UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
Commission File Number 0-26634
LeCROY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2507777
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
700 CHESTNUT RIDGE ROAD, CHESTNUT RIDGE, NEW YORK 10977
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (914) 425-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of Class)
Indicate by check mark ("X") whether the Registrant: (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ________
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the registrant's Common Stock, as of
August 18, 1999, was 7,704,994 shares. The aggregate market value on August 18,
1999 of the Common Stock held by non-affiliates of the registrant was
$116,424,523.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III hereof.
Portions of the Prospectus to Form S-1 Registration Statement No.
33-95620 and the Prospectus to Form S-3 Registration Statement No. 333-22117 are
incorporated by reference in Part II hereof.
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TABLE OF CONTENTS
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PART I
Item 1. Business................................................................................... 3
Item 2. Properties................................................................................. 11
Item 3. Legal Proceedings.......................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders........................................ 11
Item 4A. Executive Officers of the Registrant....................................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 14
Item 6. Selected Financial Data.................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 16
Item 8. Financial Statements and Supplementary Data................................................ 23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 41
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 42
Item 11. Executive Compensation..................................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 42
Item 13. Certain Relationships and Related Transactions............................................. 42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 42
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PART I
ITEM 1. BUSINESS
LeCroy Corporation (the "Registrant" and "Company") was founded in 1964 and
is currently incorporated in the State of Delaware.
The Company develops, manufactures, sells and licenses signal analyzers,
principally high-performance digital oscilloscopes, and LAN (Local Area
Networks) network analyzers. Digital oscilloscopes capture electronic signals,
convert them to digital form and perform sophisticated measurements and
analyses. The Company's digital oscilloscope products are used by design
engineers and researchers in a broad range of industries, including electronics,
computers and communications. LAN network analyzers are used to diagnose the
performance of high-speed local area networks.
The Company believes that market trends in these industries towards faster
and more complex signals are favorable to the LeCroy core technology--the
capture and analysis of such signals. The ability to capture and analyze the
shapes of high-speed electronic signals requires highly specialized analog chip
design technology. LeCroy is one of very few companies possessing such
capability. The Company's original digital oscilloscope technology is derived
from its historical efforts in developing products for scientists engaged in
high energy physics ("HEP") research
In 1985, the Company introduced its first digital oscilloscope product.
Subsequently, the Company expanded its digital oscilloscope product offerings to
include a variety of models with a broad range of capabilities to address most
segments of the digital oscilloscope market. In fiscal 1999 the Company
continued to expand its oscilloscope product offerings with the Waverunner
family mid-market oscilloscope, the high-performance LC584AXL, and new
differential signal probe products.
In 1998, the company expanded its signal analyzer product offering with
the introduction of the NEWSLineTM LAN analyzer, thereby entering new high
growth markets.
INDUSTRY BACKGROUND
Researchers, engineers and field technicians rely on test and measurement
instrumentation such as signal analyzers in designing, developing and servicing
electronic equipment. When designing and developing electronic circuits,
researchers and engineers use signal analyzers to ensure that the circuits are
performing as designed. Field technicians use such instruments to diagnose
electronic equipment to determine whether it is performing as intended.
The most general-purpose test and measurement instrument used for signal
analysis is the oscilloscope. Digital oscilloscopes are signal analyzers that,
like their earlier analog counterparts, can display a representation of an
electronic signal's "shape," which is essentially a measure of a signal's
voltage as a function of time. Digital oscilloscopes, however, go beyond the
capabilities of analog oscilloscopes in that they capture a signal in digital
form by sampling it over time and storing the data or measurements in memory.
The stored signal can then be viewed later, and more importantly, the instrument
can perform various analyses on the stored data. Certain oscilloscope users
still prefer the analog style oscilloscope. These instruments are less
complicated to use and they acquire a view of signal changes at a faster rate
than digital oscilloscopes. The Company is the sole supplier in North America
and Europe of high performance analog oscilloscopes produced by Iwatsu Electric
Co., Ltd.
During the past few decades, there has been an increasing proliferation of
electronics in general and digital electronics in particular. The growth in
digital electronics has been driven primarily by the growth in stand-alone
computers and related systems, the increase in embedded digital controls within
other electronic and electrical devices and the rapid increase in digital
communications. Combined with the general growth in the quantity of digital
electronics, there has been a substantial increase in processing speed. For
example, processing speeds of personal computers have increased dramatically in
recent years from about 33 MHz to more than 500 MHz, and sophisticated
communications equipment transmits data at rates that exceed 1 gigabit per
second.
Signal shape analysis is becoming increasingly important as data rates in
applications such as computers, Local Area Networks (LANs) and
telecommunications systems increase. Within a given digital circuit, it takes a
finite amount of time for a digital signal to change from a "zero" or "off"
state to a "one" or "on" state. As digital data
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rates increase, signals within a circuit may not have sufficient time to cleanly
change from a "zero" to a "one" or vice-versa. This distorts, or changes the
shape of the digital signal, which can lead to computation or information
errors. To identify such problems, engineers use digital oscilloscopes to
analyze the signal's shape, which is not generally possible using other
measurement and analysis instruments (such as protocol analyzers or logic
analyzers).
SIGNAL ANALYZER MARKET
Signal Analyzers are a sub-category of the Test Instruments Business. The
Company participates today in two markets, the oscilloscope market and the
communication test market.
* OSCILLOSCOPE MARKET. The Company believes that the digital
oscilloscope market is generally segmented according to bandwidth,
and that with advances in technology, the bandwidth requirements of
each market segment will increase. Products in the low-end or
commodity segment of the market (less than 400 MHz) cannot capture
fast, long, complex signals. Such products typically do not have the
appropriate combination of bandwidth, sample rate and memory that is
needed for analysis of long complex signals. These instruments
typically sell for under $5,000. The high-performance market segment
(bandwidth of greater than 400 MHz) is characterized by instruments
with high sample rates (from 500 MS/s to more than 10 GS/s) and long
record lengths (from 10,000 to 16 million sample points) and greater
processing power to perform more sophisticated analyses. These
high-performance digital oscilloscopes typically range in price from
$5,000 to $35,000, although certain very high bandwidth oscilloscopes
for specialized applications are priced above $35,000. The Company's
Waverunner and LC series digital oscilloscope product families, high
performance analog oscilloscopes, and disk drive analyzers are all
targeted at customers in the high-performance market segment.
LECROY PRODUCT ADVANTAGES
The Company believes that its expertise in signal shape analysis has
enabled it to develop digital oscilloscopes that provide key advantages over
competitive offerings:
* HIGH SAMPLE RATES. The Company's advanced technology, which includes
many sophisticated custom components, enables its digital
oscilloscopes to make measurements at high sample rates. The
Company's Model LC584 offers sample rates of up to 8 GS/s.
* LONG RECORD LENGTHS. The Company's advanced memory architecture,
which includes many sophisticated custom components, enables its
digital oscilloscope products to have long record capability. The
Company's Model LC584 offers record lengths of up to 16 million
sample points at 8 GS/s
* POWERFUL PROCESSING CAPABILITY. The Company's multiprocessor
architecture in each of its LC models combines a Motorola PowerPC(R)
main processor with custom processors designed by the Company. The
combination of this advanced multiprocessing technology with the
Company's patented data-compaction technique enables the rapid and
accurate display of long signals and the performance of complex
analyses.
* SOPHISTICATED ANALYSIS SOFTWARE. The Company's analysis software
options, available either at the time of purchase or as aftermarket
upgrades, provide a wide range of capabilities customized for
specific end-user applications. By customizing its analysis
software, the Company believes that it can provide a total solution
to a particular customer's measurement and analysis requirements.
The Company believes that the high sample rates, long record lengths and
powerful hardware and software processing capabilities offered by its various
digital oscilloscope products position it to serve industries, such as the
computer disk drive and communications industries, that require the ability to
measure long, high-speed complex data streams. The Company believes that its
ability to offer digital oscilloscope customers products with these advantages
at what it believes are competitive prices permits it to compete favorably in
its target market segment.
* COMMUNICATION TEST MARKET. The Communication Test Instrument market
was $3 billion in calendar 1998 according to Prime Data. The
company's products are focused on data communications applications,
primarily LAN network analysis. As such, the Company believes that
its addressable
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markets are approximately $800 million in communication test. The
addressable market divides itself into three segments, protocol
analyzers, LAN meters, and cable testers.
LeCROY PRODUCT ADVANTAGES
The Company believes that its expertise in signal shape analysis has
enabled it to develop the LAN analyzer product called NEWSLine, which identifies
problems in critical networks that could not be discovered with conventional
networking tools. NEWSLine functions as a diagnostic tool capable of pinpointing
the root cause of network disruptions, while the network is online. Key
advantages over competitive offerings are:
* ANALOG SIGNAL ANALYSIS. The NEWSLine product measures electronic signals
using analog measurement techniques. Protocol analyzers and other
competitive hand-held instruments analyze only the digital
interpretation of the electronic signal and as such have lost critical
measurement information. For example, the product can perform emission
or jitter analysis, measurements that are not possible with digital type
instruments
* LIVE NETWORK ANALYSIS. The NEWSLine product measures and analyses the
network when it is live. As such, the product sees actual network
traffic and does not require the network to be taken down.
