of our focus on high-performance oscilloscopes and protocol analyzers, our sales engineers are skilled in performing product demonstrations for current and prospective customers.
We sell our oscilloscopes and protocol analyzers through our own direct sales force in the United States, Switzerland, Germany, Italy, France, the United Kingdom, Sweden, Japan, China, South Korea and Singapore, with regional sales headquarters located in Chestnut Ridge, New York; Geneva, Switzerland; and Tokyo, Japan. 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.
We support our customers through a worldwide network of specialized applications engineers. We maintain service, repair and calibration facilities in Chestnut Ridge, New York; Santa Clara, California, Geneva, Switzerland; Seoul, South Korea; Tokyo, Japan; and Shanghai, China.
In order to raise market awareness of our products, we maintain an informative website (www.Lecroy.com), 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.
TECHNOLOGY AND PRODUCT DEVELOPMENT
We believe we are a technology leader in both the oscilloscope and protocol analyzer markets. 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 by oscilloscopes and protocol analyzers.
In protocol analyzers, with the acquisition of Computer Access Technology Corporation ("CATC)" in October 2004 (See " Management's Discussion and Analysis of Financial Condition and Results of Operations - CATC Acquisition"), we believe we have a competitive advantage as a result of our knowledge and expertise in multiple communications standards, computer and software architecture and advanced ASIC and programmable logic design. This expertise is enhanced by our advanced design tools and collaboration among our various design teams. We have a broad, vertically integrated technology base that includes the knowledge and expertise to design advanced ASICs, use programmable logic in the form of microcontrollers and programmable logic devices in real-time embedded applications, design electronic circuit boards and systems, and design and develop embedded software, software drivers and software applications.
Our product development 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.
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. This development agreement is set to expire in December 2006 but can be renewed at no additional cost. During fiscal 2005, this agreement was renewed at no cost for an additional term of two years.
Our software engineering group continues to develop and advance our protocol, 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 specific communications protocols, data storage, power measurement, communications and other markets.
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 and protocol analyzer product introduction and development. Our WaveMaster, WaveExpert and WavePro oscilloscopes and related products are manufactured at our facility in Chestnut Ridge, New York. Protocol analyzer products are manufactured in both our Chestnut Ridge, NY and Santa Clara, California facilities. 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 WaveJet and WaveSurfer 4X products are manufactured by our strategic partner, Iwatsu, and our WaveRunner 6000A and WaveSurfer XS products are manufactured by a contract manufacturer, Plexus Corporation.
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 and loss of revenues.
COMPETITION
Oscilloscopes
The oscilloscope market is highly competitive and characterized by rapid and continual advances in technology. Our principal competitors in this market are Tektronix, Inc. ("Tektronix") and Agilent Technologies, Inc. ("Agilent"). 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 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 ($2,900 to $128,000) in which our oscilloscopes are focused. 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.
Protocol Analyzers
Our protocol analyzer markets are highly competitive, and we expect competition to intensify in the future. We compete with a number of companies,
with Agilent and Finisar Corporation representing the largest competitors. These competitors are diverse and offer a variety of solutions directed at various segments of this marketplace. We believe the principal factors of competition include:
o Product functionality;
o Time to market with new products;
o Ease of product use;
o Product speed, reliability, stability and accuracy;
o Price performance;
o Flexibility and programmability of products;
o Upgradeability of products;
o Local support and service for products; and
o Breadth of product offerings.
We believe we compete favorably with respect to each of these factors and have gained significant market share in some of our target markets as a result. We believe our success has been driven by our vertically integrated technology, ability to generate customer loyalty and ability to anticipate market trends.
BACKLOG
Our backlog of unshipped customer orders was approximately $11.2 million and $8.5 million as of June 30, 2006 and 2005, respectively. Backlog at June 30, 2005 excluded $0.7 million 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. This revenue was fully recognized in fiscal 2006. Customers may cancel or reschedule 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 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. We currently hold 57 U.S. and 25 foreign patents, and approximately 47 pending applications covering a range of products with various expiration dates. Although none of our products depends exclusively on any single patent, we believe our patents, in the aggregate, are important to our business and contribute to our competitive advantage.
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. With the exception of our technology development agreement with IBM, the capabilities licensed or otherwise acquired through these agreements, and additional license agreements we entered into, 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.
Although we believe that our products and technologies do not infringe the proprietary rights of third parties, there can be no assurance that third parties will not assert claims against us based on the infringement or alleged infringement of any such rights. Such claims are typically costly to defend, regardless of the legal outcome. There can be no assurance that we would prevail with respect to any such claim, or that a license to third party rights, if needed, would be available or 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, 2006, we had 458 full-time employees, 215 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 satisfactory.
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 August 31, 2006:
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. In August 2006, he was given the additional responsibility of managing LeCroy's worldwide sales force. 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.
Carmine J. Napolitano was appointed Vice President and General Manager of LeCroy's Product Divisions in August 2006. Previously he held the position of Vice President, President - Serial Data Division, with the acquisition of CATC in November 2004, (See "Management's Discussion and Analysis of Financial Condition and Results of Operations - CATC Acquisition,") having served as a CATC Director, President and Chief Executive Officer since July 2004. Mr. Napolitano joined CATC in September 2002 as Vice President, Chief Financial Officer and Secretary. He was named Chief Legal Officer in August 2003 and was promoted to President in November 2003. Before joining CATC, from August 1995 until August 2002, Mr. Napolitano was Vice President of Finance & Administration and Chief Financial Officer at Centric Software, a leader in collaborative product development software. Mr. Napolitano received a BS in Mechanical Engineering from the University of California, Santa Barbara and an MBA in Finance from New York University.
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.
Sean B. O'Connor was appointed Vice President, Finance and Chief Financial Officer in November 2005. Previously he served as Vice President, Legal Affairs and Chief Compliance Officer and from August 2001 to May 2005, he served as the Company's Tax Director. Prior to joining LeCroy, he was an attorney at the law firm of McDermott, Will and Emory. Previously Mr. O'Connor served as Director of Taxation and Finance at Movado Group and as a senior consultant in the New York office of PricewaterhouseCoopers LLC. Mr. O'Connor, a CPA, received his B.B.A. from Pace University and his J.D. from Seton Hall University School of Law.
Conrad J. Fernandes was appointed Vice President of Corporate Development and Strategy in August 2006. Previously he served as Vice President, Worldwide Sales from July 2001 to August 2006, 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.
Dr. Corey Hirsch has served as Vice President, Information Systems and Facilities since January 2002, and was named Chief Information Officer in May 2005. He joined LeCroy in September 2001, after a 24-year tenure at Tektronix, most recently as Director of European Operations, and Acting European Vice President. He completed his Doctorate degree in Business Administration from Brunel University, London and his Masters in Business Administration from the University of Oregon, and has recently earned a Certification in Information Security Management (CISM) from Information Systems Audit and Control Association (ISACA).
FORWARD-LOOKING INFORMATION
This Form 10-K contains forward-looking statements. When used in this Form 10-K, the words "anticipate," "believe," "estimate," "will," "plan," "intend," and "expect" and similar expressions identify forward-looking statements.
Although we believe that our plans, intentions, and expectations reflected in any forward-looking statements are reasonable, these plans, intentions, or expectations may not be achieved. Our actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied, by the forward-looking statements contained in this Form 10-K. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this Form 10-K, including under the heading "Risk Factors." All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Form 10-K. Except as required by federal securities laws, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
ITEM 1A.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this Form 10-K when evaluating the Company and its business. If any of the following risks actually occurs, our business, financial condition, or results of operations could suffer. In that case, the trading price of our common stock could decline and our stockholders may lose all or part of their investment.
RISKS RELATED TO OUR BUSINESS
OUR OPERATING RESULTS ARE EXPECTED TO CONTINUE TO FLUCTUATE AND MAY NOT MEET OUR FINANCIAL GUIDANCE OR PUBLISHED ANALYST FORECASTS, WHICH MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE SIGNIFICANTLY.
Our past operating results, including our gross profits, have fluctuated from fiscal period to fiscal period. We expect our future operating results and gross profits will continue to fluctuate from fiscal period to fiscal period due to a number of factors, many of which are outside our control and any of which could cause our stock price to fluctuate. The primary factors that affect our operating results include the following:
o changes in overall demand for our products;
o the timing of the announcement, introduction and market acceptance of new products by us or competing companies;
o the timing and magnitude of research and development expenses;
o changes in the estimation of the future size and growth rates of our markets;
o changes in our production efficiency;
o disruptions in operations at any of our facilities or the facilities of any of our contract manufacturers for any reason;
o changes in the selling prices of our products; and
o changes in foreign currency exchange risks.
In addition, we have historically experienced somewhat lower activity during our first fiscal quarter than in other fiscal quarters which, we believe, is due principally to the lower level of orders and market activity during the summer months, particularly in Europe. We believe this seasonal aspect of our business is likely to continue in the future.
OUR STOCK PRICE MAY BE VOLATILE IN THE FUTURE, AND OUR STOCKHOLDERS MAY BE UNABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID.
The market price of our common stock fluctuates significantly. The stock price could fluctuate in the future due to a number of factors, some of which are beyond our control. These factors include:
o historically low trading volume in our stock relative to alternative investments;
o announcements of developments related to our business, including additions or departures of key personnel;
o announcements of technological innovations or new products or enhancements by us or our competitors;
o sales by competitors, including sales to our customers;
o sales of common stock into the public market, including those by directors and members of management;
o developments in our relationships with our customers, partners, distributors and suppliers;
o shortfalls or changes from analysts' expectations in revenue, gross profits, earnings or losses, or other financial results;
o discontinuance of our recent stock repurchase program;
o regulatory developments;
o fluctuations in results of operations;
o failure to meet our financial obligations under any loans or financing agreements;
o trends in the seasonality of our sales; and
o general conditions in our market or the markets served by our customers.
In addition, in recent years the stock market in general and the market for shares of technology stocks in particular have experienced extreme price fluctuations, which have often been due largely to factors other than the operating performance of the affected companies. We cannot ensure that the market price of our common stock will not decline substantially, or otherwise continue to experience significant fluctuations in the future, including fluctuations that are unrelated to our operating performance.
IF DEMAND FOR OUR PRODUCTS DOES NOT MATCH MANUFACTURING CAPACITY, WE MAY UNDERUTILIZE OUR CAPACITY OR, ALTERNATIVELY, BE UNABLE TO FULFILL ORDERS IN A TIMELY MANNER, AND IN EITHER SITUATION OUR OPERATING RESULTS MAY SUFFER.
The sale of our products is dependent, to a large degree, on customers whose industries are subject to cyclical trends in the demands for their products. We may not be able to adapt production capacity and related cost structures to rapidly changing market conditions in a timely manner. When demand does not meet expectations, manufacturing capacity will likely exceed production requirements. We have at times increased our production capacity and the overhead that supports production based on anticipated market demand which has not always developed as expected. As a result, we have periodically underutilized our capacity, which has adversely affected our earnings due to existing fixed costs. In addition, conversely, if during a market upturn we cannot increase manufacturing capacity to meet product demand, we will be unable to fulfill orders in a timely manner, which in turn may have a negative effect on operating results and our overall business.
IF OUR OPERATING RESULTS DECLINE IN THE LONG-TERM, WE MAY BE REQUIRED TO ESTABLISH AN ADDITIONAL VALUATION ALLOWANCE AGAINST OUR NET DEFERRED TAX ASSETS.
We evaluate whether our deferred tax assets can be realized and assess the need for a valuation allowance on an ongoing basis. As of June 30, 2006, our Consolidated Balance Sheet includes approximately $15.5 million of deferred tax assets after valuation allowance related to the future tax benefit of certain temporary differences between our financial statements and our tax returns. Realization of our deferred tax assets is mainly dependent on our ability to generate future taxable income. As of June 30, 2006, we recorded a valuation allowance of approximately $0.3 million to reserve for those deferred tax assets we believe are not more likely than not to be realized in future periods. An additional valuation allowance would be recorded if it was deemed more likely than not that some or all of our deferred assets will not be realized. If we establish additional valuation allowances, we would record a tax expense in our Consolidated Statements of Operations, which would have an adverse impact on our operating results.
WE FACE RISKS FROM FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES VERSUS THE U.S. DOLLAR AND THE COST OF CURRENCY EXCHANGE, WHICH AFFECT OUR REVENUE, COST OF REVENUE AND OPERATING MARGINS AND COULD RESULT IN EXCHANGE LOSSES.
A large portion of our sales and expenses are denominated in foreign currencies. We purchase materials from suppliers and sell our products around the world and maintain investments in foreign subsidiaries, all denominated in a variety of currencies. As a consequence, we are exposed to risks from fluctuations in foreign currency exchange rates with respect to a number of
currencies, changes in government policies and legal and regulatory requirements, political instability, transportation delays and the imposition of tariffs and export controls. Changes in the relation of foreign currencies to the U.S. dollar will affect revenues, our cost of revenue and operating margins and could result in exchange losses. Among the more significant potential risks to us of relative fluctuations in foreign currency exchange rates is the relationship among and between the U.S. dollar, European monetary unit (Euro), Swiss franc, British pound, Swedish krona, Japanese yen, Korean won, and Singapore dollar.
We have a program of entering into foreign exchange forward contracts to minimize the risks associated with currency fluctuations on assets, liabilities or other transactions denominated in other than the functional currency of us or our subsidiaries. It cannot be assured, however, that this program will effectively offset all of our foreign currency risk related to these assets or liabilities. These foreign exchange forward contracts do not qualify for hedge accounting. Other than this program, we do not attempt to reduce our foreign currency exchange risks by entering into foreign currency management programs. As a consequence, there can be no assurance that fluctuations in foreign currency exchange rates in the future will not result in mismatches between local currency revenues and expenses, and will not adversely affect our results of operations. Moreover, fluctuations in exchange rates could affect the demand for our products.
No assurance can be given that our strategies will prevent future currency fluctuations from having a material adverse affect on our business, financial condition, results of operations or liquidity.
WE FACE NUMEROUS RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS, WHICH COULD CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS SINCE APPROXIMATELY TWO-THIRDS OF OUR REVENUES ARE DERIVED FROM INTERNATIONAL SALES.
We market and sell our products and services outside the United States, and currently have employees located in China, France, Germany, Italy, Japan, Singapore, South Korea, Sweden, Switzerland and the United Kingdom. Many of our customers and licensees are located outside the United States. As part of our strategy, we have expanded our international sales, particularly in China. We face numerous risks in doing business outside the United States, including:
o dependence on sales representatives or foreign distributors and their sales channels;
o longer accounts receivable collection cycles;
o less effective and less predictable recognition, protection and enforcement of intellectual property rights, specifically in areas of Asia and particularly in China;
o trade protection measures, import or export licensing requirements, tariffs and other trade barriers;
o highly cyclical business environments;
o unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements;
o strengthening of the U.S. dollar, which could make our products more expensive;
o changes in the political or economic condition of a specific country or region, particularly in emerging markets; and
o potentially adverse tax consequences.
Such factors could cause our future international sales to decline.
Our business practices in international markets are also subject to the requirements of the Foreign Corrupt Practices Act. If any of our employees are found to have violated these requirements, we could be subject to significant fines and other penalties.
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, which accounts for a material portion of our internationally derived revenue, is also subject to regulation under the Treaty for Nuclear Non-Proliferation. However, only a small portion of those oscilloscopes are sold in countries where that treaty restricts the end-user. These restrictions may make foreign competitors facing less stringent controls on their products more competitive in the global market. 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. Our international sales and, because approximately two-thirds of our revenue is derived from sales outside the United States, our sales in general, could be materially harmed by our inability to obtain required licenses or by the costs of compliance.
We may be greatly impacted by the political, economic, and military conditions in China, Taiwan, North Korea, and South Korea. These countries have recently conducted military exercises in or near the others' territorial waters and airspace. Such disputes may continue or escalate, resulting in economic embargoes, disruptions in shipping, or even military hostilities. This could severely harm our business by interrupting or delaying shipment of our products to or through these areas and/or reducing our sales in these areas.
WE DEPEND ON SINGLE-SOURCE SUPPLIERS FOR SOME OF OUR PRODUCTS, AND THE LOSS OF THESE SUPPLIERS COULD HARM OUR BUSINESS BY INTERRUPTING OR TERMINATING OUR MANUFACTURE OF THOSE PRODUCTS.
We purchase a small number of parts from single-source suppliers. In particular, several key integrated circuits that we use are made by International Business Machines ("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.
WE DEPEND UPON KEY PERSONNEL AND QUALIFIED FUTURE HIRES TO IMPLEMENT OUR EXPANSION STRATEGY, AND IF WE ARE UNABLE TO RETAIN OR ATTRACT PERSONNEL WE MAY NOT BE ABLE TO MANAGE AND OPERATE SUCCESSFULLY AND WE MAY NOT BE ABLE TO MEET OUR STRATEGIC OBJECTIVES.
Our success depends on the efforts and abilities of senior management and key employees in the sales, marketing, research and development, and manufacturing areas. Many of these employees would be difficult to replace. We do not have employment contracts with some of our key personnel. If we cannot retain existing key managers and employ additional qualified senior employees, our business, financial condition, and results of operations could be materially and adversely affected. We do not maintain "key man" life insurance policies on any of our personnel. Future expansion of operations will require us to attract, train and retain new personnel. In addition, we may be limited by non-solicitation agreements entered into by our key personnel with respect to hiring employees from our competitors. These factors could increase our operating expenses. If we are unable to recruit or retain a sufficient number of qualified employees, or the costs of compensation or employee benefits increase substantially, our business, results of operations or financial condition could be materially and adversely affected.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL AND PROPRIETARY RIGHTS, WHICH WOULD DEPRIVE US OF A COMPETITIVE ADVANTAGE AND THEREBY NEGATIVELY IMPACT OUR ABILITY TO COMPETE.
As a technology-based company, our success depends on developing and protecting our intellectual property. We rely generally on patent, copyright, trademark and trade secret laws in the United States and abroad. Electronic equipment as complex as most of our products, however, is generally not patentable in its entirety. We also license intellectual property from third parties and rely on those parties to maintain and protect their technology. We cannot be certain that actions we take to establish and protect proprietary rights will be adequate, particularly in countries where intellectual property rights are not highly developed or protected. If we are unable to adequately protect our technology, or if we are unable to continue to obtain or maintain licenses for protected technology from third parties, it may be difficult to design alternatives to such technology without incurring significant costs. Thus, the loss of intellectual property rights to technology could have a material adverse effect on our business, results of operations or financial condition. From time to time, in the ordinary course of business, we receive notices from third parties regarding intellectual property infringement or take action against others with regard to intellectual property rights. Even where we are successful in defending or pursuing such claims, we may incur significant costs. In the event of a successful claim against us, we could lose our rights to needed technology or be required to pay license fees for the infringed rights, either of which could have an adverse impact on our business.
WE LICENSE CERTAIN INTELLECTUAL PROPERTY FROM THIRD PARTIES, AND THE LOSS OF THESE LICENSES COULD DELAY DEVELOPMENT OF FUTURE PRODUCTS OR PREVENT THE SALE OR ENHANCEMENT OF EXISTING PRODUCTS.
We rely on licenses of intellectual property for our businesses, including technology used in our products. We cannot ensure that these licenses will be available in the future on favorable terms or at all. The loss of these licenses or the ability to maintain any of them on acceptable terms could delay development of future products or prevent the further sale or enhancement of existing products. Such loss could adversely affect our business, results of operations and financial condition.
POTENTIAL ACQUISITIONS, STRATEGIC ALLIANCES, AND JOINT VENTURES MAY RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED.
In the normal course of business, we engage in discussions with third parties relating to possible acquisitions, strategic alliances and joint ventures. On October 29, 2004, we acquired all of the outstanding shares of common stock of CATC. As a result of our acquisition of CATC or other transactions which may be consummated, our financial results may differ from the investment community's expectations in a given quarter and year. In addition, acquisitions and strategic alliances may require us to integrate a different company culture, management team and business infrastructure. We may have difficulty developing, manufacturing and marketing the products of the newly-acquired company in a way that enhances the performance of our combined businesses or product lines to realize the value from expected synergies. Depending on the size and complexity of an acquisition, our successful integration of the entity depends on a variety of factors, including:
o the retention of key employees;
o the management of facilities and employees in different geographic areas;
o the retention of key customers; and
o the integration or coordination of different research and development, product manufacturing and sales programs and facilities.
Any impairment of the value of purchased assets or goodwill could have a significant negative impact on our future operating results.
All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted.
WE MAY NOT BE ABLE TO OBTAIN THE CAPITAL WE NEED TO MAINTAIN OR GROW OUR BUSINESS.
Our ability to execute our long-term strategy may depend to a significant degree on our ability to obtain long-term debt and equity capital. We have no commitments for additional borrowings at this time, other than $46.5 million remaining under the Revolver with The Bank of New York and the other lenders party thereto, or for sales of equity, other than under our existing employee benefit plans. We cannot determine the precise amount and timing of our funding needs at this time. We may be unable to obtain future additional financing on terms acceptable to us, or at all. If we fail to comply with certain covenants relating to our indebtedness, we may need to refinance our indebtedness or repay it. We also may need to refinance our indebtedness at maturity. We may not be able to obtain additional capital on favorable terms to refinance our indebtedness.
The following factors could affect our ability to obtain additional financing on favorable terms, or at all:
o our results of operations;
o general economic conditions and conditions in our industry;
o the perception in the capital markets of our business;
o our ratio of debt to equity;
o our financial condition;
o our business prospects; and
o changes in interest rates.
In addition, certain covenants relating to our $100.0 million credit facility impose limitations on additional indebtedness. If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures and reduce research and development expenditures. Any such actions could have a material adverse effect on our business, financial condition, results of operations and liquidity.
WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF VIOLATIONS OF OR LIABILITIES UNDER ENVIRONMENTAL LAWS.
Our operations and products are subject to laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes and the cleanup of contaminated sites. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party claims for property damage and personal injury as a result of violations of or liabilities under environmental laws or noncompliance with environmental permits.
Our former subsidiary, Digitech Industries, Inc., has been involved in environmental remediation activities, the liability for which was retained by us and entirely reserved for after the sale of the Vigilant Networks business and the residual assets of Digitech. Any liability beyond what is currently expected and reserved for could have a material adverse affect on our results of operations.
WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS, AND FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT CONTRACTS COULD HARM OUR BUSINESS BY LEADING TO A REDUCTION IN REVENUE ASSOCIATED WITH THESE CUSTOMERS.
We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with these regulations might result in suspension of these contracts, or administrative penalties.
WE HAVE A CREDIT FACILITY THAT CONTAINS FINANCIAL COVENANTS, AND THE FAILURE TO COMPLY WITH THESE COVENANTS COULD HARM OUR FINANCIAL CONDITION BECAUSE OUR CREDIT FACILITY MAY BE UNAVAILABLE TO US.
We have a $100.0 million credit facility with The Bank of New York and the other lenders party thereto. We are subject to financial covenants under our credit facility, including interest coverage ratio, minimum total net worth, leverage ratio and fixed charge coverage ratio requirements. Failure to comply with the financial covenants under our credit facility may adversely affect our business, results of operations, liquidity and financial condition.
ISSUANCE OF SHARES IN CONNECTION WITH FINANCING TRANSACTIONS OR UNDER STOCK PLANS WILL DILUTE CURRENT STOCKHOLDERS.
Pursuant to our stock plans, our management is authorized to grant restricted stock awards or stock options to our employees, directors and consultants. Our stockholders will incur dilution upon exercise of any outstanding stock options. In addition, if we raise additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to our existing stockholders will result, and new investors could have rights superior to existing stockholders.
ANTI-TAKEOVER PROVISIONS UNDER OUR STOCKHOLDER RIGHTS PLAN, CHARTER DOCUMENTS AND DELAWARE LAW COULD DELAY OR PREVENT A CHANGE OF CONTROL AND COULD ALSO LIMIT THE MARKET PRICE OF OUR STOCK.
Our stockholder rights plan, certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company that our stockholders might consider favorable. Certain provisions of our certificate of incorporation and bylaws allow us to:
o authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of the common stock;
o provide for a classified board of directors, with each director serving a staggered three-year term;
o prohibit stockholders from filling board vacancies, calling special stockholder meetings, or taking action by written consent; and
o require advance written notice of stockholder proposals and director nominations.
In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, bylaws and stockholder rights plan and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including delay or impede a merger, tender offer, or proxy contest involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.
WE FACE BURDENS RELATING TO THE RECENT TREND TOWARD STRICTER CORPORATE GOVERNANCE AND FINANCIAL REPORTING STANDARDS.
Recently adopted or new legislation or regulations that follow the trend of imposing stricter corporate governance and financial reporting standards, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, have led to an increase in our costs of compliance. A failure to comply with these new laws and regulations may impact market perception of our financial condition, could materially harm our business and could cause the market price of our common stock to decline. Additionally, it is unclear what additional laws or regulations may develop, and we cannot predict the ultimate impact of any future changes.
WE MUST SUCCESSFULLY EXECUTE OUR STRATEGY TO INTRODUCE NEW PRODUCTS.
One of our key strategies is to expand our addressable portion of the oscilloscope and protocol analysis markets by introducing new products such as sampling oscilloscopes and protocol exercisers and probes. We have in the past withdrawn product lines due to implementation and financial concerns. The success of our new product offerings will depend on a number of factors, including our ability to identify customers' existing and future needs properly and quickly, timely manufacture and deliver products that address these needs in sufficient volumes, differentiate offerings from competitors' offerings, price products competitively and anticipate competitors' developments of new products or technological innovations.
WITHOUT THE TIMELY INTRODUCTION OF COMPETITIVE PRODUCTS, OUR PRODUCTS MAY BECOME TECHNOLOGICALLY OBSOLETE.
We generally sell our products in industries that are characterized by rapid technological changes, frequent new product announcements and introductions and changing industry standards. The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation, highly skilled engineering and development personnel and accurate anticipation of technological and market trends. Consequently, product development delays are typical in our industry. If we fail to introduce competitive products in a timely manner, customers may defer placing orders in anticipation of future releases or may purchase products from competitors. Product development delays may result from numerous factors, including:
o changing product specifications and customer requirements;
o unanticipated engineering complexities;
o difficulties with or delays by contract manufacturers or suppliers of key components or technologies;
o difficulties in allocating engineering resources and overcoming resource limitations; and
o difficulties in hiring and retaining necessary technical personnel.
Without the timely introduction of new products, services and enhancements, our products may become technologically obsolete, in which case our revenue and operating results could suffer.
IF WE DEVOTE RESOURCES TO DEVELOPING PRODUCTS FOR EMERGING COMMUNICATIONS STANDARDS THAT ULTIMATELY ARE NOT WIDELY ACCEPTED, OUR BUSINESS COULD BE HARMED.
Our future growth depends, in part, upon our ability to develop, manufacture and sell in volume advanced verification systems for existing, emerging and yet unforeseen communications standards. We have little or no control over the conception, development or adoption of new standards. Moreover, even in relation to currently emerging standards, the markets are rapidly evolving and we have virtually no ability to impact the adoption of those standards. As a result, there is significant uncertainty as to whether markets for new and emerging standards ultimately will develop at all or, if they do develop, their potential size or future growth rate. We may incur significant expenses and dedicate significant time and resources to develop products for standards that fail to gain broad acceptance. Failure of a standard for which we devote substantial resources to gain widespread acceptance would likely harm our business.
IF WE FAIL TO MAINTAIN AND EXPAND OUR RELATIONSHIPS WITH THE CORE OR PROMOTER COMPANIES IN OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY DEVELOPING AND MARKETING CERTAIN PROTOCOL ANALYZER PRODUCTS.
It is important to our success that we establish, maintain and expand our relationships with technology and infrastructure leader companies developing emerging communications standards in our target markets. We must work closely with these companies to gain valuable insights into new market demands, obtain early access to standards as they develop and help us design new or enhanced products. Generally, we do not enter into contracts obligating these companies to work or share their technology. Industry leaders could choose to work with other companies in the future. If we fail to establish, maintain and expand our industry relationships, we could lose first-mover advantage with respect to emerging standards and it would likely be more difficult for us to develop and market products that address these standards.
RISKS RELATED TO OUR INDUSTRY
WE OPERATE IN HIGHLY COMPETITIVE MARKETS AND THIS COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS.
The oscilloscope and protocol analysis markets are highly competitive and characterized by rapid and continual advances in technology. Our principal competitors in these markets are Tektronix and Agilent. Both of our principal competitors have substantially greater sales and marketing, development and financial resources. We believe that Tektronix, Agilent and other competitors each offer a wide range of products that attempt to address most sectors of the oscilloscope and many sectors of the protocol analysis markets.
We have historically engaged in intense competition with Tektronix. Some of our senior managers, including our chief executive officer and chief operating officer, are former employees of Tektronix. In fiscal 1994, we settled litigation with Tektronix alleging that our oscilloscope products infringed certain patents held by Tektronix by entering into a license agreement for the right to use that intellectual property. In fiscal 2005, we settled intellectual property litigation with Tektronix in which both sides claimed patent infringement. This settlement is described in more detail in Note 22 to the Consolidated Financial Statements.
We believe that the principal bases of competition in the oscilloscope and protocol analysis markets are a product's performance (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. If any of our competitors surpass us or are perceived to have surpassed us with respect to one or more of these factors, we may lose customers. 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 protocol analyzers and our ability to offer high-performance products timely and at a favorable "price-to-performance" ratio. We cannot assure that we will continue to compete effectively.
A PROLONGED ECONOMIC DOWNTURN COULD MATERIALLY HARM OUR BUSINESS BY DECREASING CAPITAL SPENDING.
Negative trends in the general economy, including trends resulting from actual or threatened military action by the United States and threats of terrorist attacks in the United States and abroad, could cause a decrease in capital spending in many of the markets we serve. In particular, a downward cycle affecting the computer and semiconductor, data storage devices, automotive and industrial, and military and aerospace markets would likely result in a reduction in demand for our products and would have a material adverse effect on our business, results of operations, financial condition and liquidity. In addition, if customers' markets decline, we may not be able to collect outstanding amounts due to us. Such declines could harm our consolidated financial position, results of operations, cash flows and stock price, and could limit our ability to maintain profitability.
WE COULD BE AFFECTED BY GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES.
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 therefore subject to various significant international, federal, state and local regulations, including but not limited to health and safety, product content, labor and import/export regulations. For example, the export of high-performance oscilloscopes from the United States is subject to regulation under the Treaty for Nuclear Non-Proliferation. These regulations are complex, change frequently and have tended to become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved comments to be reported pursuant to Item 1B.
ITEM 2.
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 secured credit agreement with The Bank of New York and other syndicated lenders, we granted the banks a security interest in this property. In addition, we lease other office space in Santa Clara, California and around the world to support our local sales and service operations and to support our research and development activities. Santa Clara also serves as a manufacturing facility for a limited number of products. We believe that our facilities are in good condition and are suitable and sufficient for our current operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in lawsuits, claims, investigations and proceedings, including patent and environmental matters, which arise in the ordinary course of business. There are no matters pending that the Company expects to be material to its business, results of operations, financial condition or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 2006, there were no matters submitted to a vote of securities holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the NASDAQ Global 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 Global Market. As of August 29, 2006, there were 313 stockholders of record of our common stock.
HIGH LOW ---- ----- Year Ended June 30, 2005: First Quarter...................................... $ 18.46 $ 13.00 Second Quarter..................................... 23.34 15.69 Third Quarter...................................... 25.42 17.00 Fourth Quarter..................................... 17.32 12.93
Year Ended June 30, 2006: First Quarter...................................... $ 15.98 $ 13.72 Second Quarter..................................... 16.32 14.41 Third Quarter...................................... 15.88 13.78 Fourth Quarter..................................... 15.42 11.78
ISSUER REPURCHASES OF EQUITY SECURITIES
On May 25, 2006, LeCroy's Board of Directors approved the adoption of a share repurchase plan authorizing the Company to purchase up to 2 million shares, not to exceed $25 million, of its common stock. Purchases under this buyback program may be made from time to time on the open market and in privately negotiated transactions. The timing of these purchases is dependent upon several factors, including market conditions, the market price of the Company's common stock, the effect of the share dilution on earnings, available cash and any other potential risks the Company may encounter. The share repurchase plan may be discontinued at any time at the discretion of the Company's Board of Directors.
The following table sets forth information regarding LeCroy's purchases of its common stock on a monthly basis during the fourth quarter of fiscal 2006. Share repurchases are recorded on a trade date basis.
EQUITY COMPENSATION PLAN INFORMATION
Information regarding LeCroy's equity compensation plans, including both stockholder approved plans and plans not approved by stockholders, is set forth in the section entitled "Executive Compensation-- Equity Compensation Plan Information" in LeCroy's Notice of Annual Meeting of Stockholders and Proxy Statement, to be filed within 120 days after LeCroy's fiscal year end of July 1, 2006 (the "Proxy Statement"), which information is incorporated herein by reference.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common 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. Subject to the terms of our revolving credit agreement, 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 amended bank credit agreement, we are permitted within prescribed covenant restrictions to declare and pay cash dividends.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data as of and for the year ended for each fiscal year presented has been derived from our consolidated financial statements for each of the years in the five-year period ended June 30, 2006. 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.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
(1) Certain prior year amounts have been reclassified from service revenue to product revenue to conform to the fiscal 2006 and 2005 presentation. These reclassifications had no impact on previously reported total revenue.
(2) Service and other revenue in each of fiscal 2005, 2004, 2003 and 2002 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," ("SAB 101") as of the beginning of fiscal 2001. Fiscal 2006 includes recognition of the remaining balance of $0.7 million of previously deferred revenue under SAB 101. Also included in service and other revenue in fiscal 2003 is a technology license fee of $3.0 million.
(3) Cost of revenues in fiscal 2006 includes a $0.1 million charge for severance and other related charges. Cost of revenues in fiscal 2005 includes $2.7 million of charges for inventory write-downs related to a change in our long-term product support, $1.8 million in other inventory write-downs, $1.5 million of asset impairment charges, and a $0.1 million charge for severance and other related charges. Included in cost of revenues 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.
(4) Certain prior year amounts have been reclassified from cost of revenues to selling, general and administrative expense to conform to the fiscal 2006 and 2005 presentation. These reclassifications had no impact on previously reported operating income (loss).