* ONE-ENDED MEASUREMENT. The NEWSLine product makes all its measurements
from one end without the need to terminate the network channel on the
other end.
* MULTI-PORT ANALYSIS. The NEWSLine product can analyze up to 384 channels
simultaneously. The product will discover and characterize all network
assets without connecting one channel at a time.
STRATEGY
The Company's first business objective is to become a leading supplier of
high-performance oscilloscopes. The Company's second business objective is to
leverage the technology used in those instruments - for the capture and analysis
of high speed electronic signals - to expand sales into high growth markets
including LAN test instruments. The Company also plans to participate in broader
markets by the use of LeCroy's core acquisition technology in dedicated signal
analyzers. The Company is pursuing the following strategies to achieve these
objectives:
* EXTEND HIGH-PERFORMANCE TECHNOLOGY. The high-performance acquisition
technology that the Company originally developed in the technically
demanding HEP market and its continuing investment in research and
development have enabled it to develop three families of
high-performance digital oscilloscope products. The Company intends to
continue to allocate significant resources to extending these
performance advantages.
* TARGET HIGH-GROWTH INDUSTRIES WITH SOLUTIONS. The Company's experience
with users in certain industries has shown that adding special analysis
and processing capabilities to its digital oscilloscopes permits it to
offer total solutions for special data measurement and analysis
problems. For example, the Company has developed digital oscilloscopes
targeted at the particular data measurement and analysis problems of the
data storage industry. The Company has been particularly successful in
Data Storage, Power Measurement and Jitter Analysis by providing
complete solutions using customized hardware and software.
* EXPANDING SALES IN NEW PRODUCT MARKETS. The Company believes that it is
well positioned to leverage its core competency to expand sales into new
markets. The Company began shipments of NEWSLine, the network test
product that analyzes electronic signals in communications networks in
order to provide better characterization and failure analysis
capabilities than could be achieved using previously existing products.
There can be no assurance that the Company will be successful in
implementing its strategies, including whether it will be able to leverage its
core technologies into new product markets.
PRODUCTS AND SERVICES
The Company's primary test and measurement products are its Waverunner and
LC families of digital oscilloscopes, which are targeted at users who require
high performance at competitive prices. The Company
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introduced in December 1998 its new Network analyzer products, called NEWSLine.
The Company also offers a full range of aftermarket service and support for all
its products.
DIGITAL OSCILLOSCOPES AND RELATED PRODUCTS. The Company's Waverunner and LC
digital oscilloscope products, which range in list price from approximately
$5,000 to approximately $36,000, offer precise measurement and analysis
capability for applications such as the design, development and testing of
electrical and electronic products. Such applications call for a wide range of
test instruments including those with high bandwidths (up to 1.5 GHz), high
sample rates (up to 10 GS/s), long record lengths (up to 16 million sample
points) and may require greater processing capability to perform sophisticated
analysis of the input signals. The Company's LC product family features a
proprietary color display that facilitates certain visual analyses that cannot
be performed with a monochrome scope. In addition, models in the LC series
incorporate Motorola's PowerPC main processor and other custom processors
designed by the Company.
The Company believes that the following features give its Waverunner series
and LC series products one of the best user interfaces in the digital
oscilloscope market:
* Large, high-resolution color display, organized in a manner that
facilitates easy readout and analysis of displayed data.
* User-friendly control panel.
* Main processor with up to 64 MB of random access memory.
* Flexible options for data viewing/storage including VGA port and floppy
disk drive.
* Optional built-in printer that allows users to produce a printout of the
display at the touch of a button.
* A standard general-purpose interface bus ("GPIB") that enables the digital
oscilloscope to be part of a measurement and analysis system that uses
other GPIB-compatible instruments.
As part of its strategy to focus on its Waverunner series and LC series
products, the Company is phasing out its other digital oscilloscope product
offerings. The Company is continuing to sell its current inventory of these
products.
The Company offers its customers a wide array of post-sale upgrades of
important components, such as memory, processor and analysis software, as well
as optional features such as mass storage capability and built-in printers.
These product upgrades and options allow the Company's customers to add
performance and features to adapt their digital oscilloscopes to new measurement
and analysis requirements as they arise, which the Company believes reduces the
risk of product obsolescence to a certain degree.
To provide its digital oscilloscope customers with what it believes are
total solutions to their data measurement and analysis problems, the Company
develops, manufactures and sells a complementary line of signal source products
that can create input signals so that an electronic circuit can be evaluated
under controlled conditions. Using a digital oscilloscope, an engineer can
analyze the shape of the signal within the circuit, compare it to the shape of
the "ideal" input signal generated by the signal source and thereby identify
problems in the circuit. The Company's primary signal source products are
arbitrary waveform generators that allow the user to fully program the shape of
the signals generated. For example, an arbitrary waveform generator can be
programmed to produce signals that simulate those produced by a hard disk drive
head. The Company's principal arbitrary waveform generator is its Model LW420,
the list price of which is approximately $19,000.
The following are examples of specific applications involving the Company's
Waverunner series and LC series digital oscilloscope product families:
* DATA STORAGE--The computer disk drive industry is continually seeking to
apply advanced magnetic storage technology to increase data density and
reduce access time. Design engineers in this field require digital
oscilloscopes with high sample rates and long record lengths. The
Company believes that its Model DDA-120 and DDA-110 disk drive
analyzers, which feature a maximum sample rate of 8 GS/s and a maximum
record length of 16 million sample points, are well suited to such
applications. In addition to providing digital oscilloscopes that meet
the disk drive industry's requirements for high sample rates and long
record
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lengths, the Company has worked closely with customers in this industry
to develop specialized processing software that incorporates advanced
algorithms designed specifically for their particular measurement and
analysis requirements. The Company believes that the combination of its
high-performance data-acquisition technology with this specialized
processing capability has been a significant factor in the growth of its
sales to this industry.
* CELLULAR TELEPHONES/PAGERS--In contrast to many other applications, the
design of cellular telephones and pagers does not require digital
oscilloscopes with high bandwidths or sample rates. This is due to the
relatively longer and slower electronic signals associated with these
products. It is therefore important that digital oscilloscopes for these
applications have long record lengths and the ability to display the
captured data in a meaningful and usable format. The Company believes
that its Model LT344L digital oscilloscope is particularly well suited
to such applications. The Model LT344L has a medium bandwidth and sample
rate, but features a maximum record length of 1 million sample points.
In addition, this instrument has the ability to simultaneously display
the entire signal as well as an enlarged or "zoomed" view of a portion
of the signal.
* LASERs--A typical laser pulse has a duration on the order of two
billionths of a second. To capture and analyze the shape of a laser
pulse, a digital oscilloscope must make measurements of its amplitude
many times during this period. The Company believes that its Model 9362
is well suited to this application as it has the capability to make
precise measurements at the rate of ten billion per second, therefore
permitting this oscilloscope to capture accurately the shape of the
laser pulse so that it can be analyzed.
EMBEDDED SIGNAL ANALYZERS. In April 1998 LeCroy introduced the model
LSA1000, Signalyst, which can be used to incorporate a LeCroy digitizing system
into systems designed by other manufacturers. This product allows the fast
amplifier, high speed ADC, long record length and powerful processing of a
LeCroy digitizer system to be incorporated into other products and test systems.
NETWORK TEST PRODUCTS. The NEWSLine Network analyzer product has a unique
ability to preemptively identify the potential for network failure and
proactively monitor the network and report failures. This product localizes the
source of network problems to the transmitter, cabling, noise emissions or
network interface card and diagnoses the root cause of the failure.
HEP PRODUCTS. A typical HEP experiment consists of a large assembly of
electronics that measures particle energy and speed from up to many hundreds of
thousands of particle detectors. These measurements are used to identify
individual particles and to study their interactions. The Company's HEP product
offerings consist of an extensive range of modular products. These products
include analog-to-digital converters, which measure particle energy and
time-to-digital converters, which measure particle speed. The modular nature of
these products enables experimenters to select products from the Company's HEP
product catalog and combine them in a configuration that provides an overall
solution to their particular data measurement and analysis problems.
Sales of HEP products (including digitizers) accounted for approximately
6%, 5% and 6% of the Company's total revenues in its fiscal years ended June 30,
1999, 1998 and 1997, respectively. The Company expects HEP revenues to decline
in the future.
SERVICE AND AFTERMARKET PRODUCTS. The Company provides aftermarket support,
repair, maintenance and recalibration of installed Company products, as well as
installation of a variety of post-sale upgrades and optional features. The
Company maintains major field service centers in Chestnut Ridge, New York
(located at the Company's corporate headquarters), Geneva, Switzerland and
Osaka, Japan. Sophisticated service on certain key components of the Company's
digital oscilloscope products, including on its printed circuit boards, is
performed only at the Company's facilities in Geneva, Switzerland and Chestnut
Ridge, New York. The Company warrants its digital oscilloscopes from one to
three years, signal source products from one to five years and HEP products for
one year.
Service and aftermarket products (including product upgrades) generated
approximately 5% of the Company's total revenues in each of its fiscal years
ended June 30, 1999, 1998 and 1997.