(5) In Selling, general and administrative expense in fiscal 2006 and 2005, we recorded a charge for severance and other related costs of $0.2 million and $1.5 million, respectively. 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.
(6) Research and development in each of fiscal 2006, 2005, 2004, 2003 and 2002 includes severance-related charges of $0.1 million, $0.1 million, zero, $0.7 million and $0.2 million, respectively. In fiscal 2005 we recorded a charge for in-process research and development ("IPR&D") of $2.2 million related to the acquisition of Computer Access Technology Corporation ("CATC") and, in fiscal 2002, a $4.0 million technology access fee paid to IBM.
(7) Results for fiscal 2006 and 2005 include CATC acquired October 29, 2004 (See "CATC Acquisition" in Management's Discussion and Analysis of Financial Condition and Results of Operations).
ITEM 7.
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.
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. Fiscal years 2006 and 2004 each include 52 weeks. Fiscal year 2005 includes 53 weeks.
OVERVIEW
We were founded in 1964 to develop, manufacture and sell high performance signal analysis tools to scientists engaged in high-energy physics research. In 1985 we introduced our first oscilloscope using our core competency of designing signal acquisition and digitizing technology.
We are a leading, worldwide provider of oscilloscopes and protocol analyzers 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 six families of oscilloscopes, which address different solutions to the markets we serve: WaveExpert, a powerful family of sampling oscilloscopes and modules; WaveMaster, one of our high performance product families; WavePro, which is targeted at the mid- to high-performance sector; WaveRunner, designed for the mid-performance sector; WaveSurfer, designed for value-oriented users in the low-performance bandwith sector of the market; and WaveJet, our entry-level oscilloscope products. Our protocol analyzers are tools used by designers and engineers to generate and monitor traffic over high speed serial data interfaces, including USB2.0, Bluetooth, PCI Express, Serial ATA, Serial Attached SCSI (SAS), Wireless USB, and others.
We sell our products into a broad range of end markets, including Computer/Semiconductor/Consumer Electronics, Data Storage, Automotive/Industrial, and Military/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.
We employ a direct sales model utilizing a highly skilled global sales force where it makes economic sense to do so. We supplement our direct sales force with a combination of manufacturers' representatives and distributors in areas where demand levels do not justify direct distribution. We divided the world into four areas - North America, Europe/Middle East, Japan and Asia/Pacific. In North America we primarily sell our products directly in the United States. In Europe/Middle East, we sell our products directly in Switzerland, Germany, Italy, France, the United Kingdom and Sweden. In Japan, we sell our products directly. In Asia/Pacific, we sell our products directly in South Korea, Singapore and five regions in China.
We generate revenue in a single segment within the Test and Measurement market, primarily from the sale of our oscilloscopes, protocol analyzers, probes, accessories, and applications solutions. To a lesser extent, we also generate revenue from the sales of our extended warranty, maintenance contracts and repairs and calibrations on our instruments after their warranties expire.
Generally, we transact revenues and pay our operating expenses in the local currencies of the countries in which we have a direct distribution presence or other operations, with limited exceptions, most notably in China where our sales and operating expenses are denominated in U.S. dollars. In Europe/Middle East, we transact business in Euros, Swiss francs, British pounds, Swedish krona and
U.S. dollars. In Japan, we transact business in Japanese yen. In South Korea, we transact business in Korean won and in Singapore, we transact business in both U.S. dollars and Singapore dollars. For a discussion of our foreign currency exchange rate exposure, see below, Item 7A
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We purchase materials from suppliers and sell our products around the world and maintain investments in foreign subsidiaries, all denominated in a variety of currencies. As a consequence, we are exposed to risks from fluctuations in foreign currency exchange rates with respect to a number of currencies, changes in government policies and legal and regulatory requirements, political instability, transportation delays and the imposition of tariffs and export controls. Among the more significant potential risks to us of relative fluctuations in foreign currency exchange rates is the relationship among and between the U.S. dollar, Euro, Swiss franc, British pound, Swedish krona, Japanese yen, Korean won and Singapore dollar.
We have a program of entering into foreign exchange forward contracts to minimize the risks associated with currency fluctuations on assets or liabilities denominated in other than our functional currency or the functional currency of our subsidiaries. It cannot be assured, however, that this program will effectively offset all of our foreign currency risk related to these assets or liabilities. These foreign exchange forward contracts do not qualify for hedge accounting in accordance with SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities", as amended ("SFAS No. 133").
Other than this program, we do not attempt to reduce our foreign currency exchange risks by entering into foreign currency management programs. As a consequence, there can be no assurance that fluctuations in foreign currency exchange rates in the future resulting in mismatches between local currency revenues and expenses will not adversely affect our results of operations. Moreover, fluctuations in exchange rates could affect the demand for our products.
During fiscal 2006, 2005 and 2004, foreign currency exchange gains (losses) on these derivatives and on transactions denominated in other than their functional currencies were ($0.3) million, $0.2 million, and $0.3 million, respectively. These net gains (losses) are included in Other, net in the Consolidated Statements of Operations and include foreign exchange contract gross gains of $0.6 million, $0.6 million and $0.5 million in fiscal 2006, 2005 and 2004, respectively. At June 30, 2006 and 2005, the notional amounts of the Company's open foreign exchange forward contracts, all with maturities of less than six months, were $13.7 million and $9.8 million, respectively.
We performed a sensitivity analysis for the fourth quarter of fiscal 2006 assuming a hypothetical 10% adverse change in foreign currency exchange rates on our foreign exchange forward contracts and our assets and liabilities denominated in other than their functional currencies. In management's opinion, a 10% adverse change in foreign currency exchange rates would have an immaterial effect on these instruments and therefore, on our consolidated results of operations, financial position or cash flows.
We are exposed to adverse changes in interest rates primarily due to our investment in cash equivalents as well as our $100.0 million credit facility. Market risk is estimated as the potential change in fair value resulting from a hypothetical 1% adverse change in interest rates, which would have been immaterial to our results of operations, financial position or cash flows. Borrowings under the Term Loan and revolving line of credit have variable rates and the carrying amounts are considered by management to be a reasonable estimate of their fair value. Please refer to Note 13 - Long Term Debt and Capital Leases for specifics related to our credit facility.
As required by the terms of the Credit Agreement (See Note 13 - Long Term Debt and Capital Leases), on January 27, 2005 we entered into a Master Agreement with Manufacturers & Traders Trust Co. ("M&T Bank"), the purpose of which is to protect against rising interest rates during the term of the Credit Agreement. Under the Credit Agreement we are obligated to enter into one or more interest rate swap agreements covering the interest payable with respect to at least 50% of the outstanding principal amount of the Term Loan for a period of at least three years. In connection with the Master Agreement (See Note 13 - Long Term Debt and Capital Leases), we entered into an interest rate swap transaction effective January 31, 2005 and continuing through January 31, 2008, corresponding with the repayment terms of the Term Loan. In accordance with the interest rate swap transaction, we pay interest quarterly on the notional amount at a fixed annualized rate of 3.87% to M&T Bank, and receive interest quarterly on the same notional amount at the three-month LIBOR rate in effect at the beginning of each quarterly reset period; except for the initial period, which covered the two months ending March 31, 2005, in which we received interest at a LIBOR rate of 2.64%. The initial notional amount was $25.0 million and resets quarterly to 50% of the outstanding principal balance with respect to the original amortization schedule as set forth in the Credit Agreement. The net interest expense incurred on the swap was approximately $0.1 million income for the year ended June 30, 2006 and ($0.1) million expense for the year ended June 20, 2005. The notional amount as of June 30, 2006 was approximately $19.1 million as compared to approximately $23.1 million as of June 30, 2005. The fair value of the interest rate swap as of June 30, 2006 and 2005, was approximately $0.4 million and $0.1 million, respectively, and approximates the amount that we would have received from M&T Bank if we had canceled the transaction at those dates. The fair value is recorded in Other non-current assets in the Consolidated Balance Sheets as of June 30, 2006 and 2005 and the change in fair value of $0.3 million and $66,000 for the year ended June 30, 2006 and 2005 respectively, is recognized in Interest expense in the Consolidated Statements of Operations. This interest rate swap does not qualify for hedge accounting in
accordance with SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities" ("SFAS No. 133").
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders LeCroy Corporation:
We have audited the accompanying consolidated balance sheets of LeCroy Corporation and subsidiaries as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended June 30, 2006. In connection with our audits of the consolidated financial statements, we also have audited the valuation and qualifying accounts financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LeCroy Corporation and subsidiaries as of June 30, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of LeCroy Corporation and subsidiaries' internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 13, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey September 13, 2006
LECROY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
LeCroy Corporation (the "Company" or "LeCroy"), was founded and incorporated in the State of New York in 1964 and reincorporated in the State of Delaware in 1995. The Company develops, manufactures, sells and licenses high-performance oscilloscopes and global communications protocol analyzers. 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. Protocol analyzers are tools used by designers and engineers to generate and monitor traffic over high speed serial data interfaces, including USB2.0, Bluetooth, PCI Express, Serial ATA, Serial Attached SCSI (SAS), Wireless USB, and others. The Company's products are sold into a broad range of end markets, including computer/semiconductor/consumer electronics, data storage, automotive/industrial, and military/aerospace. Revenues are also generated from the sale of probes, accessories, and applications solutions, and to a lesser extent, extended warranty and maintenance contracts, repairs and calibrations performed on instruments after the expiration of their warranties.
BASIS OF PRESENTATION AND USE OF ESTIMATES
The consolidated financial statements include the accounts of LeCroy and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior-years' amounts to conform to the current-year presentation.
The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the revenues and expenses reported during the period. The most significant of these estimates and assumptions relate to revenue recognition, reserve for accounts receivable, allowance for excess and obsolete inventory, valuation of long-lived and intangible assets, goodwill and deferred tax assets, and share-based compensation expense and warranty. These estimates and assumptions are based on management's judgment and available information and, consequently, actual results could differ from these estimates.
FISCAL YEAR ENDING DATES
The Company's fiscal year ends on the Saturday closest to June 30 (July 1, 2006, July 2, 2005 and June 26, 2004). Fiscal years 2006 and 2004 represented 52-week periods and fiscal year 2005 represented a 53-week period. For clarity of presentation, the consolidated financial statement year-end references are stated as June 30.
REVENUE
LeCroy recognizes product and service revenue, net of allowances for anticipated returns, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the selling price is fixed or determinable and (4) collection is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, or when services have been provided. The price is considered fixed or determinable when it is not subject to refund or adjustments.
The Company maintains an allowance for doubtful accounts relating to accounts receivable estimated to be non-collectible. The Company analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, the Company maintains an allowance for anticipated sales returns. The Company analyzes historical return trends as well as in-transit product returns to evaluate the adequacy of the allowance for anticipated returns.
Test and measurement products revenue. The Company generates Test and measurement product revenue from the sales of oscilloscopes and application solutions, protocol analyzers, probes and accessories. Provisions for warranty costs are recorded at the time products are shipped. Application solutions, which provide oscilloscopes with additional analysis capabilities, are either delivered via compact disc or are already loaded in the oscilloscopes and activated via a key code after the sale is made to the customer. No post-contract support is provided on the application solutions. All sales of test and measurement products are based upon separately established prices for the items and are recorded as revenue according to the above revenue recognition criteria. Revenues from these products are included in revenues from Test and measurement products in the Consolidated Statements of Operations. Certain software is embedded in the Company's oscilloscopes, but the embedded software component is considered incidental.
In the first quarter of fiscal 2006, in an effort to provide end-user customers an alternative to purchasing the Company's higher end products under its standard terms and conditions, the Company began offering customers an opportunity to enter into sales-type or direct financing leases for these products. The Company is accounting for these leases in accordance with Statement of Financial Accounting Standards ("SFAS") No. 13, "Accounting for Leases." Lease and rental revenues are reported within Test and measurement product revenue.
Due to the significant software content of its protocol analyzer products, the Company recognizes revenue on the sale of these products, in accordance with American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position 98-9, "Modifications of SOP 97-2 with Respect to Certain Transactions" ("SOP 98-9"), upon shipment, provided there is persuasive evidence of an arrangement, the product has been delivered, the price is fixed or determinable and collectibility is probable. Software maintenance support revenue is deferred based on its vendor specific objective evidence of fair value ("VSOE") and recognized ratably over the maintenance support periods. Provisions for warranty costs are recorded at the time of product revenue recognition. Revenues from protocol analyzer products are included in Test and measurement products in the Consolidated Statements of Operations.
Software license revenue. The Company recognizes software license revenue in accordance with SOP 97-2 as amended by SOP 98-9. Revenues from perpetual software license agreements are recognized upon delivery of the software if evidence of an arrangement exists, pricing is fixed and determinable, and collectibility is probable. If an acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. The Company allocates revenue on software arrangements involving multiple elements to each element based on the relative fair values of the elements. The determination of fair value of each element in multiple element arrangements is based on VSOE. The Company analyzes all of the elements and determines if there is sufficient VSOE to allocate revenue to maintenance included in multiple element arrangements. Accordingly, assuming all other revenue recognition criteria are met, revenue is recognized upon delivery using the residual method in accordance with SOP 98-9, where the VSOE of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as license revenue. The revenue allocated to software maintenance is recognized ratably over the term of the support agreement. The revenue allocated to licenses is recognized upon delivery of the licenses. Revenues from perpetual software license agreements are included in Service and other in the Consolidated Statements of Operations. There was no revenue from perpetual software license agreements for the years ended June 30, 2006, 2005 and 2004.
Service and other revenue. Service and other revenue includes extended warranty contracts, software maintenance agreements and repairs and calibrations performed on instruments after the expiration of their normal warranty period. The Company defers revenue for extended warranty contracts, software maintenance agreements and calibration services and then recognizes such revenue on a straight-line basis over the related service period. When arrangements include multiple elements, the Company uses relative fair values in accordance with Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables," to allocate revenue to the elements and recognizes revenue when the criteria for revenue recognition have been met for each element.
Deferred product revenue. During the third quarter of fiscal 2004, the Company began shipping the WaveSurfer oscilloscope product line. One component of the Company's strategy for distributing this product line was the use of a buy-sell distribution channel. This was the Company's initial entry into this distribution channel and, because of the associated uncertainty about sell-through volumes, the Company was unable to sufficiently estimate the amounts of potential product returns. In the fourth quarter of fiscal 2005, having had four full quarters of experience with this product and channel with no significant returns, the Company had sufficient data to estimate potential returns and, in accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists" ("SFAS 48"), recognized previously deferred revenue of $2.6 million. Revenue related to WaveSurfers sold to distributors, beginning with the fourth quarter of fiscal 2005, is recognized upon shipment to the distributor, rather than upon the sale of the unit by the distributor to the end user, and a provision for expected returns is recognized.
Deferred license revenue. Revenue from license fees under agreements that have exclusivity clauses and, from the licensee's perspective, have ongoing requirements or expectations that are more than perfunctory, are recognized on a straight-line basis over the terms of the related agreements. An ongoing requirement or expectation would be considered more than perfunctory if any party to the contract considers it to be "essential to the functionality" of the delivered product or service or failure to complete the activities would result in the customer receiving a full or partial refund or rejecting the products delivered or services performed to date.
Beginning in fiscal 2001 with the adoption of the SEC's Staff Accounting Bulletin, ("SAB") No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," (superseded by SAB 104), certain previously recognized license fee revenue was deferred and recognized in future periods over the terms of the agreements. The adoption of SAB 101 was recorded as of the beginning of fiscal 2001 and resulted in a non-cash charge for the cumulative effect of an accounting change of $4.4 million, net of a tax benefit of $2.7 million. The deferred revenue is being amortized into revenue on a straight-line basis over 5.5 years, the remaining terms of the license agreements. The Company recognized pretax license fee revenue of $0.7 million, $1.3 million and $1.3 million during fiscal years 2006, 2005 and 2004, respectively. Such license fees were included in Service and other revenue in the Consolidated Statements of Operations. As of June 30, 2006, there is no remaining deferred license revenue from the adoption of SAB 101.
SHARE - BASED COMPENSATION
In the first quarter of fiscal 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R") which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements at their fair values. The Company adopted SFAS 123R using the modified prospective application method under which the provisions of SFAS 123R apply to new awards and to awards modified, repurchased, or cancelled after the adoption date. Additionally, compensation cost for the portion of the awards for which the requisite service has not been rendered that are outstanding as of the adoption date is recognized in the Consolidated Statement of Operations over the remaining service period after the adoption date based on the award's original estimate of fair value. The Company uses the Black-Scholes option pricing model to estimate the fair value of options on the date of grant which requires certain estimates by management including the expected volatility and expected term of the option. Management also makes decisions regarding the risk free interest rate used in the model and makes estimates regarding forfeiture rates. Fluctuations in the market that affect these estimates could have an impact on the resulting compensation cost. The fair value of the compensation cost is recognized on a straight-line basis over the requisite service period of the award.
Historically, through fiscal 2005, the Company accounted for stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. No compensation expense related to stock options was reflected in the Company's Consolidated Statements of Operations, with the exception of the CATC Plans, as all options had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation cost for restricted stock (non-vested stock) was recorded based on its market value on the date of grant and was expensed in the Company's Consolidated Statements of Operations ratably over the vesting period. Upon the grant of restricted stock, deferred stock compensation was recorded as an offset to additional paid-in capital and was amortized on a straight-line basis as compensation expense over the vesting period. (See Note 14 to the Consolidated Financial Statements for additional information.)
WARRANTY
The Company provides a warranty on its products, typically extending three years after delivery and accounted for in accordance with SFAS No. 5, "Accounting for Contingencies" ("SFAS 5"). Estimated future warranty obligations related to products are provided by charges to Cost of revenues in the period that the related revenue is recognized. These estimates are derived from historical data of product reliability and, for new products, published (by a third party) expected failure rates. The expected failure rate is arrived at in terms of units, which are then converted into labor hours to which an average fully burdened cost per hour is applied to derive the amount of accrued warranty required. On a quarterly basis, the Company studies trends of warranty claims and performance of specific products and adjusts its warranty obligation through charges or credits to Cost of revenues.
SHIPPING AND HANDLING COSTS
The Company records the costs and fees associated with transporting its products to customers as a component of Selling, general and administrative expense in the Consolidated Statements of Operations. These costs totaled $3.5 million, $3.1 million and $2.2 million for the fiscal years ended June 30, 2006, 2005 and 2004, respectively.
ADVERTISING COSTS
The costs of general advertising, promotion and marketing programs are charged to Selling, general and administrative expense in the Consolidated Statements of Operations in the fiscal year incurred. The costs of advertising related to new product introductions are deferred until such advertising first takes place, which generally coincides with product introduction. Advertising expense for the fiscal years ended June 30, 2006, 2005 and 2004 was $2.6 million, $2.7 million and $2.3 million, respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The Company evaluates the requirement to capitalize certain software development costs for protocol analyzers in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, costs incurred to develop or significantly enhance computer software products are charged to research and development expense as incurred until technological feasibility has been established. The nature of the Company's development for protocol analyzers is generally such that the Company can measure technological feasibility most effectively using the working model method where the time between establishment of a working model and general availability is of short duration which results in very little or no costs that qualify for capitalization. As such, the Company has not capitalized any software development costs for the years ended June 30, 2006, 2005 or 2004.
CASH AND CASH EQUIVALENTS
Cash in excess of current operating requirements are invested in cash equivalents, which are short-term, highly liquid interest bearing investments with maturities of three months or less at the date of purchase and are stated at cost, which approximates market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation. Replacements, maintenance and repairs which do not improve or extend the life of the respective asset are expensed as incurred. Depreciation and amortization of property and equipment is provided on a straight-line basis over the asset's estimated useful life or related lease term, if shorter, as follows:
Building and improvements....................... 10-32 years Furniture, machinery and equipment.............. 2-10 years Computer software and hardware.................. 2-7 years
INVENTORIES
Inventories, with the exception of demonstration units in finished goods, are stated at the lower of cost (first-in, first-out method) or market. Demonstration units are stated at lower of cost (specific identification method) or market.
IMPAIRMENT OF LONG-LIVED ASSETS AND ACQUIRED INTANGIBLE ASSETS
The Company monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets, including amortizable intangible assets, may not be recoverable. When such events or changes in circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded to the extent that the carrying amount exceeds the fair value. During 2005, an intangible asset that provided for manufacturing rights to, and the use of, certain intellectual property failed the impairment test due to a change in product strategy and, accordingly, a $1.5 million pre-tax loss was recognized in Cost of revenues in the fiscal 2005 Consolidated Statement of Operations. There were no other impairment indicators for other long-lived assets during the fiscal years ended June 30, 2006, 2005 or 2004.
GOODWILL
Goodwill is recognized for the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a purchase business combination. The Company tests goodwill 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 using the Company's market capitalization. The Company has one reporting unit for the purposes of impairment testing.
The Company completed the annual impairment test during the fourth quarter of fiscal 2006 and determined that there was no impairment to its recorded goodwill balance of $78.5 million at June 30, 2006. There were no impairment indicators during fiscal years 2006, 2005 or 2004.
CONCENTRATION OF CREDIT RISK
The Company develops, manufactures, sells and licenses high-performance oscilloscopes and global communication protocol test solutions. The Company's products are sold into a broad range of end markets, including the computer and semiconductor, consumer electronics, data storage devices, automotive and industrial, and military and aerospace markets. Sales occur in all regions of the United States as well as a multitude of foreign countries. No customer accounted for more than 10% of the Company's consolidated revenues in any of the last three fiscal years. There is no significant concentration of the Company's accounts receivable portfolio in any customer or geographical region that presents a risk to the Company based on that concentration. Credit losses have been minimal in fiscal 2006, 2005 and 2004.
INCOME TAXES
Deferred tax assets and liabilities are recognized under the asset and liability method based upon the difference between the amounts reported for financial reporting and tax purposes. These deferred taxes are measured by applying current enacted tax rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which related temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The Company's policy is not to provide for U.S. taxes on undistributed earnings of foreign subsidiaries to the extent such earnings are determined to be permanently invested outside the United States.
FOREIGN EXCHANGE
The Company's foreign subsidiaries use their local currency as the functional currency and translate all assets and liabilities at fiscal year-end exchange rates and all income and expenses at average fiscal year exchange rates with translation adjustments recorded in Accumulated other comprehensive income, a separate component of stockholders' equity in the Consolidated Balance Sheets. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in Other, net in the Consolidated Statements of Operations. Foreign currency transaction gains and losses, related to short-term intercompany loans, are recorded in the Consolidated Statements of Operations as incurred. Intercompany loans that are of a long-term-investment nature are accounted for in accordance with SFAS 52, "Foreign Currency Translation," whereby foreign currency transaction gains and losses are recorded in accumulated other comprehensive income, a component of stockholders' equity.
FINANCIAL INSTRUMENTS
Cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities reported in the Consolidated Balance Sheets equal or approximate their fair value due to their short term to maturity. The Term Loan, totaling $34.1 million at June 30, 2006, is included within Current portion of long-term debt and capital leases and Long term debt. Borrowings under the revolving line of credit totaling $3.5 million at June 30, 2006 are included in Short-term borrowings. Borrowings under the Term Loan and revolving line of credit have variable rates and the carrying amounts are considered by management to be a reasonable estimate of their fair value. See below for the fair value of derivative instruments.
DERIVATIVE INSTRUMENTS
The Company accounts for derivatives and hedging activities in accordance with SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities," as amended ("SFAS 133"), which requires that all derivative instruments be recorded on the balance sheet at their respective fair values. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument is dependent upon whether the derivative has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. The Company's foreign exchange forward contracts and interest rate swap agreements are not accounted for as hedges in accordance with SFAS 133; therefore, any changes in fair value of these contracts are recorded in Other (expense) income, net in the Consolidated Statements of Operations. These derivatives are also recorded on the Consolidated Balance Sheets at fair value.
The Company does not use derivative financial instruments for trading or other speculative purposes and does not enter into fair value hedges.
The Company enters into foreign exchange forward contracts to minimize the risks associated with foreign currency fluctuations on assets or liabilities denominated in other than the functional currency of the Company or its subsidiaries. The Company also entered into an interest rate swap transaction with the Manufacturers & Traders Trust Co. ("M&T Bank") effective January 31, 2005 and continuing through January 31, 2008, corresponding with the repayment terms of the $50.0 million Term Loan portion of the senior, secured, five-year credit agreement entered into with the lenders listed therein and The Bank of New York, as administrative agent for such lenders on October 29, 2004 (the "Credit Agreement"). These foreign exchange forward contracts and interest rate swap agreements are not accounted for as hedges in accordance with SFAS 133; therefore, any changes in fair value of these contracts are recorded in Other (expense) income, net in the Consolidated Statements of Operations. These derivatives are also recorded on the Consolidated Balance Sheets in Other assets or liabilities at fair value. The fair value of the foreign exchange forward contracts is a liability of approximately ($0.2) million at June 30, 2006 as compared to an asset of approximately $0.1 million at June 30, 2005.
The changes in fair value of the foreign exchange contracts are highly inversely correlated to changes in the value of certain of the Company's foreign currency-denominated assets and liabilities. At June 30, 2006 and 2005, the notional amounts of the Company's open foreign exchange forward contracts, all with maturities of less than six months, were approximately $14.6 million and $10.6 million, respectively.
The notional amount of the interest rate swap as of June 30, 2006 and 2005 was approximately $19.1 million and $23.1 million, respectively. The fair value of the interest rate swap as of June 30, 2006 and 2005, was $0.4 million and $66,000, respectively, is recorded in Other assets on the Consolidated Balance Sheets and approximates the amount that the Company would have received from M&T Bank if the Company had canceled the transaction at that date.
COMPREHENSIVE INCOME
Comprehensive income comprises net income, foreign currency translation adjustments and unrealized gains and losses on marketable securities classified as available-for-sale, net of reclassification adjustments for realized gain and losses on marketable securities included in net income.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No. 154, "Accounting Changes and Error Corrections," ("SFAS 154") which will be effective for the Company for reporting changes in accounting principles and for correction of errors beginning in fiscal year 2007. SFAS 154 requires a change in accounting principle to be applied retrospectively application to prior periods' financial statements, unless explicit transition provisions are provided for in new accounting pronouncements or existing pronouncements that are in the transition phase when SFAS 154 becomes effective. There will be no immediate effect from our adoption of SFAS 154.
In June 2005, the FASB issued FASB Staff Position ("FSP") 143-1, "Accounting for Electronic Equipment Waste Obligations." FSP 143-1 addresses the accounting related to obligations associated with Directive 2002/96/ EC on Waste Electrical and Electronic Equipment (the "Directive") adopted by the European Union. Under the Directive, the waste management obligation for historical equipment (products put on the market on or prior to August 13, 2005) remains with the commercial user until the equipment is replaced. FSP 143-1 is effective the later of the end of the first quarter of fiscal year 2006 or the date of adoption of the law by the applicable EU-member country. It is expected that the law will be adopted by certain EU countries in calendar year 2006 and that the Company will be required to adopt the provisions of FSP-143-1 at that time. The effects will depend on the respective laws adopted by the EU member countries.
On February 3, 2006, the FASB issued FSP 123(R)-4, "Classification of Options and Similar Instruments as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event." This amends paragraphs 32 and A229 of SFAS 123R , which required that share options with contingent cash settlement features be classified as liabilities regardless of the event's likelihood of occurrence. FSP 123(R)-4 requires companies with cash-settleable provisions in their employee share-option awards to assess the probability of the contingent event's occurrence when determining the classification of the awards as liability or equity. If the event's likelihood of occurrence is less than probable and the award would otherwise be classified as equity, under FSP 123(R)-4, it would be equity classified. The Company would be required to make an ongoing assessment of the probability of the contingent event occurring and reclassify the award as a liability should the event become probable. The Company was required to adopt the provisions of this FSP as of the beginning of the fourth quarter of fiscal 2006, the first reporting period after the FSP was posted to the FASB website. The adoption of FSP 123(R)-4 had no impact on the Company's results of operations or financial condition as it has not issued any share options with contingent cash settlement features.
On February 16, 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Instruments, an amendment of FASB Statements No. 133 and 140" ("SFAS 155"). SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to separate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. It also clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring separation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The adoption of SFAS 155 is not expected to have any impact on the Company's results of operations or financial condition as it does not currently use hybrid instruments.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--An Interpretation of FASB Statement No. 109" ("FIN 48"), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 will be effective for fiscal years beginning after December 15, 2006. Management is currently evaluating the effect that adoption of this interpretation will have on the Company's consolidated financial position and results of operations.
2. CATC ACQUISITION
On October 29, 2004, the Company completed its acquisition of 100% of the outstanding common stock of Computer Access Technology Corporation ("CATC") via the merger of a newly-formed, wholly-owned subsidiary of LeCroy with and into CATC, with CATC surviving as a wholly-owned subsidiary of LeCroy (the "Merger"). CATC is a provider of advanced verification systems for existing and emerging digital communications standards. CATC's products are used by semiconductor, device, system and software companies at each phase of their products' lifecycles from development through production and market deployment. CATC had approximately 70 employees at the time of the Merger. Through its acquisition of CATC, LeCroy expects to capitalize on the increasing demand for serial data test instruments, leverage its global, technical, direct sales force to accelerate the growth of CATC's products, strengthen its position in the data storage market, increase penetration into the computer market, expand gross profit, increase operating leverage leading to expanded operating profit and increase cash generation capabilities.
Total consideration paid to acquire CATC was $130.0 million. The Merger was recorded under the purchase method of accounting, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," which requires that the total consideration be allocated to the assets acquired and liabilities assumed based on their fair values. On the effective date of the Merger, each share of CATC common stock issued and outstanding immediately prior thereto was canceled and converted into the right to receive $6.00 in cash. In addition, LeCroy paid cash to the holders of CATC's outstanding, vested, in-the-money stock options and employee stock purchase plan (the "CATC ESPP") purchase rights. Further, LeCroy assumed CATC's outstanding unvested stock options, as well as certain vested but unexercised stock options, by granting to CATC employees a total of 648,284 options to purchase LeCroy common stock (the "LeCroy Options"). The LeCroy Options were recorded at their fair values using the Black-Scholes option pricing model based on a stock price of $16.83 per share, which was the closing price of LeCroy common stock on October 29, 2004, less the intrinsic value of unvested options, which was to be charged as compensation expense to operations as earned by employees over their remaining vesting periods. (See Note 14 - Share-Based Compensation for further discussion of the accounting for these options following the Company's adoption of SFAS No. 123R.) LeCroy paid cash of $80.4 million, net of cash acquired, using $30.4 million of cash on hand and borrowings of $50.0 million under the Company's $75.0 million senior, secured, five-year credit agreement entered into on October 29, 2004, with the lenders listed therein and The Bank of New York, as administrative agent for such lenders. (See Note 13 - Long-term Debt and Capital Leases). The Merger consideration is summarized below (in thousands):
Cash for shares................................................. $ 120,242 Cash for options and CATC ESPP purchase rights.................. 3,965 Fair value of stock options assumed............................. 5,111 Intrinsic value of unearned stock compensation on unvested options assumed................................. (1,945) Transaction costs............................................... 2,622 ----------- Total purchase price....................................... $ 129,995 ===========
The fair value of tangible and intangible assets acquired and liabilities assumed was established based upon the unaudited October 28, 2004 Consolidated
Balance Sheet of CATC, as well as certain assumptions made regarding fair values. The fair value of finished goods and work in process inventory was valued based on estimated selling prices less direct costs to sell and a profit margin on the selling effort. The fair value of the in-process research and development ("IPR&D"), purchased technology, trade name and purchase orders was determined by an independent appraisal firm. The fair value of the IPR&D was based on the total estimated costs to develop the related technologies less the costs incurred to date for the projects, and the intangible asset values were based on estimates of future cash flows associated with those assets. The purchased technology, trade name and purchase orders related to this acquisition are being amortized over their estimated economic useful lives ranging from two to twenty-nine months. The excess of the purchase price over the fair value of the net assets acquired has been allocated to goodwill. The principle factors that contributed to a purchase price that resulted in the recognition of goodwill was the fair value of the going-concern element of the CATC business, which includes the assembled workforce and their technology position within emerging communication standards, as well as the expected synergies that will be achieved by combining both companies. The goodwill is not deductible for tax purposes. During the fourth quarter of fiscal 2006, the Company reduced its CATC goodwill by approximately $0.4 million, a result of a reversal of a pre-acquisition tax contingency reserve. In fiscal 2005, the Company reduced its CATC goodwill by approximately $2.9 million, a result of a reversal of a valuation allowance against the CATC deferred tax assets and a reversal of a pre-acquisition contingency reserve. The final purchase price allocation is summarized below (in thousands):
Cash $ 46,466 Accounts receivable 2,296 Inventory 3,710 Other current assets 133 Fixed assets 663 Other assets 28 Deferred tax asset, net 367 In-process research and development 2,190 Purchased technology 3,080 Purchased trade name 70 Purchased purchase orders 90 Goodwill 76,599 Current liabilities assumed (5,045) Long-term liabilities assumed (652) -------- Total purchase price $129,995 ========
The $2.2 million allocated to IPR&D was written off during the second quarter of fiscal 2005 in accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method." This charge was included in Research and development expense in the Consolidated Statement of Operations for that fiscal year.
The Consolidated Statements of Operations include the results of operations of CATC since October 29, 2004. The following (unaudited) pro forma consolidated results of operations have been prepared as if the Merger had occurred at the beginning of each year presented (in thousands, except per share data).
The write-off of IPR&D of $2.2 million is excluded from the calculation of net income (loss) and net income (loss) per share in the table shown above as the charge is non-recurring.
The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the Merger been consummated as of that time, nor is it intended to be a projection of future results.
3. RESTRUCTURING AND ASSET IMPAIRMENT
In the fourth quarter of fiscal 2006, the Company realigned some of its business processes and as a result, incurred severance and related expenses of approximately $0.4 million of which approximately $0.1 million was charged to Cost of revenues, $0.2 million was expensed to Selling, general and administrative and $0.1 million was expensed to Research and development. The implementation of this plan resulted in headcount reductions of sixteen employees or 3.5% of the workforce as compared to June 30, 2005. As of June 30, 2006, approximately $0.2 million has been paid in cash and $0.2 million remains in Accrued expenses and other current liabilities on the Consolidated Balance Sheet. Severance and other related amounts under this plan will be paid by the end of the third quarter of fiscal 2007.