CUSTOMERS
The largest group of users of the Company's digital oscilloscopes are
electronic product designers and test engineers. Researchers in many scientific
disciplines including high-energy physics, medicine, geology, ultrasound and
mechanics also use the Company's digital oscilloscopes.
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Revenue derived from one customer accounted for 11% of the Company's
consolidated revenues in fiscal 1998. No other customer accounted for more than
10% of the Company's consolidated revenues in any of the last three fiscal
years. The Company's top 25 product customers consist of the following:
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COMPUTERS/DISK DRIVES/PERIPHERALS AUTOMOTIVE/TRANSPORTATION TELECOMMUNICATIONS
* Hitachi * Bosch * AlcatEL
* International Business Machines * Siemens AG * Hewlett PackaRd
Corporation * Iwatsu Electric Co., Ltd.
* Maxtor Corporation INDUSTRIAL * Lucent Technologies
* Quantum Corporation ---------- * Motorola, Inc.
* Samsung * Fujitsu * Sony
* Seagate * Matsushita * Sprint-Global One
* Toshiba * PE Biosystems * Trend Communications
* Western Digital
OTHER
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GOVERNMENT/MILITARY/AEROSPACE * Bruker Analytical Systems
* Naval Air Warfare Center * Electro Rent
* Newcourt Technologies Corp.
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SALES, MARKETING AND DISTRIBUTION
The Company maintains a direct sales force of highly trained, technically
sophisticated sales engineers who are knowledgeable in the use of signal
analyzers in general and the features and advantages of the Company's products
in particular. In addition, particularly because of the Company's focus on
high-performance digital oscilloscopes, the Company believes that its sales
engineers are skilled in performing product demonstrations for current and
prospective customers. The Company believes it has a competitive advantage in
sales situations in which its sales engineers have the opportunity to
demonstrate the advantages of the Company's digital oscilloscopes; accordingly,
such demonstrations are an integral part of the Company's sales strategy.
The Company sells its digital oscilloscope products through its own direct
sales force in the United States, Europe, Japan and South Korea with regional
sales headquarters located in Chestnut Ridge, New York, Geneva, Switzerland and
Osaka, Japan. As of June 30, 1999, the Company's direct digital oscilloscope
sales force consisted of approximately 88 sales engineers and regional managers
worldwide. The Company also uses manufacturer's representatives in support of
its direct selling efforts and in territories where the sales potential does not
currently justify the maintenance of a direct sales force. In addition, in Japan
the Company maintains a strategic alliance with Iwatsu Electric Co. Ltd., a
Japanese communications and test-and-measurement company that sells and
distributes some of the Company's products under the "Iwatsu/LeCroy" and
"Iwatsu" labels.
In January 1999, LeCroy and Anixter Inc. signed a two-year, multi-million
dollar contract for Anixter's exclusive North American distribution of LeCroy
Corporation's NEWSLine product. Anixter customers include companies from a
variety of industries including transportation, computer, manufacturing and
financial.
In order to raise market awareness of its products, the Company advertises
in trade publications, distributes promotional materials, conducts marketing
programs and seminars, issues press releases regarding new products, publishes
technical articles and participates in industry trade shows and conferences.
SEASONALITY
The Company historically has experienced somewhat lower activity during
its first fiscal quarter than in other fiscal quarters due, it believes,
principally to the lower level of orders and market activity during the summer
months, particularly in Europe. The Company believes this seasonable aspect of
its business is likely to continue in the future.
RESEARCH AND DEVELOPMENT
The Company believes that as a result of what it views as a continuing
shift in technology towards higher speed digital signals containing more complex
data, users of signal analyzer products will continue to demand higher
bandwidths, higher sample rates, longer record lengths and more powerful
processing capabilities. The primary objective of the Company's research and
development program is to extend its high performance technology in order to
satisfy this demand, while maintaining ease-of-use qualities and favorable
price-to-performance ratios. There can be no assurance that the Company will
achieve this objective.
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The Company is continuing to develop its sampling, data storage and
processing technologies using advanced integrated circuit techniques, and is
also working to improve its existing digital oscilloscope platform to provide
display enhancements, higher speed data processing and a broader range of
application-specific hardware and software options. The Company also is engaged
in the development of several new instruments and integrated circuits to address
the needs for precise amplitude and time measurement.
The Company intends to use its core acquisition technology to develop
dedicated signal analyzers for broader markets. The Company believes that
possible market opportunities for such products include the networking and
communications industries. The Company is currently in the introduction stage
with respect to a LAN monitor product that analyzes electronic signals in
communications networks in order to provide better monitoring and
failure-diagnosis capabilities than can be achieved using existing products.
The Company conducts research and development activities at its various
facilities. The Company's research and development costs, which are expensed as
incurred, were approximately $18.6 million, $20.5 million and $15.5 million in
its fiscal years ended June 30, 1999, 1998 and 1997, respectively, which
expenses represented 14.8%, 15.7% and 12.4% of total revenues, respectively, for
such fiscal years. In addition incident to an acquisition in fiscal 1998 was the
purchase of incomplete technology activities which resulted in a pre-tax charge
of $1.6 million, included in the Consolidated Statements of Operations in
Non-recurring charges-acquisitions. The Company intends to continue to invest
approximately 14% to 15% of revenues in its research and development efforts.
MANUFACTURING AND SUPPLIES
The Company's digital oscilloscopes and related products were manufactured
at the Company's facilities in Geneva, Switzerland and Chestnut Ridge, New York,
with HEP products also manufactured at the Chestnut Ridge facility.
Manufacturing operations were closed at the Geneva facility during the fourth
quarter of fiscal 1999 as part of the Company's restructuring efforts.
The Company obtains certain parts, components and sub-assemblies from
single sources. This has particularly been the case with several key integrated
circuits made by certain single source suppliers (Motorola, Philips, TRW and LSI
Logic). The Company believes that, for integrated circuits in particular,
alternative sources of supply would be difficult to develop over a short period
of time. An interruption in supply or an increase in price for its parts,
components and sub-assemblies would have a material adverse affect on the
Company's business, results of operations and financial condition.
As of June 30, 1999, the Company's Chestnut Ridge facility employed 99
manufacturing employees in an area devoted to such tasks of approximately 29,000
square feet.
BACKLOG
The Company's backlog of unshipped customer orders was approximately $15.2
million and $6.4 million as of June 30, 1999 and 1998, respectively. Customers
may cancel orders at any time. The Company believes that its level of backlog at
any particular time is not necessarily indicative of future operating
performance of the Company.
FOREIGN CURRENCY EXCHANGE
The Company had manufacturing facilities in both the United States and
Switzerland during fiscal 1999, purchases parts, components and sub-assemblies
from suppliers around the world in a variety of currencies, and sells its
products around the world in a variety of currencies. As a consequence, the
Company is 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 the Company of relative fluctuations in foreign currency
exchange rates is the relationship among and between the United States dollar,
Swiss franc and Japanese yen, and, to a lesser extent, the German deutschemark,
British pound, French franc and Italian lira. Local currency expenses resulting
from manufacturing and the worldwide sourcing of parts, components and
sub-assemblies are not generally offset by related local currency revenues, if
any. The Company seeks to mitigate to some degree its exposure to foreign
currency exchange rate fluctuations by borrowing under its multicurrency
revolving credit facility in circumstances in which it is exposed to significant
local currency receivables. The Company does not attempt to reduce its foreign
currency exchange risks by entering into other foreign currency management
programs or hedging transactions and has no plans to do so in the near term. As
a consequence, there
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can be no assurance that the Company's results of operations will not be
adversely effected by fluctuations in foreign currency exchange rates in the
future, as a result of mismatches between local currency revenues and expenses,
the translation of foreign currencies into the United States dollar, the
Company's financial reporting currency, or otherwise. Moreover, fluctuations in
exchange rates could affect demand for the Company's products. During the fiscal
years ended June 30, 1999, 1998, and 1997 the Company reported foreign currency
exchange gains (losses) of $742,000, $(477,000) and $678,000, respectively.
COMPETITION
The market for signal analyzers is highly competitive and characterized by
rapid and continual advances in technology. According to Prime Data, Inc.
("Prime Data"), an independent industry survey organization, total digital
oscilloscope sales, excluding handhelds, grew from $638 million in 1994 to $793
million in 1998. Prime Data estimates that the four largest suppliers of digital
oscilloscopes, exclusive of handheld models, and their approximate respective
market shares for calendar 1997 were Tektronix, Inc. with 42%, Hewlett-Packard
Company with 21%, and LeCroy with 15%. Some of the Company's principal
competitors have substantially greater sales and marketing, development and
financial resources than the Company. The Company believes that each of these
companies offers a wide range of products that attempt to address most segments
of the digital oscilloscope market.
The Company believes that the principal bases of competition in the signal
analyzer market are a product's performance (bandwidth, sample rate, record
length and processing power), its price and quality, the vendor's name
recognition, reputation, product availability and the availability and quality
of post-sale support. The Company also believes that its success will depend in
part on its ability to maintain and develop the advanced technology used in its
signal analyzer products and its ability to offer high-performance products at a
favorable price-to-performance ratio. The Company believes that it currently
competes effectively with respect to each of the principal bases of competition
in the signal analyzer market in the general price range ($5,000 to $36,000) in
which its digital oscilloscopes are focused and that it will be able to continue
to do so, although there can be no assurance that this is or will be the case.