During the fourth quarter of fiscal 2005, the Company realigned some of its business processes and, as a result, incurred expenses of approximately $1.0 million, consisting of $0.7 million of severance and related expenses and $0.3 million of facility closure expenses which included lease termination costs and asset write-downs. Of these costs, $0.1 million was recorded in Cost of revenues, $0.8 million was recorded in Selling, general and administrative and $0.1 million was recorded in Research and development. As of June 30, 2006, approximately $0.7 million of severance has been paid and $0.3 million of facility charges have been paid in cash or written off and approximately $19,000 remains in Accrued expenses and other current liabilities on the Consolidated Balance Sheet. The remaining balance is expected to be paid by the end of fiscal 2007.
Finally, during the second quarter of fiscal 2005, as a result of the Merger, the Company adopted a plan to restructure its organization and refine its product strategy. In connection with the adoption of this plan, the Company recorded a charge for severance and related expenses in fiscal 2005 of approximately $0.6 million in Selling, general and administrative expense. The implementation of this plan resulted in headcount reductions of six employees or approximately 2% of the workforce as compared to June 30, 2004. As of June 30, 2006, approximately $554,000 of severance has been paid and approximately $46,000 remains in Accrued Expenses and other current liabilities on the Consolidated Balance Sheet. Severance and other related amounts under this plan are expected to be paid by the end of the second quarter of fiscal 2007. Additionally, in the second quarter of fiscal 2005, as a result of a change in the Company's organization stemming from the Merger and a subsequent change in the Company's low to mid-range oscilloscope manufacturing strategy, the Company took a $1.5 million non-cash charge to Cost of revenues for the impairment of a related intangible asset.
The below table summarizes the restructuring charges for the fiscal years ended June 30, 2006 and 2005 (no similar charges were recorded in fiscal 2004) (in thousands):
FOR THE YEAR ENDED JUNE 30, --------------------------- 2006 2005 ---- ----
Charges for: Impaired intangible assets............. $ -- $ 1,500 Service center closure................. -- 59 Severance and related costs............ 77 18 --------- ------------ Cost of revenues.................... $ 77 $ 1,577 ========= ============
Charges for: Severance and related costs............ $ 127 $ 77 --------- ------------ Research and development............ $ 127 $ 77 ========= ============
Charges for: Severance and related costs............ $ 176 $ 1,328 Facility closure....................... -- 171 --------- ------------ Selling, general and administrative. $ 176 $ 1,499 ========= ============
4. DISCONTINUED OPERATIONS
In August 2000, the Company closed the sale of the assets and business of its Vigilant Networks, Inc. subsidiary ("Vigilant") and a portion of the assets and business of its Digitech Industries, Inc. subsidiary ("Digitech") for gross proceeds of $12.0 million. The remaining business of Digitech was classified as discontinued operations. The buyer also assumed certain liabilities of Vigilant.
In fiscal 2004, the Company recorded $0.1 million of gain 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. As of June 30, 2006, the Company has accrued discontinued operations reserves of $0.2 million due to environmental matters at Digitech's previously leased facilities (See Note 22- Commitments and Contingencies).
5. ACCOUNTS RECEIVABLE, NET
In fiscal 2006, the Company had an agreement with one of its customers, who is also a vendor, that provided the Company with the legal right to offset outstanding accounts receivable balances against outstanding accounts payable balances. At June 30, 2006, the Company netted $25,000 of accounts receivable against accounts payable on the Consolidated Balance Sheet related to this agreement. During fiscal 2005, the Company had agreements with two of its customers, who were also vendors, that provided the Company with the legal right to offset outstanding accounts receivable balances against outstanding accounts payable balances. At June 30, 2005, the Company netted $2.3 million of accounts receivable against accounts payable on the Consolidated Balance Sheet related to these agreements.
The allowance for doubtful accounts and sales returns was approximately $0.5 million and $0.4 million as of June 30, 2006 and June 30, 2005, respectively.
6. INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30, --------------------- 2006 2005 (1) ---------- --------- Raw materials...................... $ 7,726 $ 4,488 Work in process.................... 6,933 3,425 Finished goods..................... 19,382 19,748 ---------- ---------- $ 34,041 $ 27,661 ========== ==========
(1) Approximately $5.6 million of inventory classified as raw materials as of June 30, 2005 has been reclassified to finished goods to conform to the current year presentation.
The value of demonstration units included in finished goods was $10.9 million and $10.8 million at June 30, 2006 and 2005, respectively. The Company's demonstration units are held for sale and are sold regularly in the ordinary course of business through its normal sales distribution channels and existing customer base. The allowance for excess and obsolete inventory, included above, amounted to $1.6 million and $1.1 million at June 30, 2006 and 2005, respectively.
In fiscal 2005, as a result of the Merger, the Company reviewed the long-term product support policies in place at LeCroy and at CATC prior to the Merger with an aim toward developing one policy to best serve customers. In connection with the resultant change in policy, as well as changes in the Company's product support strategy, for the year ended June 30, 2005, the Company recorded a $2.7 million charge to Cost of revenues in the Consolidated Statements of Operations for the write-off of excess parts. In addition, in fiscal 2005 the Company expensed approximately $1.8 million for the write-down of inventory primarily related to a lower of cost or market adjustment due to renegotiated pricing with a particular vendor.
7. OTHER CURRENT ASSETS
Other current assets consist of the following (in thousands):
JUNE 30, ---------------------- 2006 2005 ---------- ---------- Deferred tax assets, net..................... $ 8,200 $ 9,000 Prepaid taxes................................ 762 7 Other receivables............................ 488 390 Prepaid probes and accessories............... 43 195 Value-added tax receivable................... 433 565 Other........................................ 3,311 2,458 ---------- ---------- $ 13,237 $ 12,615 ========== ==========
8. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following (in thousands):
JUNE 30, ------------------------- 2006 2005 ------------ ----------- Land, building and improvements................... $ 16,890 $ 15,494 Furniture, machinery and equipment................ 30,153 28,638 Computer software and hardware.................... 17,250 15,712 ----------- ----------- 64,293 59,844 Less: Accumulated depreciation and amortization... (43,934) (40,766) ----------- ----------- $ 20,359 $ 19,078 =========== ===========
Depreciation and amortization expense for the fiscal years ended June 30, 2006, 2005 and 2004 was $5.0 million, $5.1 million and $5.0 million, respectively.
9. GOODWILL AND OTHER NON-CURRENT ASSETS
Goodwill and Other non-current assets consist of the following (in thousands):
JUNE 30, ---------------------- 2006 2005 ---------- ---------- Goodwill.......................................... $ 78,473 $ 78,848 ========== ==========
Intangibles, net.................................. $ 4,022 $ 5,783 Deferred tax assets, net.......................... 3,964 5,446 Other............................................. 2,039 1,596 ---------- ---------- $ 10,025 $ 12,825 ========== ==========
The fiscal 2006 decrease in Goodwill of $0.4 million is attributable to the release of a CATC pre-acquisition tax contingency reserve for rights which expired in fiscal 2006. In fiscal 2005, the Company reduced its CATC goodwill by approximately $2.9 million, a result of a reversal of a valuation allowance against the CATC deferred tax assets and a reversal of a pre-acquisition contingency reserve. (See Note 2 - CATC Acquisition)
The following table reflects the gross carrying amount and accumulated amortization of the Company's intangible assets included in Other non-current assets on the Consolidated Balance Sheets as of the dates indicated (in thousands):
During the year ended June 30, 2006, the Company completed a purchase and settlement agreement with Iwatsu Electric Company, Ltd. ("Iwatsu") that included a non-compete agreement, whereby Iwatsu agreed not to engage in competition with the Company for a period of ten years and the purchase of certain other intellectual property rights (see Note 21). The asset for the intellectual property rights is being amortized over a period of seven years based on the estimated useful life.
During the year ended June 30, 2005, the Company entered into capital lease agreements for $1.0 million for the use of electronic design automation software and a license for $0.2 million for the ability to use certain computer aided design software tools. Additionally, the Company increased an existing license by $0.1 million for the use of embedded memory macro technology. The assets for the design software licenses are being amortized over a period of three years based on the terms of the license agreements. The asset for the use of the embedded memory technology has an amortization period of five years based on the terms of the license agreement.
Amortization for assets under capital leases is included in total depreciation and amortization expense. The net carrying value of assets under capital leases at June 30, 2006, is $0.7 million.
As part of the Merger, LeCroy purchased technology, the CATC trade name and purchase orders at their fair value of $3.2 million.
Also during the year ended June 30, 2005, as a result of a change in the Company's organization stemming from the Merger and a subsequent change in the Company's low to mid-range oscilloscope manufacturing strategy, the Company recorded a $1.5 million non-cash charge for the write-off of an intangible asset.
Amortization expense for those intangible assets with finite lives was $2.6 million, $3.1 million, and $1.4 million for fiscal 2006, 2005 and 2004, respectively. The cost of an amortizable intangible asset is amortized on a straight-line basis over the estimated economic life of the asset. As of June 30, 2006, certain technology rights totaling $5.0 million were fully amortized due to contract expiration and were removed from the Consolidated Balance Sheet in the first quarter of fiscal 2006. Management estimates intangible assets amortization expense on a straight-line basis in fiscal 2007 through 2011 and beyond will approximate $1.9 million, $1.0 million, $0.5 million, $0.1 million, $0.1 million and $0.4 million, respectively.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other liabilities consist of the following (in thousands):
JUNE 30, ---------------------- 2006 2005 ---------- ---------- Compensation and benefits........................... $ 5,450 $ 5,279 Income taxes........................................ 2,718 3,046 Deferred license fee revenue, current portion....... -- 665 Warranty............................................ 1,005 971 Deferred revenue, current portion................... 1,144 1,049 Retained liabilities from discontinued operations... 160 160 Other current liabilities........................... 2,931 3,472 ---------- ---------- $ 13,408 $ 14,642 ========== ==========
11. WARRANTIES AND GUARANTEES
The following table is a reconciliation of the changes in the Company's aggregate product warranty liability during the years ended June 30, 2006, 2005 and 2004 (in thousands):
In the fourth quarter of fiscal 2006, management determined that certain amounts previously reported as warranty costs were services expense that had been misclassified. This caused an overstatement of the related warranty accruals in the table above. The warranty accrual and cost activity for all years presented above has been revised to properly reflect only warranty expense. These revisions had no impact on the Company's beginning or ending warranty liability balance, financial position or Cost of revenue for any of the periods presented.
During the year ended June 30, 2005, the Company's management revisited labor and cost estimates utilized in its existing warranty model in light of the Company's fiscal 2005 product introductions, and determined that the actual labor and cost estimates to repair the warranty units were lower than previously estimated given the Company's success in reducing the time and costs necessary to fix the newer models currently under warranty. As a result of this evaluation and conclusion the Company changed the labor and cost estimates used to calculate the warranty accrual commencing with the period ended March 31, 2005. This change in estimate was recorded in the quarter ended March 31, 2005, and reduced the accrual required by approximately $350,000.
In connection with an agreement to license the Company's MAUI Instrument Operating System technology entered into by the Company during the third quarter of fiscal 2003, the Company agreed to indemnify the licensee against losses arising from any third party claim against the licensee to the extent such claim arose directly out of the infringement of a U.S. or Japanese patent by any LeCroy software components delivered under the license agreement. As of June 30, 2006, there have been no claims under such indemnification provisions.
As is customary in the test and measurement industry, and as provided for by local law in the U.S. and other jurisdictions, the Company's standard terms of sale provide remedies to customers, such as defense, settlement or payment of a judgment for intellectual property claims related to the use of the Company's products. Such indemnification provisions are accounted for in accordance with SFAS No. 5. To date, there have been no claims under such indemnification provisions.
12. INCOME TAXES
The components of income from continuing operations before income taxes are as follows (in thousands):
YEARS ENDED ------------------------------------ JUNE 30, 2006 2005 2004 ---------- ------------ ---------- Domestic......................... $ 5,896 $ 142 $ 10,546 Foreign.......................... 4,140 2,873 2,032 ---------- ---------- ---------- $ 10,036 $ 3,015 $ 12,578 ========== ========== ==========
The income tax (provision) benefit from continuing operations consists of the following (in thousands):
YEARS ENDED ----------------------------------- JUNE 30, 2006 2005 2004 ---------- ---------- --------- Current: U.S. federal................... $ (81) $ (105) $ (36) U.S. state and local........... (245) (161) (133) Foreign........................ (1,289) (945) (421) Deferred: U.S. federal................... (1,567) 89 (3,554) U.S. state and local........... (322) 9 (313) Foreign........................ 41 241 (196) --------- --------- --------- $ (3,463) $ (872) $ (4,653) ========= ========= =========
The reconciliations between the income tax (provision) benefit at the U.S. federal statutory rate and the Company's effective tax rate from continuing operations is as follows (in thousands):
Significant components of the Company's net deferred tax assets as of June 30, 2006 and 2005 were as follows (in thousands):
At June 30, 2006 and 2005, $8.2 million and $9.0 million, respectively, of the Company's net deferred tax assets were included on the Consolidated Balance Sheets in Other current assets, $4.0 million and $5.4 million, respectively, were included in Other non-current assets, and $0.2 million and zero of foreign deferred tax liabilities, respectively, were included in Accrued expenses and other current liabilities.
The Company is required to recognize all or a portion of its deferred tax assets if it believes that it is more likely than not, given the weight of all available evidence, that all or a portion of its deferred tax assets will be realized. Management assesses the realizability of the deferred tax assets at each interim and annual balance sheet date based on actual and forecasted operating results. The Company assessed both its positive and negative evidence to determine the proper amount of its required valuation allowance. Factors considered include the Company's current utilization of net operating loss carryforwards as well as management's projection that the Company expects to utilize the net operating loss carryforwards within one year, prior to the initial expiration period in fiscal 2022.
As a result of profits realized in certain subsidiaries in Europe during fiscal 2006, resulting in the utilization of foreign net operating losses, the valuation allowance recorded in those subsidiaries were accordingly reduced by $92,000. A valuation allowance totaling $258,000 as of June 30, 2006, continues to be recorded for certain tax credits and foreign net operating loss carryforwards due to the uncertainty surrounding the utilization of these deferred tax assets. As such, management believes that it is more likely than not that the Company will realize the benefits of the Company's deductible
differences, net of the valuation allowance. The valuation allowance against deferred tax assets decreased in fiscal 2005 by $5.0 million principally due to a change in estimate that resulted in a corresponding reduction of the gross carrying values of the deferred tax assets related to certain tax credits and amended return net operating loss carryforwards. Management will continue to assess the realizability of the deferred tax assets at each interim and annual balance sheet date based on actual and forecasted operating results.
On October 22, 2004, the American Jobs Creation Act (the "Act") was signed into law. The Act included a provision for the deduction of 85% of certain foreign earnings that were repatriated, as defined in the Act. In fiscal 2005, the Company elected to repatriate $23.1 million of qualifying earnings pursuant to its approved domestic reinvestment plan. The income tax effect recognized under the repatriation provision was approximately $1.1 million which was substantially offset by the release of a tax reserve related to a favorable foreign tax audit settlement during fiscal 2005.
Historically, it has been the practice of the Company to reinvest unremitted earnings of foreign subsidiaries. During the fourth quarter of fiscal 2001, however, the Company determined that it would repatriate approximately $7.0 million in future periods from its foreign subsidiaries. The Company believes repatriation of these earnings will result in additional taxes in the amount of $1.6 million and provided for that amount in the fiscal 2001 tax provision. The cumulative amount of all other undistributed earnings of consolidated foreign subsidiaries, for which U.S. federal income tax has not been provided, was $5.5 million and $4.0 million at June 30, 2006 and 2005, respectively. These earnings, which reflect full provision for non-U.S. income taxes, are anticipated to be reinvested permanently outside the United States. Determining the U.S. income tax liability that might result if these earnings were remitted is not practicable.
At June 30, 2006, the Company has federal and state net operating loss carryforwards of approximately $9.6 million and acquired net operating loss carryforwards of $5.3 million available to offset future taxable income. The carryforwards begin to expire at various dates starting in 2022 through 2025. Foreign tax net operating loss carryforwards of approximately $0.3 million at June 30, 2006 are available to offset future taxable income of certain foreign subsidiaries. These foreign net operating loss carryforwards do not have an expiration period. The Company has approximately $1.4 million of foreign tax credits, $2.5 million of state tax credits, $1.2 million of acquired state tax credits, $3.7 million of federal general business credits, and $0.9 million of acquired federal general business credits. The foreign, state and federal tax credits expire at various dates between fiscal 2007 and 2022.
13. LONG-TERM DEBT AND CAPITAL LEASES
On October 29, 2004, LeCroy entered into a $75.0 million senior, secured, five-year credit agreement with the lenders listed therein and The Bank of New York, as administrative agent for such lenders (the "Credit Agreement"), which replaced LeCroy's prior $25.0 million revolving credit facility with The Bank of New York. The terms of the Credit Agreement provide LeCroy with a $50.0 million term loan (the "Term Loan") and a $25.0 million revolving credit facility (the "Revolver"), which includes a $1.0 million swingline loan subfacility and a $1.0 million letter of credit subfacility. The performance by LeCroy of its obligations under the Credit Agreement is secured by all of the assets of LeCroy and its domestic subsidiaries, and is guaranteed by LeCroy's domestic subsidiaries. The proceeds under the Term Loan were used to finance the acquisition of CATC and pay transaction expenses related to the Merger. Proceeds from the Revolver may be used for general corporate purposes, including the financing of working capital requirements, capital expenditures and acquisitions. As of June 30, 2006, the Company had an outstanding loan balance of $3.5 million against the Revolver and $34.1 million on the Term Loan. The Company has not borrowed against the letter of credit sub-facility or swingline loan subfacility.
On May 9, 2006, the Company amended the Credit Agreement ("Amendment No.2") to, among other terms, (a) increase the Revolver Commitments from $25.0 million to $50 million, (b) amend the financial covenants and reduce certain fees and margins, (c) extend the Revolver termination date from October 29, 2009 to October 29, 2010, (d) increase the aggregate amount the Company is permitted to pay for acquisitions and (e) permit the Company to make certain payments for cash dividends and repurchases of common stock.
Borrowings under the Credit Agreement, as amended, bear interest at variable rates equal to, at the Company's election, (1) the higher of (a) the prime rate or (b) the federal funds rate plus 0.5%, plus an applicable margin of between 0.00% and 1.50% based on the Company's leverage ratio, as defined in the Credit Agreement, or (2) the London Interbank Offering Rate ("LIBOR") plus an applicable margin of between 1.25% and 2.75% based on the Company's leverage ratio. In addition, the Company must pay commitment fees on unused Revolver borrowings during the term of the Credit Agreement at rates between 0.375% and 0.5% dependent upon its leverage ratio.
Under the Credit Agreement, the Company is required to comply with certain financial covenants, measured quarterly, including a minimum interest coverage ratio, minimum total net worth, maximum leverage ratio, minimum fixed charge coverage ratio and limitations on capital expenditures. As of June 30, 2006, the Company was in compliance with its financial covenants under the Credit Agreement.
Beginning March 31, 2005, outstanding borrowings of $50.0 million under the Term Loan were required to be repaid quarterly through October 2009, based on an annualized amortization rate starting at 15% in calendar year 2005 and increasing 250 basis points per year during the term of the Credit Agreement. As of June 30, 2006, the Company has repaid $15.9 million of the principal balance of this loan including voluntary repayments in excess of those required by the Credit Agreement aggregating $4.1 million. The remaining outstanding balance to be repaid annually is approximately $9.4 million, $10.6 million, $11.9 million and $2.2 million for the years ended June 2007, 2008, 2009 and 2010, respectively.
As of June 30, 2006, there was an outstanding balance of $3.5 million against the Revolver included in Short-Term borrowings on the Consolidated Balance Sheets which was repaid in July 2006.
The Company incurred approximately $1.4 million of transaction fees in connection with entering into the Credit Agreement, which have been deferred and are being amortized over the term of the Credit Agreement using the effective interest method for the Term Loan and the straight-line method for the Revolver. The Company incurred additional fees of approximately $0.2 million in connection with entering into Amendment No. 2 which have been deferred and are being amortized on a straight line basis over the term of Amendment No. 2 in accordance with EITF 98-14. Amortization of the remaining balance of the transaction fees under the Credit Agreement has been adjusted to coincide with the one-year extension of the Revolver. At June 30, 2006, of the total unamortized fees of $0.9 million under both agreements, $0.3 million were included in Other current assets, and $0.6 million were included in Other non-current assets on the Consolidated Balance Sheets.
As required by the terms of the Credit Agreement, the Company entered into an interest rate swap transaction effective January 31, 2005 (See Note 24 - Derivative Instruments).
In addition to the above U.S.-based credit facilities, the Company maintains certain short-term foreign credit facilities, principally with two Japanese banks totaling 150.0 million yen (approximately $1.3 million as of June 30, 2006 and 2005). No amounts were outstanding under these facilities as of June 30, 2006 and 2005. The Company's Swiss subsidiary, LeCroy S.A., also has an overdraft facility totaling 1.0 million Swiss francs (approximately $0.8 million as of June 30, 2006 and 2005). As of June 30, 2006 and 2005, 0.4 million Swiss francs were held against supplier obligations leaving an available balance of 0.6 million Swiss francs under this credit facility. These obligations to suppliers, such as rent and utilities, are payable under the credit facility only in the event that the Company is unable to meet its financial obligations to those suppliers.
The Company had a five-year $2.0 million capital lease line of credit to fund certain capital expenditures that bore interest at an annual rate of 12.2% on outstanding borrowings. This line of credit, originally set to expire in November 2005, was renewed for one additional year. As of June 30, 2006 and 2005, the Company had $0.1 million outstanding under this line of credit, all of which was current and included within Current portion of long-term debt and capital leases on the Consolidated Balance Sheets.
During fiscal 2005, the Company entered into vendor supplied capital lease agreements for technology rights of $1.3 million. These leases bear interest at 4.5% to 4.88% with three-year terms. At June 30, 2006, the Company's outstanding balance under these agreements was $0.6 million of which $0.5 million was included within Current portion of long-term debt and capital leases and $0.1 million was included within Deferred revenue and other non-current liabilities in the Consolidated Balance Sheet. Under these capital lease obligations, the annual payments, including interest, for fiscal year 2007 and 2008 are $0.5 million and $0.1 million, respectively.
14. SHARE-BASED COMPENSATION
Share-Based Compensation
Historically, through fiscal 2005, the Company accounted for stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. No compensation expense related to stock option plans was reflected in the Company's Consolidated Statements of Operations, with the exception of the CATC Plans described below, as all options had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation cost for restricted stock (non-vested stock) was recorded based on its market value on the date of grant and was expensed in the Company's Consolidated Statements of Operations ratably over the vesting period. Upon the grant of restricted stock, deferred stock compensation was recorded as an offset to additional paid-in capital and was amortized on a straight-line basis as compensation expense over the vesting period.
On July 3, 2005, the start of the first quarter of fiscal 2006, the Company adopted the provisions of SFAS 123R, which requires that the costs resulting from all share-based payment transactions be recognized in the financial statements at their fair values. The Company adopted SFAS 123R using the modified prospective application method under which the provisions of SFAS 123R apply to new awards and to awards modified, repurchased, or cancelled after the adoption date. Additionally, compensation cost for the portion of the awards for which the requisite service has not been rendered that are outstanding as of the adoption date is recognized in the Consolidated Statement of Operations over the remaining service period after the adoption date based on the award's original estimate of fair value. In connection with the adoption of SFAS 123R, the deferred stock compensation at June 30, 2005 of $8.6 million relating to previous grants of restricted stock and stock options assumed in the Merger was eliminated against additional paid-in capital during the first quarter of fiscal 2006. Results for prior periods have not been restated. Total share-based compensation expense recorded in the Consolidated Statement of Operations for the year ended June 30, 2006 is $5.3 million.
As a result of applying SFAS 123R during fiscal 2006, the Company's income before income taxes and net income for the year ended June 30, 2006 are $2.3 million and $1.3 million lower, respectively, than if it had continued to account for share-based compensation under APB No. 25. Basic and diluted earnings per share for the year ended June 30, 2006 are $0.11 and $0.10 per share lower, respectively, than if the Company had continued to account for share-based compensation under APB No. 25. Under APB No. 25, restricted stock was historically being expensed although under APB No. 25, forfeitures were accounted for as they occurred.
On November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 ("FSP 123R-3"), "Transition Election Related to Accounting for the Tax Effects of Share-based Payment Awards," that provides an elective alternative transition method of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R (the "APIC Pool") to the method otherwise required by paragraph 81 of SFAS 123R. The Company may take up to one year from the effective date of this FSP to evaluate its available alternatives and make its one-time election. The Company is currently evaluating the alternative methods; however, neither alternative would have an impact on the Company's results of operations or financial condition for the year ended June 30, 2006, due to the fact that the Company is currently using prior period net operating losses and has not realized any tax benefits under SFAS 123R. Until and unless the Company elects the transition method described in this FSP, the Company will follow the transition method described in paragraph 81 of SFAS 123R.
The following table illustrates the effect on net income and net income per common share for the years ended June 30, 2005 and 2004, as if the Company had applied the fair value recognition provisions for stock-based employee compensation under Statement of Financial Accounting Standards No. 123 "Accounting for Stock-based Compensation", ("SFAS 123"), as amended. For purposes of the pro forma presentation, option and restricted stock forfeitures are accounted for as they occurred and no amounts of compensation expense have been capitalized into inventory or other assets, but instead were considered as period expenses (in thousands, except per share data):
Prior to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires the cash flows resulting from tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. For the year ended June 30, 2006, there was no excess tax benefit recognized resulting from share-based compensation cost.
The fair value of options granted is estimated on the date of grant using a Black-Scholes option pricing model. Expected volatilities are calculated based on the historical volatility of the Company's stock. Management monitors share option exercise and employee termination patterns to estimate forfeiture rates. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected holding period of options represents the period of time that options granted are expected to be outstanding. The risk-free interest rate is based on the interest rate of a 5-year U.S. Treasury note in effect on the date of the grant or such other period that most closely equals the term of the option.
The table below presents the assumptions used to calculate the fair value of options granted during the years ended June 30, 2006, 2005 and 2004:
Additionally, the Company has an Employee Stock Purchase Plan ("ESPP") with a look-back option that allows employees to purchase shares of common stock at 85% of the market value at the lower of either the date of enrollment or the date of purchase. Payment for the ESPP is a fixed amount, set at the beginning of the period, made through payroll withholding over the enrollment period which is six months. The number of shares the participant can acquire is variable based on the fixed amount withheld and the applicable fair value. SFAS No. 123R requires an ESPP with a purchase price discount of greater than 5% and a look-back option to be compensatory. The fair value of the `put' and `call' features of the estimated shares to be purchased are estimated at the beginning of the purchase period using a Black-Scholes option pricing model. Expected volatilities are calculated based on the historical six-month volatility of the Company's stock. The expected holding period is equal to the six-month enrollment period. The risk-free interest rate is based on the interest rate of a six-month U.S. Treasury note in effect on the first day of the enrollment period. The fair value of the shares is liability classified until the end of the six-month period at which time the fair value is re-calculated as of the end of the period and compared to the estimate. The lower amount is then equity classified and any over accrual reversed. As of June 30, 2006, there is approximately $42,000 of liability classified share-based compensation expense included in Accrued expenses and other current liabilities on the Consolidated Balance Sheet.
Stock Option Plans
The Company maintains share-based payment arrangements under the following plans: (i) the Amended and Restated 1993 Stock Incentive Plan ("1993 Plan"), (ii) the Amended and Restated 1995 Employee Stock Purchase Plan ("ESPP"), (iii) the Amended and Restated 1998 Non-Employee Director Stock Plan ("1998 Plan"), (iv) the 2003 Stock Incentive Plan ("2003 Plan"), (v) the 2004 Employment Inducement Stock Plan ("2004 Plan"), (vi) the LeCroy Corporation (CATC) Special 2000 Stock Option Plan, (vii) the LeCroy Corporation (CATC) 2000 Stock Incentive Plan, and (viii) the LeCroy Corporation (CATC) 1994 Stock Option Plan (items (vi), (vii) and (viii) collectively the "LeCroy (CATC) Plans"). The Company has a policy of issuing new shares to satisfy share option exercises.
The 1993 Plan expired on January 4, 2003. All options outstanding under the 1993 Plan at the time of its expiration will continue in full force and effect in accordance with their terms. The vesting period and expiration of each grant was determined by the Compensation Committee of the Board of Directors. In general, the vesting period is 25% per annum over a four-year period, or 50% after the second year and 25% for the third and fourth years. The lives of the options are generally ten years from the date of grant. As of June 30, 2006, there were 1,310,582 options outstanding under the 1993 Plan, of which 1,243,458 options were vested.
The ESPP has reserved for issuance an aggregate of 1,060,000 shares of Common Stock and is set to expire on November 30, 2011. The purpose of the ESPP is twofold: first, to encourage stock ownership by employees by establishing a program that permits them to purchase shares of Common Stock on a regular basis through payroll deductions; and second, to offer employees an opportunity, without adverse tax consequences, to purchase stock at a price equal to 85% of the market value on the first or last business day of the offering period. Through June 30, 2006, a total of 570,921 shares have been issued under the ESPP including 78,408, 56,214 and 49,141 shares for the years ended June 30, 2006, 2005 and 2004, respectively. As of June 30, 2006, 489,079 shares are available for future issuance.
In October 1998, the Board of Directors and stockholders terminated the 1995 Non-Employee Director Stock Option Plan ("1995 Plan") and adopted the 1998 Plan. As of June 30, 2006, stock options to purchase 901 shares of Common Stock issued pursuant to the 1995 Plan are outstanding and fully vested. On October 26, 2005, the Company's shareholders approved amendments to the 1998 Plan to extend the termination date of the 1998 Plan to October 27, 2010 and to provide for the ability to grant restricted stock awards under the 1998 Plan. Pursuant to the 1998 Plan, each non-employee director receives annually either a stock option grant of 15,000 shares to vest ratably over 36 months, or a restricted stock award of 10,000 shares of Common Stock, subject to such vesting and other conditions and restrictions as the Board may determine at its discretion. Additionally, each non-employee director will receive annually a restricted stock award of 5,000 shares of Common Stock subject to such vesting and other conditions and restrictions as the Board may determine at its discretion. A total of 500,000 shares of Common Stock can be issued during the term of the 1998 Plan. As of June 30, 2006, there were 238,670 options outstanding under the 1998 Plan, of which 234,086 options were vested. As of June 30, 2006, 212,330 shares are available for future issuance under the 1998 Plan.
The 2003 Plan provides for the grant of incentive stock options, nonqualified stock options and restricted stock awards to employees (including officers and employee directors) and consultants. Unless approved by stockholders owning a majority of shares present and entitled to vote at a duly convened meeting of stockholders of the Company, the purchase price of any option granted under the 2003 Plan may not be less than 100% of the fair value of the Company's common stock on the date of grant. The aggregate number of shares of Common Stock that may be issued or transferred pursuant to options or restricted stock awards under the 2003 Plan is 1,560,167 shares. The 2003 Plan also allows for awards based on performance criteria which awards may then qualify as "performance-based compensation" under Section 162(m) of the Internal Revenue Code. The Compensation Committee of the Board of Directors administers the 2003 Plan and has the authority to determine the terms of such options or awards including the number of shares, exercise or purchase prices and times at which the options become and remain exercisable or restricted stock is no longer restricted. There have been no performance-based awards granted under the 2003 Plan. The 2003 Plan expires on October 29, 2013. As of June 30, 2006, there were 57,968 options outstanding under the 2003 Plan, of which 9,018 options were vested. As of June 30, 2006, 966,577 shares are available for future issuance under the 2003 Plan.
In connection with the Merger, on October 29, 2004, the Company's Board of Directors approved the 2004 Plan to promote the interests of the Company and its stockholders by strengthening the Company's ability to attract and induce persons to become employees of the Company, including certain of CATC's employees. The adoption of the 2004 Plan did not require stockholder approval. The number of shares of LeCroy common stock that may be issued or transferred pursuant to options or restricted stock awards granted under the 2004 Plan is 750,000 shares. On October 29, 2004, the Company issued the following grants under the 2004 Plan: (i) 70,000 shares of restricted common stock to certain former officers of CATC, and (ii) options to purchase an aggregate of 230,984 shares of common stock to 61 former CATC employees who became non-officer employees of LeCroy (none of whom received an option grant of more than 20,000 shares). The options were issued with vesting periods of four to six years. On September 13, 2005, the Board of Directors resolved that no further grants would be made under the 2004 Plan. The 2004 Plan expires on October 29, 2014. As of June 30, 2006, there were 172,152 options outstanding under the 2004 Plan, of which 16,126 options were vested.
In connection with the Merger, LeCroy assumed the LeCroy CATC Plans. On October 27, 2004, the Board of Directors of CATC approved technical amendments to each of the CATC Stock Plans in anticipation of their assumption by LeCroy pursuant to the Merger including, without limitation, amendments reflecting that any stock option or other award granted thereunder would be exercisable for LeCroy common stock. Pursuant to SFAS No. 141 and FIN 44, the 648,284 unvested stock options and certain vested but unexercised stock options, granted by the Company in exchange for the stock options held by the employees of CATC were considered part of the purchase price for CATC. The $5.1 million fair value of the new awards was included in the purchase price, less the intrinsic value of unvested options of $1.9 million, which, during the period from October 29, 2004 to June 30, 2005, was being charged as compensation expense to operations on a straight-line basis as earned by employees over their remaining vesting periods. In connection with the adoption of SFAS 123R, the remaining unamortized deferred compensation was eliminated against additional paid-in capital on the date of adoption and compensation cost for unvested options under the LeCroy (CATC) Plans is being recognized over the remaining vesting period using the fair value of the options on the date of the Merger. On September 13, 2005, the Board of Directors resolved that no further grants would be made under the LeCroy (CATC) Plans. As of June 30, 2006, there were 450,575 options outstanding under the LeCroy (CATC) Plans, of which 289,122 options were vested.