The Company believes that its principal competition in the HEP market comes
from its customers themselves, who are technically sophisticated and frequently
choose to construct their own measurement and analysis systems. The Company also
believes that the rest of this market is highly fragmented and consists of a
number of small firms, no one of which commands a significant market share.
PATENTS, TRADEMARKS AND LICENSES
The Company currently relies on a combination of patents, trade secrets,
technical expertise and continuing technological research and development to
establish and protect proprietary rights in its products. The Company believes,
however, that because of the rapid pace of change and advancement in digital
oscilloscope technology, legal intellectual property protection is and will
continue to be a less significant factor in the Company's success than the
Company's core competency in converting electronic signals to digital form and
the experience and expertise of its personnel.
The Company protects significant technologies, products and processes that
it considers important to its business by, among other things, filing
applications for patent protection. As of June 30, 1999, the Company held a
total of fifteen United States patents expiring in the years from 2000 to 2017.
The Company also holds five foreign patents. The Company has pending
applications for thirteen additional United States patents and for seventeen
additional foreign patents. The patent positions of high-technology companies
such as the Company are uncertain, however, and involve complex legal issues and
factual questions. There can be no assurance that any of the Company's pending
or future applications will result in issued patents or that any issued patents
will provide the Company with adequate protection of the covered technologies,
products or processes. Moreover, the laws of foreign countries in which the
Company's products are or may be developed, manufactured or sold may not protect
the Company's intellectual property and other proprietary rights to the same
extent as the laws of the United States.
Although the Company believes that its 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 the Company 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 the Company would prevail with respect to any such claim, or that
a license to third-party rights, if needed, would be available on acceptable
terms. In any event, patent and proprietary rights litigation can be extremely
protracted and expensive.
10
<PAGE>
In February 1994, the Company settled litigation with Tektronix, Inc.
involving allegations that the Company's digital oscilloscope products infringed
patents held by Tektronix. As part of the settlement, the Company entered into a
license agreement with respect to such patents. Pursuant to the license
agreement the Company made an initial payment of approximately $1.5 million. In
addition, the Company is required to make future royalty payments in a minimum
aggregate amount of $3.5 million over ten years ending June 30, 2004 and may be
required to make up to an additional $3.5 million in contingent royalty payments
depending on its sales of certain products in certain territories over the life
of the patents. Royalty expense approximated $982,000, $1,442,000 and $1,329,000
in fiscal 1999, 1998 and 1997, respectively. The settlement agreement provides
that Tektronix may terminate the license in the event that the Company acquires
20% or more of the stock of, or a controlling interest in, any of a number of
specified companies participating in the oscilloscope market or any of their
respective affiliates (each, a "Restricted Company") or a Restricted Company
acquires 20% or more of the stock of, or a controlling interest in, the Company
or an affiliate of the Company, or any attempt to transfer the Tektronix license
to a Restricted Company is made. This provision of the settlement could preclude
the Company from making an investment in or acquisition of such companies, and
it also could discourage such companies or another third party from attempting
to acquire control of the Company or limit the price that such a third party
might be willing to pay for the Common Stock. In addition, this provision could
limit the price that investors might be willing to pay in the future for the
Common Stock.
EMPLOYEES
As of June 30, 1999, LeCroy had 513 full time employees, of whom 283 work
in the Company's Chestnut Ridge facility, 56 work in the Company's Geneva
facility, and the remainder work in various other Company offices around the
world. None of the Company's employees is represented by a labor union and the
Company has not experienced any work stoppages. The Company believes that its
employee relations are generally satisfactory. A majority of the Company's
senior managers has over five years of service with the Company.
REGULATION
As the Company manufactures its products in the United States and
Switzerland, and sells its products and purchases parts, components and
sub-assemblies in a number of countries, the Company is subject to legal and
regulatory requirements, particularly the imposition of tariffs, customs and
export controls, in a variety of countries. In addition, the export of digital
oscilloscopes from both the United States and Switzerland is subject to
regulation under the Treaty for Nuclear Non-Proliferation by such countries.
The Company's subsidiary, Digitech Industries, Inc. has been involved in
environmental remediation activities. (See Note 12 to Consolidated Financial
Statements.) The Company does not foresee that the ultimate resolution of this
environmental matter will have a material adverse effect on the results of
future operations, financial position or the competitive position of the
Company.
ITEM 2. PROPERTIES
The Company's executive offices and one of its manufacturing facilities
are located in a two-story, approximately 88,000 square foot building in
Chestnut Ridge, New York that is owned by the Company. The Company also leases a
three story office and manufacturing building of approximately 44,000 square
feet in Geneva, Switzerland pursuant to a lease expiring December 31, 2004. In
addition, the Company leases other offices around the world to support its local
sales and service operations.
The Company believes that its facilities are in good working condition
and are suitable for its current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<S> <C> <C>
NAME AGE POSITION
- ---- --- --------
Walter O. LeCroy, Jr. ................ 64 Honorary Chairman of the Board of Directors
Lutz P. Henckels...................... 58 President, Chief Executive Officer and Director
Thomas H. Reslewic.................... 40 Executive Vice President--Chief Operating Officer
Ronald S. Nersesian................... 39 Senior Vice President--General Manager Oscilloscope
Division
Luis B. Boza.......................... 61 Vice President--Quality
Werner H. Brokatzky................... 54 Vice President--Operations
Brian V. Cake......................... 56 Vice President--Chief Technical Officer
Dennis A. Carpenter................... 52 Vice President--General Manager LeCroy North America
Warren Davis......................... 53 Vice President--Human Resources
John C. Maag.......................... 49 Vice President--Finance, Chief Financial Officer, Principal
Accounting Officer, Secretary and Treasurer
James J. Mueller...................... 46 Vice President--Technology Development
</TABLE>
WALTER O. LECROY, JR., founder of the Company, has served as Honorary
Chairman of the Board since February 1999. Mr. LeCroy previously served as the
Chairman of the Board since the Company's inception. Mr. LeCroy was instrumental
in the initial development of the Company's core technology. Mr. LeCroy has a
Bachelor of Arts degree in physics from Columbia University.
LUTZ P. HENCKELS has served as the President and the Chief Executive
Officer since July 1993. He served as a consultant for the Company from January
1993 until July 1993. Before joining the Company, Mr. Henckels served as the
President of U.S. Operations of Racal-Redac, Inc., an electronic design
automation company, from May 1989 until January 1993. Prior to 1989, Mr.
Henckels was the founder and Chief Executive Officer of HHB Systems, Inc., a
public computer-aided design and test company. Mr. Henckels has Bachelor of
Science and Master of Science degrees in electrical engineering, and a Doctor of
Science degree in computer science, from the Massachusetts Institute of
Technology.
THOMAS H. RESLEWIC has served as Executive Vice President--Chief
Operating Officer since February 1998. Mr. Reslewic served as Executive Vice
President--Signal Analysis Business Group from February 1997 until January 1998,
as Vice President--Worldwide Sales from March 1996 until November 1997, as Vice
President--Sales and Marketing from July 1994 until March 1996, as the General
Manager for North American Sales from 1993 until July 1994 and the Director of
Marketing for the Company's Signal Sources Division from 1990 until 1993.
Previously, he spent eight years in sales and marketing management with
Tektronix, Inc., a manufacturer of digital oscilloscopes and one of the
Company's principal competitors. 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.
RONALD S. NERSESIAN has served as the Senior Vice President--General
Manager Oscilloscope Division since February 1998. Mr. Nersesian served as
the Senior Vice President--Worldwide Marketing from March 1997 until January
1998 and as Vice President--Worldwide Marketing from March 1996 until February
1997. Before joining the Company, Mr. Nersesian spent eleven years with
Hewlett-Packard Company and held many marketing positions. Mr. Nersesian has a
Bachelor of Science degree in electrical engineering from Lehigh University and
a Master of Business Administration degree from New York University.
LUIS B. BOZA has served as Vice President--Quality since May 1998. Before
joining the Company, Mr. Boza spent twenty eight years at Bell Laboratories, the
Research and Development division of Lucent Technologies (formerly AT&T) and
held many management positions. Mr. Boza has a Bachelor of Science degree in
mathematics from the University of Havana, a Master of Science degree in
Statistics from the University of Chile and a Doctor of Science degree in
Statistics from the University of California, Berkeley.
12
<PAGE>
WERNER H. BROKATZKY has served as Vice President--Operations since April
1999. Previously, Mr. Brokatzky has served as Vice President--Operations
(Geneva) from January 1996 through March 1999. Mr. Brokatzky joined the Company
in August 1978 as the Manager of Finance and Administration and served as Vice
President--Finance (Geneva) from March 1990 to December 1995.
BRIAN V. CAKE has served as Vice President--Chief Technical Officer since
February 1997. Previously, Mr. Cake served as Vice President--Advanced
Development from 1986 through January 1997. He joined the Company as an engineer
in November 1980. Mr. Cake has a Bachelor of Science degree in electrical and
electronic engineering from City University in London.