Stock option transactions for fiscal years 2006, 2005 and 2004 under all plans are as follows:
The weighted-average grant-date fair value of the stock options granted during the years ended June 30, 2006, 2005 and 2004 was $7.64, $8.95 and $9.79 per option, respectively. The total intrinsic value of stock options exercised during the years ended June 30, 2006, 2005 and 2004 was $0.5 million, $3.7 million and $3.3 million, respectively. The fair value of stock options vested during the years ended June 30, 2006, 2005 and 2004, was $3.3 million, $2.3 million and $3.1 million, respectively.
The following table summarizes information about stock options outstanding at June 30, 2006:
Of the total stock options outstanding, 1,792,711, 1,860,699 and 1,771,859 options were exercisable at June 30, 2006, 2005 and 2004, respectively. Shares available for grant under all plans were 1,667,986, 1,415,772 and 977,648 at June 30, 2006, 2005 and 2004, respectively.
As of June 30, 2006, there was approximately $3.2 million of unrecognized compensation cost (net of estimated forfeitures) related to stock options granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.62 years. No compensation cost related to stock options was capitalized in inventory or any other assets for the years ended June 30, 2006, 2005 or 2004.
Restricted Stock
Compensation cost for restricted stock (referred to as non-vested stock) was historically recorded based on its market value on the date of grant as deferred stock compensation, a component of Stockholder's Equity, and then recognized ratably over the associated service period, the period in which restrictions are removed. Forfeitures were accounted for as they occurred. With the adoption of SFAS 123R, effective July 3, 2005, deferred stock compensation was eliminated against additional paid-in capital. The fair value of new grants is determined based on the closing price on the date of grant. Related compensation expense is recognized ratably over the associated service period, giving effect to estimated forfeitures. During the year ended June 30, 2006 there were 73,500 shares of restricted stock granted. Of these shares, 25,000 were issued under the 1998 Plan to non-employee directors and were immediately vested and 48,500 shares were issued to employees under the 2003 Plan with 4-year vesting. In fiscal 2005, 198,030 and 70,000 shares of restricted stock were granted under the 2003 Plan and 2004 Plan, respectively, with various vesting conditions ranging from three to four years. In fiscal 2004, 365,000 shares of restricted stock were granted under the 2003 Plan with long-term cliff vesting conditions of three to five years to certain key employees. During the years ended June 30, 2006 and 2005, 32,375 and 2,300 shares, respectively, of non-vested stock were forfeited as a result of employee terminations and $0.1 million and $24,000 of compensation expense was reversed in fiscal 2006 and 2005, respectively. As of June 30, 2006, 528,075 shares are unvested.
The following table summarizes transactions related to restricted (non-vested) stock for the years ended June 30, 2006, 2005 and 2004:
Weighted Average Number of Grant-Date Shares Fair Value ------------ -------------- Non-vested stock at June 30, 2003..... - $ -
Granted............................... 365,000 18.01 Vested................................ - - Forfeited ............................ - - ------------ Non-vested stock at June 30, 2004..... 365,000 18.01
Granted............................... 268,030 13.82 Vested................................ (86,130) 14.00 Forfeited ............................ (2,300) 13.21 ------------ Non-vested stock at June 30, 2005..... 544,600 17.39
Granted............................... 73,500 15.22 Vested................................ (57,650) 15.33 Forfeited ............................ (32,375) 17.74 ------------ Non-vested stock at June 30, 2006..... 528,075 $ 17.33 ============
As of June 30, 2006, there was approximately $5.2 million of unrecognized compensation cost (net of estimated forfeitures) related to non-vested stock granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.28 years. No compensation cost related to restricted stock grants was capitalized in inventory or any other assets for the years ended June 30, 2006, 2005 and 2004.
15. COMMON STOCK, TREASURY STOCK AND WARRANTS TO PURCHASE COMMON STOCK
On April 14, 2004, the Company closed an underwritten public follow-on offering of 500,000 shares of its common stock at $19.00 per share (less the underwriting discount) raising aggregate net proceeds of approximately $7.9 million, net of $1.1 million in offering costs and expenses. On April 27, 2004, pursuant to the exercise of an over-allotment option, the Company 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, the Company used $4.0 million of proceeds from this offering to repay $4.0 million of indebtedness outstanding under its revolving credit facility.
On May 25, 2006, the Company's Board of Directors approved the adoption of a share repurchase plan authorizing the Company to purchase up to 2 million shares, not to exceed $25 million, of its common stock for the treasury. During the fourth quarter of fiscal 2006, the Company repurchased 142,283 shares for total consideration of $1.9 million.
Purchases under this buyback program may be made from time to time on the open market and in privately negotiated transactions, including pursuant to the terms of a 10b5-1 plan. A 10b5-1 plan allows a company to purchase shares during a blackout period, provided the company communicates its share purchase instructions to the broker prior to the blackout period, pursuant to a written plan that may not be changed. The timing of these purchases is dependent upon several factors, including market conditions, the market price of the Company's common stock, the effect of the share dilution on earnings, available cash and any other potential risks the Company may encounter. The share repurchase plan may be discontinued at any time at the discretion of the Company.
At June 30, 2006 the Company had outstanding warrants to purchase 28,571 shares of common stock at a purchase price of $17.50 per share. These warrants expired on August 15, 2006. Warrants to purchase 250,000 shares of common stock at a purchase price of $20.00 per share expired on June 30, 2006. No warrants were exercised during the fiscal years ended June 30, 2006, 2005 or 2004.
16. EARNINGS PER COMMON SHARE
The following is a presentation of the numerators and the denominators of the basic and diluted income per common share computations for the years ended June 30, 2006, 2005 and 2004 (in thousands):
The computations of diluted net income per common share available to common stockholders for the years ended June 30, 2006, 2005 and 2004 do not include approximately 1.7 million, 1.6 million and 1.1 million, respectively, of stock options, restricted stock and warrants to purchase common stock as the effect of their inclusion would have been anti-dilutive to earnings per share.
17. STOCKHOLDER RIGHTS PLAN
On November 2, 1998, the Company's Board of Directors declared a dividend distribution of one right in respect to each share of LeCroy's Common Stock outstanding at the record date, November 18, 1998. To date, the rights have been traded together with the Common Stock and are not exercisable or separately tradable. The rights will be exercisable if a person or group acquires, in the future, 15% or more of the Company's stock or announces a tender offer. Right holders, other than the acquiring person or group, are then entitled to purchase an amount of the Company's stock at a 50% discount to the share price at that time. The number of shares of stock that a right holder is entitled to purchase is based on the exercise price. Under certain circumstances, the right will entitle the stockholder to buy shares in an acquiring entity at a discount.
The Board of Directors may redeem the rights at a price of $0.001 per right up until 10 days following a public announcement that any person or group has acquired 15% or more of LeCroy's Common Stock. The rights will expire on November 2, 2008, unless redeemed prior to that date.
18. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999, the Company completed a private placement of 500,000 shares of its redeemable convertible preferred stock for proceeds of $10.0 million. The shares of preferred stock were entitled to a 12% cumulative dividend on the original purchase price of $10.0 million, with redemption rights beginning on June 30, 2004 at the sole discretion of the holders of such shares. On September 27, 2003, the Company repurchased from the holders of its redeemable convertible preferred stock all 500,000 issued and outstanding shares for $23.0 million in cash. In connection with the repurchase of preferred stock, the Company recorded a charge of approximately $7.7 million to stockholders' equity representing the premium paid to the holders of its preferred stock ($1.0 million charged to Retained earnings and $6.7 million charged to Additional paid-in capital) and recognized transaction costs of $0.4 million included in Other, net in the fiscal 2004 Consolidated Statement of Operations. In accordance with the SEC's position published in EITF Topic No. D-42 relating to induced conversions of preferred stock, the Company recorded the $7.7 million premium paid to purchase the preferred stock as a charge to arrive at Net income applicable to common stockholders in fiscal 2004.
The Company and the holders of its preferred stock agreed that the final repurchase of preferred stock would be negotiated as though the transaction had occurred at the beginning of the first quarter of fiscal 2004. As a result, the Company accounted for the transaction as though no dividends had accrued in fiscal 2004 and that the charge for the value originally attributed to the warrants at the point of issue that remained unaccreted at the time of redemption was accelerated and combined with the redemption premium to reflect the total charge related to the redemption of convertible preferred stock in the fiscal 2004 Consolidated Statement of Operations.
19. EMPLOYEE BENEFIT PLANS
The Company had two employee 401(k) savings plans. One is a trusted, employee 401(k) savings plan for eligible U.S. employees under which it contributes an unconditional match of up to 50% of employee contributions up to a maximum employer contribution of 5% of the employee's eligible compensation, as defined.
The other plan is the CATC 401(k) Profit Sharing Plan (the "CATC 401(k) Plan") which the Company assumed in the Merger, and which covered all full-time former CATC employees employed by LeCroy. The CATC 401(k) Plan permitted, but did not require, that the Company provide matching contributions to the CATC 401(k) Plan on behalf of all participants. Effective January 11, 2006 the Company decided to merge the CATC 401(k) Plan into the trusted, employee 401(k) savings plan. For fiscal 2006, 2005 and 2004, the Company has expensed $0.6 million, $0.6 million and $0.4 million, respectively, for those plans.
The Company's subsidiary in Switzerland maintains a defined contribution plan, which requires employee contributions based upon a percentage of the employee's earnings, as defined, currently ranging from 4.6% to 8.4%. The Company makes a matching contribution based also upon a percentage of the employee's earnings, as defined, currently ranging from 5.4% to 9.6%. For fiscal 2006, 2005, and 2004, the Company has expensed $0.4 million, $0.5 million, and $0.4 million, respectively, in matching contributions to this plan.
20. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has defined one reportable segment in the test and measurement market, in which it develops, manufactures, sells and licenses high-performance oscilloscopes and global communication protocol test solutions. Design engineers and researchers use oscilloscopes to measure and analyze complex electronic signals in order to develop high performance systems and protocol analyzers to validate electronic designs and to improve time to market. Revenue from the sale of the Company's products, which are similar in nature, are reflected as Test and measurement product revenue in our Consolidated Statements of Operations.
Revenues are attributed to countries based on customer ship-to addresses. Revenues by geographic area are as follows:
2006 2005 2004 ----------- ----------- ---------- North America.......... $ 51,795 $ 52,500 $ 38,926 Europe / Middle East... 48,767 49,650 37,716 Japan.................. 22,043 26,209 20,024 Asia / Pacific......... 37,931 36,619 28,274 ---------- ---------- ---------- Total revenues....... $ 160,536 $ 164,978 $ 124,940 ========== ========== ==========
Total assets by geographic area are as follows:
JUNE 30, JUNE 30, ------------------------ 2006 2005 ----------- ----------- North America................. $ 180,070 $ 170,685 Europe / Middle East.......... 12,053 11,241 Japan......................... 5,360 6,328 Asia / Pacific................ 4,491 4,914 ------------ ----------- $ 201,974 $ 193,168 =========== ===========
Total long-lived assets (1) by geographic area are as follows:
JUNE 30, JUNE 30, 2006 2005 ----------- ----------- North America..................... $ 103,473 $ 103,921 Europe / Middle East.............. 581 525 Japan............................. 400 456 Asia / Pacific.................... 439 419 ----------- ----------- $ 104,893 $ 105,321 =========== ===========
(1) Long lived assets presented in the table above exclude non-current deferred tax assets.
No customer accounted for more than 10% of the Company's consolidated revenues in any of the last three fiscal years.
Revenue attributable to individual countries based on customer ship-to addresses that account for 10% or more of total revenues in fiscal 2006 include the United States ($46.0 million), Japan ($22.0 million) and Germany ($17.3 million); in fiscal 2005 include the United States ($47.0 million), Japan ($26.2 million) and Germany ($19.4 million); and in fiscal 2004 include the United States ($37.3 million), Japan ($20.0 million) and Germany ($15.9 million).
21. IWATSU SETTLEMENT/PURCHASE AGREEMENT
On March 22, 2006, the Company completed a purchase and settlement agreement with Iwatsu Electric Company, Ltd. ("Iwatsu") for a total of $3.6 million which included the settlement of an underlying dispute between the Company and Iwatsu relating to the ownership of intellectual property contained in Iwatsu's ViewGo product line, a non-compete agreement, whereby Iwatsu agreed not to engage in competition with the Company for a period of ten years, and the purchase of certain other intellectual property rights unrelated to the ViewGo product line. The Company obtained an independent third-party appraisal to value these elements of the Iwatsu agreement. As a result of the appraisal, in the third quarter of fiscal 2006, the Company expensed $2.8 million of the total purchase price as a legal settlement. The remaining $0.8 million was recorded as intangible assets of which $0.5 million will be amortized over the 10-year estimated life of the non-compete agreement and $0.3 million will be amortized over the 7-year estimated useful life of the acquired intellectual property assets. The ViewGo product line was re-engineered by the Company and launched as the WaveJet family of products during the third quarter of fiscal 2006.
22. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Operating leases covering plant, certain office facilities and equipment expire at various dates through 2013. Future minimum annual lease payments required during the years ending June 30, 2007, 2008, 2009, 2010, 2011 and thereafter, under non-cancelable operating leases having an original term of more than one year, are $2.0 million, $1.6 million, $0.7 million, $0.2 million, $0.1 million and $0.1 million, respectively. Aggregate rental expense on non-cancelable operating leases for the years ended June 30, 2006, 2005 and 2004 approximated $2.1 million, $2.0 million and $2.1 million, respectively.
ENVIRONMENTAL
The Company's former subsidiary, Digitech, was notified prior to 1999 by the Connecticut Department of Environmental Protection (the "DEP") that it may be responsible for environmental damage that occurred at its previously leased facilities in Ridgefield, Connecticut (the "Ridgefield Site"). Based upon recommendations made by the DEP, Digitech engaged environmental consultants to assist it in evaluating the costs associated with the DEP's recommendations for monitoring and remediation of the environmental damage.
In May 1999, LeCroy, Digitech and the former owners of the Ridgefield Site entered into an agreement with the current owners of the Ridgefield Site. The current owners purchased an insurance policy providing for $2.0 million of coverage against certain environmental liabilities related to the Ridgefield Site. This insurance policy names both LeCroy and Digitech as insured parties. The current owners of the Ridgefield Site also agreed to remediate all environmental problems associated with the property and to obtain all applicable approvals and certifications from the DEP. The current owners of the Ridgefield Site also agreed to hold both LeCroy and Digitech harmless in the event of a claim made against them relating to these environmental matters. In return for the above, forty-five days after the DEP has provided written notification to the Company that the site remediation has been accomplished to its satisfaction, the Company agreed to pay the former owners of the Ridgefield Site $0.2 million as compensation for the reduced sale value of the property due to the environmental problems existing on the site. The Company has retained this liability after the sale of the Vigilant business and the residual assets of Digitech, which amount is recorded in Accrued expenses and other current liabilities on the June 30, 2006 and 2005 Consolidated Balance Sheets.
LEGAL
On April 28, 2003, Tektronix, Inc. ("Tektronix") filed a complaint against the Company in the United States District Court for the District of Oregon claiming that the Company infringed on eight of Tektronix' U.S. patents. In the Company's responsive pleading, the Company denied that it has infringed, or is infringing, any of these patents, and contends that the patents are invalid. The Company furthermore filed a counterclaim on August 5, 2003, claiming Tektronix is infringing three of the Company's patents. On April 11, 2005, all claims related to two of the Tektronix patents were voluntarily dismissed from the Tektronix complaint and the Company's counterclaim. All claims related to one of the Company's patents were also voluntarily dismissed from the Company's counterclaim. On November 30, 2004, the Company filed a Motion for Summary Judgment of Non-infringement concerning one of the six Tektronix patents. In response, Tektronix filed a Cross-Motion for Summary Judgment of Infringement by the Company concerning the same patent. By order dated May 4, 2005, the court granted the Company's Motion for Summary Judgment of Non-infringement and denied Tektronix' Cross-Motion for Summary Judgment of Infringement. On May 11, 2005, Tektronix and the Company entered into an agreement settling all claims and counterclaims between the parties in connection with their respective patents. As part of the settlement agreement, the Company paid $1.0 million to Tektronix in fiscal 2005.
From time to time, the Company may be involved in lawsuits, claims, investigations and proceedings, including patent and environmental matters, which arise in the ordinary course of business. There are no matters pending that the Company expects to be material to its business, results of operations, financial condition or cash flows.
23. RELATED PARTY TRANSACTIONS
On October 20, 2000, the Compensation Committee of the Board of Directors approved a $0.3 million five-year loan to Thomas H. Reslewic, LeCroy's Chief Executive Officer and President, secured by Mr. Reslewic's non-qualified stock options. The loan accrued interest at 9.5% compounded annually with interest payable at the maturity of the loan. If Mr. Reslewic remained an employee of LeCroy for the entire five-year term of the loan or was terminated without cause prior to the maturity date of the loan, the Company would forgive the loan principal and all accrued interest. The loan was amortized on a straight-line basis and the compensation expense was recorded within Selling, general and administrative expenses. The loan reached maturity in the second quarter of fiscal 2006 and was forgiven along with the accrued interest, in accordance with the agreement.
On July 19, 2005 the Compensation Committee of the Board of Directors approved a $0.3 million retention bonus to Mr. Reslewic. This retention bonus requires Mr. Reslewic to remain an employee for five years. If Mr. Reslewic terminates his employment earlier than five years, he will be required to repay the bonus in full. The retention bonus is being amortized over five years on a straight line basis as compensation expense. At June 30, 2006 $0.2 million remains on the balance sheet of which a portion is in Other current assets and the remaining balance is in Other non-current assets on the Consolidated Balance Sheet.
24. DERIVATIVE INSTRUMENTS
The Company has the following derivative instruments:
Interest Rate Swap
As required by the terms of the Credit Agreement (See Note 13 - Long Term Debt and Capital Leases), on January 27, 2005 the Company entered into a Master Agreement with the M&T Bank, the purpose of which is to protect against rising interest rates during the term of the Credit Agreement. The Credit Agreement obligates the Company to enter into one or more interest rate swap agreements covering the interest payable with respect to at least 50% of the outstanding principal amount of the Term Loan for a period of at least three years. In connection with the Master Agreement, the Company entered into an interest rate swap transaction effective January 31, 2005 and continuing through January 31, 2008, corresponding with the repayment terms of the Term Loan. The swap agreement is not designated as a cash flow hedge under SFAS 133. Accordingly, changes in the fair value of the swap are charged or credited to operations. In accordance with the interest rate swap transaction, the Company pays interest quarterly on the notional amount at a fixed annualized rate of 3.87% to M&T Bank, and receives interest quarterly on the same notional amount at the three-month LIBOR rate in effect at the beginning of each quarterly reset period; except for the initial period, which covered the two months ending March
31, 2005, in which the Company received interest at a LIBOR rate of 2.64%. The initial notional amount was $25.0 million and resets quarterly to 50% of the outstanding principal balance of the Term Loan with respect to the original amortization schedule as set forth in the Credit Agreement. The net interest incurred on the swap was approximately $0.1 million income for the year ended June 30, 2006 and ($0.1) million expense for the year ended June 30, 2005. The notional amount as of June 30, 2006 was approximately $19.1 million as compared to approximately $23.1 million as of June 30, 2005. The fair value of the interest rate swap as of June 30, 2006 and 2005, was $0.4 million and $0.1 million, respectively, and approximates the amount that the Company would have received from M&T Bank if the Company had canceled the transaction at those dates. The fair value is recorded in Other non-current assets in the Consolidated Balance Sheets as of June 30, 2006 and 2005 and the change in fair value of $0.3 million ad $66,000 for the year ended June 30, 2006 and 2005, respectively, is recognized in Interest expense in the Consolidated Statements of Operations.
Forward foreign exchange contracts
The Company enters into short-term forward exchange agreements to purchase foreign currencies at set rates in the future. These foreign currency forward exchange agreements are used to limit exposure to fluctuations in foreign currency exchange rates on assets and liabilities denominated in currencies other than the subsidiaries' functional currency. Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables and payables not denominated in, or indexed to, their functional currencies. The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized currently in Other (expense) income, net in the Consolidated Statement of Operations.
During fiscal 2006, 2005 and 2004, foreign currency exchange gains (losses) on these derivatives and on transactions denominated in other than their functional currencies, were ($0.3) million, $0.2 million and $0.3 million, respectively. These net gains (losses) are included in Other, net in the Consolidated Statements of Operations and include foreign exchange contract gross gains of $0.6 million, $0.6 million and $0.5 million in fiscal 2006, 2005 and 2004, respectively. At June 30, 2006 and 2005, the notional amounts of the Company's open foreign exchange forward contracts, all with maturities of less than six months, were approximately $14.6 million and $10.6 million, respectively.
25. UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The Company has periods ending on the Saturday closest to the end of the month. For clarity of presentation, period-ends are stated as of the last day of the month. Summarized unaudited quarterly operating results for fiscal years 2006 and 2005 (all quarters represent 13-week periods, except for the quarter ended September 30, 2004 which was a 14-week period) are as follows (in thousands, except per share data):
(1) Included in service and other revenue for the first two quarters of fiscal 2006 and for each of the four quarters in fiscal 2005 is $0.3 million related to the recognition of deferred revenue associated with the adoption of SAB 101. For the third quarter in fiscal 2006, $0.1 million was recognized related to SAB 101 deferred revenue. The quarter ended June 30, 2005, includes product revenue of approximately $2.6 million from previously deferred revenue related to the Company's WaveSurfer product line.
(2) Certain quarterly amounts have been reclassified from service revenue to product revenue to conform to the fiscal 2006 and third and fourth quarter of fiscal 2005 presentation. These reclassifications had no impact on previously reported total revenues.
(3) Included in cost of revenues in the quarter ended June 30, 2006 are charges of $0.1 million for severance and other related charges. Included in cost of revenues in the quarter ended June 30, 2005 are charges of $1.8 million for inventory adjustments and $0.1 million for severance and service center closure. Included in cost of revenues in the quarter ended December 31, 2004 are $1.5 million of asset impairment charges and $2.7 million for inventory write-offs resulting from the change in long-term product support policies.
(4) Included in selling, general and administrative expense are severance charges of $0.2 million, $0.6 million and $0.6 million for the quarters ended June 30, 2006, June 30, 2005 and December 31, 2004, respectively. During the quarter ended June 30, 2005, the Company adopted a plan to attain cost efficiencies by consolidating service operations into a fewer number of facilities. In connection with this plan, the Company recorded lease termination costs of $0.2 million in the quarter ended June 30, 2005.
(5) Included in research and development expense in the quarters ended June 30, 2006 and 2005 are severance charges of $0.1 million for each quarter.
SCHEDULE II
(1) Uncollectible accounts receivable written-off and change in sales return estimates.
(2) Inventory disposals and/or impact of foreign currency.
(3) Adjustment associated with a change in estimate primarily related to a reduction of certain deferred tax assets.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information relating to the Company and the Company's consolidated subsidiaries required to be disclosed in the Company's reports filed or submitted under the Exchange Act.
There have not been any changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test the Company's internal controls over financial reporting and include in this Annual Report on Form 10-K a report on management's assessment of the effectiveness of the Company's internal controls over financial reporting. See "Management's Report on Internal Control over Financial Reporting." In addition, KPMG LLP, an independent registered public accounting firm, has audited management's assessment of the effectiveness of internal control over financial reporting as of June 30, 2006, as well as the effectiveness of internal control over financial reporting as of June 30, 2006 and has issued their report thereon, also included in this Annual Report on Form 10-K.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the guidelines established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management has concluded that our internal control over financial reporting is effective as of June 30, 2006. In addition, KPMG LLP, our independent registered public accounting firm, has audited our assessment of the effectiveness of internal control over financial reporting as of June 30, 2006, as well as the effectiveness of internal control over financial reporting as of June 30, 2006 and has issued their report thereon. That report appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders LeCroy Corporation:
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that LeCroy Corporation and subsidiaries maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). LeCroy Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that LeCroy Corporation and subsidiaries maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, LeCroy Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of LeCroy Corporation and subsidiaries as of June 30, 2006 and 2005, and the related consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for each of the years in the three-year period ended June 30, 2006, and our report dated September 13, 2006, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Short Hills, New Jersey September 13, 2006
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to our directors will be contained in the section captioned "Structure and Compensation of the Board of Director's" of the Definitive Proxy Statement relating to our 2006 Annual Meeting of Stockholders ("2006 Proxy Statement"), which is scheduled to be held October 25, 2006. Information with respect to Item 405 disclosure of delinquent Form 3, 4 or 5 filers will be contained in the section captioned "Section 16(A) Beneficial Ownership Reporting Compliance" in the 2006 Proxy Statement. Those portions of the 2006 Proxy Statement are incorporated herein by reference. The discussion of our executive officers is included in Part I, Item 1 of this report under "Executive Officers of the Registrant."
The Company has adopted a code of ethics entitled "Revised Principles of Business Conduct Policy," which applies to its officers, directors and employees. A copy is available to any person without charge upon written request to:
LeCroy Corporation Attention: Investor Relations 700 Chestnut Ridge Road Chestnut Ridge, New York 10977
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
A description of the compensation of our executive officers will be contained in the section captioned "Executive Compensation" of the 2006 Proxy Statement. That portion of the 2006 Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
A description of the security ownership of certain beneficial owners and management will be contained in the section captioned "Security Ownership of Certain Beneficial Owners and Management" of the 2006 Proxy Statement. That portion of the 2006 Proxy Statement is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
A description of our equity compensation plans will be contained in the section captioned "Executive Compensation and Other Information" of the 2006 Proxy Statement. That portion of the 2006 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain relationships and related transactions with management will be contained in the section captioned "Certain Relationships and Related Transactions" in the 2006 Proxy Statement. That portion of the 2006 Proxy Statement is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
A description of the principal accounting fees and services will be contained in the section captioned "Principal Accounting Fees and Services" in the 2006 Proxy Statement. That portion of the 2006 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of this report:
(a) (1) FINANCIAL STATEMENTS -- See Index to Consolidated Financial Statements at Item 8 of this report. (a) (2) FINANCIAL STATEMENT SCHEDULES -- See Index to Consolidated Financial Statements at Item 8 of this report (Schedule II).
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable, not required or is included elsewhere in the financial statements or notes thereto.
(a) (3) EXHIBITS
The following exhibits are filed with this report:
Exhibit Number Description -------- ------------
2.1 Agreement and Plan of Merger, dated as of September 1, 2004, among the Registrant, Cobalt Acquisition Corporation and Computer Access Technology Corporation, filed as Exhibit 2.1 to Form 8-K dated September 2, 2004, incorporated herein by reference.
3.1 Certificate of Incorporation of the Registrant as of July 24, 1995, filed as Exhibit 3.1 to Form S-1 Registration Statement No. 33-95620, incorporated herein by reference.
3.2 Amendment to the Certificate of Designation of the Series A Convertible Redeemable Preferred Stock as of April 9, 2001, filed as Exhibit 10.37 to Form 10-Q for the quarterly period ended March 31, 2001, incorporated herein by reference.
3.3 By-Laws of the Registrant, as amended, dated August 16, 2000, filed as Exhibit 3.3 to Form 10-Q for the quarterly period ended September 30, 2000, incorporated herein by reference.
4.1 Warrant to purchase 28,571 shares of the Registrant's Common Stock, dated June 15, 2004, issued by the Registrant to Capital Ventures International, filed as Exhibit 10.52 to Form S-3 Registration Statement No. 333-1119730, incorporated herein by reference.
10.1 Credit Agreement, dated as of October 29, 2004, among the Registrant, the lenders party thereto and The Bank of New York, as Administrative Agent, filed as Exhibit 10.14 to Form 8-K filed on November 2, 2004, incorporated herein by reference.
10.2 LeCroy Corporation Amended and Restated 1993 Stock Incentive Plan filed as Exhibit 10.1 to Form S-1 Registration Statement No. 33-95620, incorporated herein by reference.*
10.3 Amendment to LeCroy Corporation Amended and Restated 1993 Stock Incentive Plan, filed as Exhibit 10.33 to Form 10-Q for the quarterly period ended September 30, 2000, incorporated herein by reference.*
10.4 LeCroy Corporation 1995 Non-Employee Director Stock Option Plan filed as Exhibit 10.2 to Form S-1 Registration Statement No. 33-95620, incorporated herein by reference.*
10.5 LeCroy Corporation 1995 Employee Stock Purchase Plan, filed as Exhibit 10.3 to Form S-1 Registration Statement No. 33-95620, incorporated herein by reference.*
10.6 LeCroy Corporation 1998 Non-Employee Director Stock Option Plan, incorporated by reference to Appendix A to the Company's Definitive Proxy Statement filed on September 18, 1998.
10.7 Amendment to the LeCroy Corporation 1998 Non-Employee Director Stock Option Plan, dated August 16, 2000, filed as Exhibit 10.34 to Form 10-Q for the quarterly period ended September 30, 2000, incorporated herein by reference.*
10.8 Amendment to the LeCroy Corporation 1998 Non-Employee Director Stock Option Plan, dated October 25, 2000, filed as Exhibit 10.35 to Form 10-Q for the quarterly period ended September 30, 2000, incorporated herein by reference.*
10.9 LeCroy Corporation's 2003 Stock Incentive Plan, incorporated by reference to Appendix A to the Company's Definitive Proxy Statement filed on September 26, 2003.*
10.10 Form of Restricted Stock Purchase Agreement, filed as Exhibit 10.41 to Form 10-K for the fiscal year ended June 30, 2002, incorporated herein by reference.*
10.11 LeCroy Corporation Amended and Restated 1995 Employee Stock Purchase Plan, incorporated by reference to Appendix B to the Registrant's Definitive Proxy Statement filed on September 26, 2003.*
10.12 LeCroy Corporation's 2004 Employment Inducement Stock Plan, filed as Exhibit 10.5 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.13 Computer Access Technology Corporation Special 2000 Stock Option Plan, filed as Exhibit 10.7 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.14 Amendments to Computer Access Technology Corporation 2000 Special Stock Option Plan, filed as Exhibit 10.11 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.15 Amendment to LeCroy Corporation (CATC) Special 2000 Stock Option Plan, filed as Exhibit 10.2 to Form 8-K filed on November 19, 2004, incorporated herein by reference.*
10.16 Computer Access Technology Corporation 2000 Stock Incentive Plan, filed as Exhibit 10.8 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.17 Amendments to Computer Access Technology Corporation 2000 Stock Incentive Plan, filed as Exhibit 10.12 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.18 Amendment to LeCroy Corporation (CATC) 2000 Stock Incentive Plan, filed as Exhibit 10.3 to Form 8-K filed on November 19, 2004, incorporated herein by reference.*
10.19 Computer Access Technology Corporation 1994 Stock Option Plan, filed as Exhibit 10.9 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.20 Amendments to Computer Access Technology Corporation 1994 Stock Option Plan, filed as Exhibit 10.13 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.21 Amendment to LeCroy Corporation (CATC) 1994 Stock Option Plan, filed as Exhibit 10.4 to Form 8-K filed on November 19, 2004, incorporated herein by reference.*
10.22 Employee Agreement Regarding Inventions, Confidentiality and Non-Competition, dated as of March 28, 1995, between the Registrant and Walter O. LeCroy, Jr., filed as Exhibit 10.13 to Form S-1 Registration Statement No. 33-95620, incorporated herein by reference.*
10.23 Form of Indemnification Agreement, between the Registrant and each of its executive officers and directors filed as Exhibit 10.29 to Form S-1 Registration Statement No. 33-95620, incorporated herein by reference.*
10.24 Employment Agreement, dated August 13, 2001, between the Registrant and R. Scott Bausback, filed as Exhibit 10.38 to Form 10-Q for the quarterly period ended December 31, 2001, incorporated herein by reference.*
10.25 Separation Agreement, dated August 19, 2004, between the Registrant and R. Scott Bausback, filed as Exhibit 10.50 to Form 10-K for the fiscal year ended June 30, 2004, incorporated herein by reference.*
10.26 Employment Agreement, dated January 1, 2002, between the Registrant and Thomas H. Reslewic, filed as Exhibit 10.40 to Form 10-Q for the quarterly period ended March 31, 2003, incorporated herein by reference.*
10.27 Amendment No. 1 to Employment Agreement, dated December 16, 2002, between the Registrant and Thomas H. Reslewic, filed as Exhibit 10.43 to Form 10-Q for the quarterly period ended March 31, 2003, incorporated herein by reference.*
10.28 Separation Agreement, dated August 19, 2004, between the Registrant and Thomas H. Reslewic, filed as Exhibit 10.49 to Form 10-K for the fiscal year ended June 30, 2004, incorporated herein by reference.*
10.29 Separation Agreement, dated January 6, 2003, between the Registrant and Raymond F. Kunzmann, filed as Exhibit 10.42 to Form 10-Q for the quarterly period ended December 31, 2002, incorporated herein by reference.*
10.30 Form of Separation Agreement between the Registrant and certain of its executive officers, filed as Exhibit 10.51 to Form 10-K for the fiscal year ended June 30, 2004, incorporated herein by reference.*
10.31 Employment Agreement, dated September 1, 2004 and effective October 29, 2004, between the Registrant and Carmine Napolitano, filed as Exhibit 10.1 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.32 Amendment No. 1 to Employment Agreement, dated September 30, 2004 and effective October 29, 2004, between the Registrant and Carmine Napolitano, filed as Exhibit 10.2 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.33 Services Agreement, dated August 31, 2004, between Computer Access Technology Corporation and Dan Wilnai, filed as Exhibit 10.3 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.34 Employment Agreement, dated August 31, 2004, between Computer Access Technology Corporation and Peretz Tzarnotsky, filed as Exhibit 10.4 to Form 8-K filed on November 2, 2004, incorporated herein by reference.*
10.35 Amendment No. 2 to Credit Agreement, dated as of May 9, 2006, among the Registrant, the lenders party thereto and The Bank of New York, as Administrative Agent, filed as Exhibit 10.40 to Form 10-Q filed on May 10, 2006, incorporated herein by reference.
14.1 Code of Ethics- Principles of Business Conduct, filed as Exhibit 14.1 to Form 10-K for the fiscal year ended June 30, 2003, incorporated herein by reference.
14.2 Revised Code of Ethics- Principles of Business Conduct dated December 14, 2005.
21.1 Subsidiaries of LeCroy Corporation.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2 Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
* Indicates management contract or compensatory plan, contract or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LeCroy CORPORATION
Date: September 13, 2006 By /s/ Sean B. O'Connor -------------------- Sean B. O'Connor Vice President Finance, Chief Financial Officer, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.