DENNIS A. CARPENTER has served as Vice President - General Manager LeCroy
North America since July 1999. Previously, Mr. Carpenter served as Vice
President--Worldwide Sales from November 1997 through June 1999. Before joining
the Company, Mr. Carpenter spent sixteen years with Hewlett-Packard Company in
several marketing and sales management positions. Most recently he was Sales
Manager for the Hewlett Packard Test and Measurement program. Mr. Carpenter has
a Bachelor of Science degree and a Master of Science in mechanical engineering
from the University of Massachusetts.
WARREN DAVIS has served as the Vice President--Human Resources since
February 1997. Previously, Mr. Davis served as Director of Human Resources from
July 1995 to January 1997. Before joining the Company, Mr. Davis was the Vice
President of Human Resources at EG&G Instruments, Inc., a subsidiary of EG&G,
Inc., a high technology conglomerate. Mr. Davis has a Bachelor of Arts degree in
history from The University of Notre Dame and a Master of Business
Administration degree from New York University.
JOHN C. MAAG has served as the Vice President--Finance, Chief Financial
Officer, Chief Accounting Officer, Secretary and Treasurer since December 1995.
Before joining the Company, Mr. Maag was the Corporate Controller of Dynatech
Corporation, a voice, data and video communications company from May 1987 to
December 1995. Mr. Maag has a Bachelor of Science degree in accounting from St.
Joseph's College and is a Certified Public Accountant.
JAMES J. MUELLER has served as the Vice President--Technology Development
since June 1998. Previously, Mr. Mueller served as Vice President - Worldwide
Engineering from June 1996 through May 1998, and served as R&D Manager--T&M from
April 1992 to May 1996. Mr. Mueller has a Bachelor of Arts degree in physics
from Rutgers University and a Master of Science and Doctor of Science degrees in
physics from Princeton University.
Executive officers of the Company are appointed by the Board of
Directors on an annual basis and serve until their successors have been duly
elected and qualified. There are no family relationships among any of the
executive officers or directors of the Company.
The Company has entered into indemnification agreements with its
executive officers and directors, pursuant to which the Company has agreed to
indemnify such persons to the fullest extent permitted by law, and providing for
certain other protections.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
LeCroy's common stock has been traded on the Nasdaq National Market under
the symbol LCRY. The following table sets forth, for the periods indicated, the
range of high and low sales prices for the Common Stock as reported by Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
FISCAL YEAR 1998
First Quarter ............................................ $46.00 $30.75
Second Quarter............................................ 44.13 27.38
Third Quarter............................................. 34.50 17.88
Fourth Quarter............................................ 25.25 13.75
FISCAL YEAR 1999
First Quarter............................................. $23.75 $13.25
Second Quarter............................................ 20.38 10.75
Third Quarter............................................. 24.75 15.25
Fourth Quarter............................................ 25.44 13.25
</TABLE>
The Company has never declared or paid cash dividends on its Common Stock
and intends to retain all available funds for use in the operation and expansion
of its business. The Company therefore does not anticipate that any cash
dividends will be declared or paid in the foreseeable future. As of August 9,
1999, there were approximately 242 holders of record of the Common Stock.
On June 30, 1999, the Company issued and sold an aggregate of 500,000
shares of its Series A Convertible Redeemable Preferred Stock ("Series A
Preferred Stock") for an aggregate purchase price of $10,000,000 and warrants to
purchase an aggregate of 250,000 shares of the Company's Common Stock, for an
aggregate purchase price of $0.01, in reliance on Section 4(2) of the Securities
Act of 1933, as amended. The securities were sold to Advent Global GECC III
Limited Partnership, EnviroTech Investment Fund I Limited Partnership, Adwest
Limited Partnership, Oakstone Ventures Limited Partnership, and Advent Partners
Limited Partnership, all of which are accredited investors as defined under
Regulation D of the Securities Act. Proceeds of the issuance of Series A
Preferred Stock and warrants to purchase Common Stock were allocated for general
working capital purposes.
The Series A Preferred Stock is convertible into shares of Common Stock at
any time at the option of the holder and, under certain circumstances specified
in the Company's Certificate of Incorporation, the Series A Preferred Stock is
automatically convertible into shares of Common Stock. The warrants are
exercisable, at an exercise price of $20 per share of Common Stock, at any time
until June 30, 2006.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated Statements of Operations data for the
five years ended June 30, 1999 and the Balance Sheet data at June 30, 1999,
1998, 1997, 1996 and 1995 are derived from the Consolidated Financial Statements
of the Company. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and related Notes included herein.
14
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenues
Digital oscilloscopes and related products.......... $100,366 $ 101,584 $ 100,582 $ 86,061 $ 65,785
High energy physics products........................ 7,362 6,167 6,993 10,952 12,277
Service and other................................... 6,863 6,700 6,085 5,077 5,061
-------- --------- --------- --------- ---------
Test & measurement revenue..................... $114,591 $ 114,451 $ 113,660 $ 102,090 83,123
LAN/WAN test instruments............................ 6,707 8,058 7,741 6,082 2,733
License fees........................................ 4,900 8,500 4,000 -- --
-------- --------- --------- --------- ---------
Total.......................................... 126,198 131,009 125,401 108,172 85,856
Cost of sales (1)........................................ 62,827 56,996 53,173 48,068 39,274
-------- --------- --------- --------- ---------
Gross profit................................... 63,371 74,013 72,228 60,104 46,582
Selling, general and administrative expenses............. 44,888 44,076 41,924 36,868 29,517
Research and development expenses........................ 18,638 20,541 15,495 13,704 11,123
Restructuring costs and non-recurring charges, net (2)... 6,788 5,852 3,857 -- --
Non-recurring charges (credits) - acquisitions (3)....... (1,140) 3,533 -- -- --
-------- --------- --------- --------- ---------
Total operating expenses....................... 69,174 74,002 61,276 50,572 40,640
-------- --------- --------- --------- ---------
Operating income (loss)........................ (5,803) 11 10,952 9,532 5,942
Other income (expenses), net............................. 164 9 365 (114) (2,197)
-------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary charge (5,639) 20 11,317 9,418 3,745
Provision for income taxes............................... 1,149 1,900 3,743 3,154 1,412
-------- --------- --------- --------- ---------
Income (loss) before extraordinary charge...... (6,788) (1,880) 7,574 6,264 2,333
Extraordinary charge for early retirement of debt ....... -- -- -- (1,300) --
-------- --------- --------- --------- ---------
Net income (loss).............................. (6,788) (1,880) 7,574 4,964 2,333
Charges related to convertible preferred stock........... (1,844) -- -- -- --
-------- --------- --------- --------- ---------
Income (loss) available to common stockholders $ (8,632) $ (1,880) $ 7,574 $ 4,964 $ 2,333
======== ========= ========= ========= =========
Income (loss) per common share-basic:
Income (loss) before extraordinary charge...... $ (1.13) $ (.25) $ 1.20 $ 1.26 $ .51
Extraordinary charge........................... -- -- -- (.26) --
-------- --------- --------- --------- ---------
Net income (loss).............................. $ (1.13) $ (.25) $ 1.20 $ 1.00 $ .51
======== ========= ========= ========= =========
Income (loss) per common share-diluted:
Income (loss) before extraordinary charge...... $ (1.13) $ (.25) $ 1.00 $ .98 $ .45
Extraordinary charge........................... -- -- -- (.20) --
--------- --------- --------- --------- ---------
Net income (loss).............................. $ (1.13) $ (.25) $ 1.00 $ .78 $ .45
========== ========= ========= ========== =========
Weighted average number of common shares:
Basic.......................................... 7,621 7,375 6,299 4,957 4,603
========= ========== ========== ========== =========
Diluted........................................ 7,621 7,375 7,541 6,373 5,137
========= ========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital.......................................... $ 30,380 $ 27,697 $ 41,978 $ 33,412 $ 23,014
Total assets ............................................ 102,214 89,110 79,389 65,008 51,719
Total debt and capitalized leases........................ 8,200 2,294 160 5,910 18,042
Redeemable convertible preferred stock................... 8,152 -- -- -- --
Total stockholders' equity............................... 51,855 54,107 54,324 39,159 19,006
<FN>
(1) Included in cost of sales in fiscal 1999 and fiscal 1998 are inventory
write downs of $2,170 and $2,697, respectively, pursuant to restructuring
of the Company's business.
(2) Restructuring costs were incurred in fiscal 1997 due to a restructuring of
the Company's High Energy Physics business; in fiscal 1998 due to a
restructuring of the Company's business in reaction to continued
uncertainties in the Pacific region and in fiscal 1999 due to the
consolidation of the Company's oscilloscope operations.
(3) See Notes 12 and 13 to the Consolidated Financial Statements.
</FN>
</TABLE>
15
<PAGE>
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
"Selected Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-K.
OVERVIEW
The Company's original digital oscilloscope technology was derived from its
historical efforts in developing products for high energy physics ("HEP")
research. In 1985 the Company introduced its first digital oscilloscope product.
In 1999 the Company continued to expand its product offerings with new
mid-market oscilloscopes, production and sale of the NEWSLine LAN monitor,
introduction of a remote access system product for local area network analysis
and new differential signal probe product lines.
The Company had manufacturing facilities in both the United States and
Switzerland during fiscal 1999, purchases parts, components and sub-assemblies
from a variety of vendors around the world in a variety of currencies and sells
its products worldwide in a variety of currencies. This subjects the Company to
certain risks including fluctuations in foreign currency exchange rates, changes
in government policies, legal and regulatory requirements, political
instability, transportation delays and the imposition of tariffs and export
controls. For information with respect to the risks arising from fluctuations in
foreign currency exchange rates and certain measures adopted by the Company to
mitigate to a degree such risks, see "Business--Foreign Currency Exchange."
RESULTS OF OPERATIONS
The table indicates the percentage of total revenues represented by each
item in the Company's consolidated statements of operations.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1999 1998 1997
---- ---- ----
Revenues
<S> <C> <C> <C>
Digital oscilloscopes and related products.............................. 79.5% 77.5% 80.2%
High energy physics products............................................ 5.8 4.7 5.6
Service and other....................................................... 5.5 5.1 4.8
------- ------- -------
Test and Measurement revenues........................................... 90.8 87.3 90.6
LAN/WAN test instruments................................................ 5.3 6.2 6.2
License Fees............................................................ 3.9 6.5 3.2
------- ------- -------
Total revenue........................................................ 100.0 100.0 100.0
Cost of sales................................................................ 49.8 43.5 42.4
------- ------- -------
Gross profit............................................................ 50.2 56.5 57.6
Selling, general and administrative expenses................................. 35.6 33.6 33.4
Research and development expenses............................................ 14.8 15.7 12.4
Restructuring costs.......................................................... 5.4 4.5 3.1
Non-recurring charges (credits) - acquisitions............................... (0.9) 2.7 --
------- ------- -------
Operating income (loss)................................................. (4.6) -- 8.7
Other income, net............................................................ 0.1 -- 0.3
-------- ------- -------
Income before income taxes.............................................. (4.5) -- 9.0
Provision for income taxes................................................... 0.9 1.4 3.0
------- ------- -------
Net income (loss)....................................................... (5.4)% (1.4)% 6.0%
======= ======= =======
</TABLE>
RESTRUCTURING AND NON-RECURRING CHARGES (CREDITS)
The operating results for the year ended June 30, 1999 includes total
restructuring and non-recurring charges of $11.3 million ($10.9 million after
taxes or $(1.44) per basic share) relating to the consolidation of the Company's
oscilloscope operations. The Company believes that this consolidation will
enhance operating efficiencies and enable the Company to dedicate additional
resources to capitalize on several current breakthrough technologies.
Of the aforementioned $11.3 million pretax charges, $10.4 million relates
to restructuring costs. The restructuring costs include inventory write-offs of
$2.2 million included in cost of sales, the accrual for the future minimum lease
payments for the Geneva Switzerland manufacturing facility of $3.4 million,
severance and
16
<PAGE>
employee benefit costs of $3.0 million for the reduction of full and part time
employees from the current workforce and the write down of plant assets and
capitalized management information system software and other costs of $1.8
million. As of June 30, 1999 approximately $3.9 million of these costs have been
paid. The restructuring plan is expected to be completed by the end of fiscal
2000. Associated with the restructuring efforts were $0.9 million of additional
costs incurred to redeploy manufacturing, engineering and employee resources.
In May 1999 the Company, its subsidiary, Digitech Industries, Inc. and the
former owners of the previously leased facilities in Ridgefield, Connecticut
("Ridgefield Site") entered into an agreement with the current owners of the
Ridgefield Site. The current owners have purchased an insurance policy providing
for $2 million of coverage against certain environmental liabilities related to
the Ridgefield Site. This insurance policy names both the Company and Digitech
Industries as insured parties. The current owners of the Ridgefield Site have
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 have also agreed to hold both the Company
and Digitech Industries 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 has
agreed to pay the former owners of the Ridgefield Site $160,000 for compensation
for the reduced sales value of the property due to the environmental problems
existing on the site. As a result of the above agreement, the Company reversed
$1,140,000 in the fourth quarter of fiscal 1999 of the original $1.3 million
environmental provision recorded in December 1997.
In the fourth quarter of fiscal 1998 the Company finalized a restructuring
plan amounting to $8.5 million ($7.9 million after taxes or $1.07 per basic
share) in response to continuing uncertainties in the Pacific Region. These
charges included inventory write-offs of $2.7 million included in cost of sales,
the write down of plant assets, leases and contracts of $2.9 million, and
reduction of 90 full and part-time employees of the Company's workforce, which
approximate $2.9 million. In the fourth quarter of fiscal 1999 the Company
recorded restructuring credits of $2.4 million relating to the reversal of
restructuring accruals for severance and leases related to the decision to
continue certain European sales offices. As of June 30, 1999, the 1998
restructuring plan has been substantially completed.
In January 1997, the Company adopted a strategic business plan to
reduce costs and improve asset utilization in its HEP business. In connection
with the plan, the Company has taken a series of reorganization actions
resulting in write-offs, principally for inventory and other asset revaluations,
and employee severance. The restructuring plan resulted in a charge to fiscal
1997 third quarter results of approximately $3.9 million ($2.5 million after
taxes), of which $0.6 million related to severance. At June 30, 1999, these
reorganization activities have been completed.
COMPARISON OF FISCAL YEARS 1999 AND 1998
Total revenues declined to $126.2 million in 1999 from $131.0 million in
1998, or 4%. Revenues decreased as a result of a decrease in unit sales in Asia
of mid-market segment digital oscilloscopes and related products and a decrease
in license fee revenues. On a geographic basis, total revenues increased to
$59.9 million in 1999 from $58 million in 1998 or 3% in the United States, to
$36.7 million in 1999 from $31 million in 1998 or 18%, in Europe, and declined
to $29.6 million in 1999 from $42 million in 1998 or 30%, in the rest of the
world, principally Japan and the rest of Asia.
Revenues from digital oscilloscopes and related products declined 1% to
$100.4 million in 1999, from $101.6 million in 1998. This decrease in revenues
was primarily attributable to a 5% decrease in unit sales, primarily for
mid-market products. Average selling prices of digital oscilloscope and related
products increased by 1% as compared to fiscal 1998 as a result of continuing
higher sales of the LC 564/584 introduced in the fourth quarter of fiscal 1998.
Revenues from sales of HEP products increased to $7.4 million in 1999 from
$6.2 million in 1998, or 19%, resulting from unanticipated last time procurement
from government laboratories. The Company believes that revenues from sales of
HEP products, which represented approximately 6% of total revenues in 1999 will
likely represent a declining portion of its total revenues in the future.
Service and other revenues increased to $6.9 million in 1999 from $6.7
million in 1998, or 3%, due primarily to the continued increase in marketing of
service and support programs for digital oscilloscopes and related products and
increased sales of upgrades for such products.
17
<PAGE>
Revenues from LAN/WAN test instruments declined to $6.7 million in 1999
from $8.1 million in 1998, or 17%. This decrease was attributable to the
shipment of a large order to Sprint of $3.7 million in 1998.
License fees declined to $4.9 million in 1999 from $8.5 million 1998. The
Company believes that license fee revenues are likely to continue to represent a
declining portion of its total revenue in the future.
Gross profit, excluding the impact of restructuring charges of $2.2 million
in 1999 and $2.7 million in 1998, respectively, was 51.9% in 1999 compared to
58.6% in 1998. The decline was caused by higher material costs for the LC
564/584 product lines introduced in the fourth quarter of fiscal 1998, lower
margins on the mid-market Waverunner products introduced in the second half of
1999 and lower license fees in 1999.
Selling, general and administrative expenses increased to $44.9 million in
1999 from $44.1 million in 1998, or 2%. These expenses increased as the Company
expanded its sales personnel in Korea resulting from the acquisition of Woojoo
Hi-Tech in the third quarter of fiscal 1998. As a percentage of total revenues,
selling, general and administrative expenses were 35.6% in 1999 and 33.6% in
1998.
Research and development expenses, excluding the impact of a $2.5 million
technology payment, increased to $18.6 million in 1999 from $18 million in 1998,
or 3%. Excluding the impact of the $2.5 million technology payment, research and
development expenses, as a percentage of total revenue, was 14.8% in 1999
compared to 13.8% in 1998.
Operating income, excluding the impact of the restructuring and
non-recurring charges (credits) declined to $2 million in 1999 from $12.1
million in 1998, or 83% due to the factors listed above. As a percentage of
total revenues, operating income, excluding the impact of the restructuring and
non-recurring charges (credits), was 1.6% in 1999 as compared to 9.2% in 1998.
Net interest and financing charges, included in other income, net was
$578,000 in 1999 compared to net interest income of $486,000 in 1998. The change
in the current year is due primarily to reduced levels of cash on hand as the
Company has made significant capital investments in the last half of fiscal 1998
as well as in the third quarter of fiscal 1999. These capital investments
include an equity investment and purchased manufacturing and distribution
rights. Average borrowing levels were $6.7 million 1999 as compared to $1.2
million in 1998. Other income, net in 1999 and 1998 included currency exchange
gains (losses) of $742,000 and ($477,000), respectively.
The Company's effective income tax rate for 1999 before restructuring and
non-recurring charges, net, was 43.3% compared to 29.7% in 1998 due principally
to foreign tax payments on license fees, for which no U.S. tax benefit is
recognized. Currently, the Company's Swiss subsidiary operates under a tax
agreement with the Canton of Geneva pursuant to which the effective tax rate on
income with respect to such subsidiary is approximately 17%. The Company will
renegotiate the agreement during fiscal 2000.
Excluding the impact of the restructuring and non-recurring charges
(credits), net of taxes, amounting to $7.5 million in 1999, and $10.4 million in
1998, net income declined 91% to $743,000 in 1999 compared to $8.5 million in
1998. Excluding the impact of the restructuring and non-recurring charges
(credits), net income as a percentage of total revenues was 0.6%, in 1999
compared to 6.5% for 1998.
COMPARISON OF FISCAL YEARS 1998 AND 1997
Total revenues increased to $131.0 million in 1998 from $125.4 million in
1997, or 4%, and represented record full-year revenues for the Company. Revenues
increased as a result of an increase in average selling prices of digital
oscilloscopes and license fee revenues. On a geographic basis, total revenues
increased to $58.0 million in 1998 from $51.5 million in 1997, or 13%, in the
United States, declined to $31 million in 1998 from $32.9 million in 1997, or
6%, in Europe and increased to $42 million in 1998 from $41 million in 1997, or
2%, in the rest of the world, principally Japan and the rest of Asia.
The increase in revenues was lowered by approximately $4.7 million in
the current year attributable to the net impact of the strengthening of the
United States dollar versus the Japanese yen, Swiss franc, French franc and
German deutschemark, as compared to the exchange rates prevailing in the same
period of the prior fiscal year.
Revenues from digital oscilloscopes and related products increased 1% to
$101.6 million in 1998, from $100.6 million in 1997. This slight increase in
revenues was attributable to an increase in sales in the Company's LC family
18
<PAGE>
of color digital oscilloscopes. Average selling prices of digital oscilloscope
and related products increased marginally, as compared to fiscal 1997 offset by
similar decline in unit volume.
Revenues from sales of HEP products declined to $6.2 million in 1998 from
$7.0 million in 1997, or 12%. The Company believes that revenues from sales of
HEP products, which represented approximately 5% of total revenues in 1998 as
compared to approximately 6% of total revenues in 1997.
Service and other revenues increased to $6.7 million in 1998 from $6.1
million in 1997, or 10%, due primarily to the continued increase in marketing of
service and support programs for digital oscilloscopes and related products and
higher sales of upgrades for such products.
Revenues from LAN/WAN test instruments, acquired in the Digitech
acquisition, increased to $8.1 million in 1998, from $7.7 million in 1997 or 4%.
License fee revenues, including $5.5 million for digital oscilloscope
solutions increased to $8.5 million in 1998.
Gross profit for fiscal 1998, excluding the impact of restructuring charges
of $2.7 million was 58.6% of revenues compared to 57.6% for fiscal 1997. This
growth was due to increased revenues from fees for digital oscilloscope
solutions and LAN/WAN license fee revenues.
Selling, general and administrative expenses increased to $44.1 million in
1998 from $41.9 million in 1997, or 5%. These expenses increased as the Company
expanded sales management and staff at each of its regional sales headquarters
and incurred additional sales commissions due to higher sales volume and the
expansion of administrative management and support staff. As a percentage of
total revenues, selling, general and administrative expenses were to 33.6% in
1998 compared to 33.4% in 1997.
Research and development expenses increased to $20.5 million in 1998 from
$15.5 million in 1997, or 33%. This higher level of research and development
expenses reflects an increase in connection with introductions of new digital
oscilloscopes and related products and continued development of network products
and a $2.5 million technology payment that will enhance LeCroy's position in
both the oscilloscope and network businesses. As a percentage of total revenues,
research and development expenses were 15.7% in 1998 compared to 12.4% in 1997.
Non-recurring charges for acquisitions in fiscal 1998 related to
transaction costs and one time charges resulting from the merger of Digitech
Industries, Inc. which included at $1.3 million provision for environment clean
up, $0.6 million for professional fees and write down of assets associated with
duplicate product lines, and a $1.6 million purchase of incomplete technology
resulting from the purchase of Preamble Instruments, Inc.
Operating income, excluding the impact of the restructuring and
non-recurring charges-acquisitions was $12.1 million in 1998 and $14.8 million
in 1997. As a percentage of total revenues, operating income, excluding the
impact of the restructuring and non-recurring charges, was 9.2% in 1998 as
compared to 11.8% in 1997.
Interest income and financing charges net, included in other income
(expenses), was $486,000 in 1998 compared to interest expense of $313,000 in
1997. The improvement in the current year is due primarily to reduced levels of
debt, paid down from funds received in the third quarter of fiscal 1997 from the
Company's secondary public offering of its common stock. Average borrowing
levels were $1.2 million in 1998 as compared to $4.9 million in 1997. Operating
results in fiscal 1998 and 1997 included currency exchange gains (losses) of
approximately $(477,000) and $678,000, respectively.
The Company's effective income tax rate for 1998, before restructuring and
non-recurring charges-acquisitions, was 29.7%. Currently, the Company's Swiss
subsidiary operates under a tax agreement with the Canton of Geneva pursuant to
which the effective tax rate on income with respect to such subsidiary is
approximately 17%.
Excluding the impact of the restructuring and non-recurring
charges-acquisitions amounting to $10.4 million, net income declined 16% to $8.5
million in 1998 compared to $10.1 million in 1997. Excluding the impact of the
restructuring charges and non-recurring charges-acquisitions, net income as a
percentage of total revenues was 6.5% compared to 8% for 1997.
19
<PAGE>
YEAR 2000
The year 2000 problem concerns the inability of information systems to
recognize properly and process date-sensitive information beyond December 31,
1999. Prior to the restructuring of its oscilloscope operations and the closure
of its Geneva Switzerland manufacturing facility, the Company had planned to
implement a new ERP (Enterprise Resource Planning) system in July 1999, which,
was year 2000 compliant. As a result of the aforementioned restructuring, the
Company has decided to delay the implementation of its new ERP system until
April 2000. Based upon successful application testing, the Company believes its
financial operating systems in New York are currently Year 2000 compliant,
however the financial operating system at the Geneva, Switzerland location is
not year 2000 compliant. Therefore, the Company will invoke its year 2000
contingency plan with respect to the Geneva Switzerland location. The Company
has decided to purchase a financial operating system that is year 2000 compliant
for its Geneva Switzerland location rather than upgrade the Geneva legacy
system.
The Company has purchased and installed the new financial operating system
in Geneva. The total cost of this new system was approximately $137,000. This
includes software, installation, training and support. The source of these funds
came from borrowings under the revolving line of credit.
The Company continues to work with other third party suppliers to identify
exposures and obtain compliance. At this point the Company does not anticipate
any material adverse effects resulting from year 2000 problems. Based upon
extensive testing the Company believes that all its test and measurement
products are problem free with respect to their internal time clocks in the year
2000 and beyond.
This represents a forward-looking statement under the Private Securities
Litigation Reform Act of 1997. Undiscovered issues related to the Year 2000
issue could have an adverse impact on the Company's results of operations.
Additional risks associated with the year 2000 problem include (i) failure
of systems and software used by our customers which will impact their financial
ability to purchase our products; (ii) failure of systems and software used by
vendors and third-party service providers upon which we rely for outsourced
services and products; (iii) Year 2000 problems with our suppliers which could
negatively impact our ability to fulfill our orders promptly; and (iv) errors or
failures of systems in which our products are implemented which could result in
improper interfacing or operation of such devices.
LIQUIDITY AND CAPITAL RESOURCES
Working capital was $30.4 million at June 30, 1999, which represented a
working capital ratio of 1.9 to 1, compared to $27.7 million, or 1.8 to 1, at
June 30, 1998.
Cash flows provided by (used in) operating activities were $(3.3) million
in fiscal 1999 compared to $(1.5) million in fiscal 1998 and $13 million in
fiscal 1997. The 1999 cash flows from operations declined in comparison to the
prior two fiscal years as the result of lower operating earnings in the current
year.
Capital expenditures were $8.5 million, $6.5 million and $5.4 million in
fiscal 1999, 1998 and 1997, respectively. These capital expenditures were
primarily for assembly, research, design and test equipment, facilities
improvements and information systems software. Average net fixed assets employed
were $13.2 million, or 10.4% of fiscal 1999 revenues, compared to $11.7 million
or 8.9% of revenues in fiscal 1998. LeCroy anticipates that its capital spending
for property and equipment in fiscal 1999 will approximate $7 million, primarily
for design and test equipment, an ERP information system to improve our business
processes, and facilities improvements. Funding for capital expenditures
generally will be provided from internal sources.
In February 1998 the Company made a $7 million equity investment in Iwatsu
Electric Co., Ltd. which gives LeCroy a first right of refusal for Iwatsu's test
and measurement business. In April 1998 the Company purchased manufacturing and
distribution rights for complementary Iwatsu products for $4.7 million. In March
1999 the Company purchased additional manufacturing rights for complementary
Iwatsu products for $5 million.
The Company has financed its business in fiscal 1999 through amounts
available under its multicurrency revolving credit facility, as well as the
proceeds of $10 million from a private placement of redeemable convertible
preferred stock. In March 1999 the Company amended its unsecured multicurrency
revolving credit facility and increased its borrowing capacity to $20 million,
maturing in January 2002. At June 30, 1999 the Company had
20
<PAGE>
borrowed $6.6 million under the agreement. The amended credit agreement contains
financial covenants that include maintaining specified financial ratios,
positive levels of net income and limitations on capital expenditures. At June
30, 1999, the Company was in violation of certain financial covenants, which
have been waived by the banks. In September 1999 the agreement was amended to
pledge substantially all of the Company's domestic assets as collateral
and to revise certain financial covenants.
In addition, the Company maintains certain foreign borrowing and overdraft
facilities, principally a three million Swiss franc ($1.9 million using the U.S.
dollar/Swiss franc exchange rate as of June 30, 1999 of which $1.6 million was
used) multicurrency revolving credit agreement that is cancelable upon notice by
the bank or the Company.
The Company believes that its cash on hand together with amounts
available under its multicurrency revolving credit agreement and internally
generated cash flow will be sufficient to fund working capital and capital
expenditure requirements for at least the next twelve months.
RISK MANAGEMENT
The Company does not enter into financial instruments for trading or
speculative purposes. The Company is exposed to market risk from changes in
interest rates, foreign exchange rates and market valuation of its foreign
common stock investment. Its equity investment in Iwatsu Electric Co., Ltd. is
subject to the impact of foreign exchange rates and the Japanese stock market
fluctuation which at June 30, 1999 has resulted in a $0.3 million increase from
the $7 million original cost. The change in the value of this investment, which
is deemed to be temporary, is included as part of accumulated comprehensive
(loss) in stockholders' equity and is not included in income or loss.
The Company's foreign debt, which at June 30, 1999 was comprised primarily
of short-term facilities in Swiss francs at a fixed rate amounting to $1.6
million, does not subject the Company to significant interest rate risk as the
borrowings are short term. The Company periodically uses foreign currency based
borrowings in an effort to hedge foreign exchange risks.
NEW PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement is effective for
fiscal years beginning after June 15, 2000. Management believes that adopting
this statement will not have a material impact on the financial position,
results of operations or cash flows of the Company.
This Form 10-K may contain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including without limitation,
statements regarding the intent, belief or current expectations of the Company
or its directors or officers with respect to, among others things, (i) market
trends in the Company's industries and the projected impact on the Company; (ii)
the increasing importance of signal shape analysis; (iii) the Company's ability
to meet its customers' evolving needs; (iv) the Company's position within its
industries and ability to effectively compete; (v) the Company's ability to
expand into new markets; (vi) future HEP revenues; (vii) trends in the
seasonality of the Company's sales; (viii) a shift in technology towards higher
speed digital signals containing more complex data and the demands of users of
signal analyzer products; (ix) market opportunities for dedicated signal
analyzers; (x) the resolution of certain environmental remediation activities;
(xi) consequences of the Company's consolidation of its oscilloscope operations;
(xii) the proportion that license fee revenue will represent of the Company's
future revenues; (xiii) year 2000 compliance of the Company's products, and the
impact of the year 2000 problem on the Company; (xiv) sufficiency of the
Company's cash flow to fund working capital and capital expenditure
requirements; (xv) trends affecting the Company's financial condition and
results of operations; (xvi) the Company's business and growth strategies;
(xvii) the impact of adoption of accounting conventions; and (xviii) certain
other statements identified or qualified by words such as "likely", "will",
"suggests", "may", "would", "could", "should", "expects", "anticipates",
"estimates", "plans", "projects", "believes", "is optimistic about", or similar
expressions (and variants of such words or expressions). Investors are cautioned
that forward-looking statements are inherently uncertain. These forward-looking
statements represent the best judgement of the Company as on the date of this
Form 10-K, and the Company cautions readers not to place undue reliance on such
statements. Actual performance
21
<PAGE>
and results of operations may differ materially from those projected or
suggested in the forward-looking statements due to certain risks and
uncertainties including, without limitation, risks associated with fluctuations
in the Company's operating results, volume and timing of orders received,
changes in the mix of products sold, competitive pricing pressure, the Company's
ability to meet or renegotiate customer demands, the Company's ability to
anticipate changes in the market, the Company's ability to finance its
operations on terms that are acceptable, the Company's ability to attract and
retain qualified personnel including the Company's management, changes in the
global economy, the dependence on certain key customers, the Company's ability
to realize sufficient margins on sales of its products, the availability and
timing of funding for the Company's current products and the development of
future products as well as those discussed in the section entitled "Risk
Factors" in the Prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) on March 26, 1997 (which section is hereby incorporated
by reference herein).
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
LECROY CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
Report of Independent Auditors.......................................................................... 24
Consolidated Balance Sheets as of June 30, 1999 and 1998................................................ 25
Consolidated Statements of Operations for the Years Ended June 30, 1999, 1998 and 1997.................. 26
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1999, 1998 and 1997........ 27
Consolidated Statements of Cash Flows for the Years Ended June 30, 1999, 1998 and 1997.................. 28
Notes to Consolidated Financial Statements.............................................................. 29
</TABLE>
23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LeCroy Corporation
We have audited the accompanying consolidated balance sheets of LeCroy
Corporation as of June 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial position of
LeCroy Corporation at June 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Hackensack, New Jersey
August 2, 1999, except for
the last sentence of the second
paragraph of Note 6, as to which
the date is September 7, 1999.
24
<PAGE>
LeCROY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1999 1998
------------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................................................... $ 1,791 $ 1,895
Accounts receivable, less allowance of $518 in 1999 and $568 in 1998 31,549 31,297
Inventories....................................................................... 29,120 26,682
Other current assets.............................................................. 3,200 2,556
-------- -------
Total current assets......................................................... 65,660 62,430
Property and equipment, at cost:
Land and building................................................................. 9,294 6,825
Furniture, machinery and equipment................................................ 28,463 29,907
-------- -------
37,757 36,732
Less: Accumulated depreciation and amortization................................... (23,200) (24,937)
-------- -------
14,557 11,795
Marketable securities.................................................................. 7,383 5,073
Other assets........................................................................... 14,614 9,812
-------- -------
$102,214 $89,110
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current debt...................................................................... $ 1,600 $ 2,294
Accounts payable.................................................................. 11,858 9,970
Accrued expenses:
Warranty....................................................................... 1,822 1,943
Deferred revenue............................................................... 3,910 687
Other.......................................................................... 2,573 6,293
Compensation and benefits...................................................... 6,903 7,506
Restructuring ................................................................. 3,420 2,516
Income taxes................................................................... 3,194 3,524
-------- -------
Total current liabilities.................................................... 35,280 34,733
Long-term debt......................................................................... 6,600 --
Deferred compensation.................................................................. 327 270
Contingencies and commitments
Redeemable convertible preferred stock, $.01 par value (Authorized 500,000 shares;
500,000 shares issued and outstanding; liquidation value, $10,000,000 at June 30, 1999) 8,152 --
Stockholders' Equity:
Common stock, $.01 par value (Authorized 45,000,000 shares; 7,704,994 and
7,568,667 issued and outstanding in 1999 and 1998, respectively)............... 77 76
Additional paid-in capital........................................................ 42,869 37,867
Accumulated other comprehensive loss.............................................. (3,970) (5,347)
Retained earnings................................................................. 12,879 21,511
-------- -------
Total stockholders' equity................................................... 51,855 54,107
-------- -------
$102,214 $89,110
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
LeCROY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Digital oscilloscopes and related products................................. $100,366 $101,584 $100,582
High energy physics products.............................................. 7,362 6,167 6,993
Service and other.......................................................... 6,863 6,700 6,085
-------- -------- --------
Test and measurement revenues..................................... 114,591 114,451 113,660
LAN/WAN test instruments................................................... 6,707 8,058 7,741
License fees............................................................... 4,900 8,500 4,000
-------- -------- --------
Total...................................................................... 126,198 131,009 125,401
Cost of sales................................................................... 62,827 56,996 53,173
-------- -------- --------
Gross profit............................................................... 63,371 74,013 72,228
Operating expenses:
Selling, general and administrative........................................ 44,888 44,076 41,924
Research and development................................................... 18,638 20,541 15,495
Restructuring and non-recurring charges, net............................... 6,788 5,852 3,857
Non-recurring charges (credits) - acquisitions............................. (1,140) 3,533 -
-------- -------- --------
Total operating expenses..................................... 69,174 74,002 61,276
-------- -------- --------
Operating income (loss)......................................................... (5,803) 11 10,952
Other income, net............................................................... 164 9 365
-------- -------- --------
Income (loss) before income taxes............................................... (5,639) 20 11,317
Provision for income taxes...................................................... 1,149 1,900 3,743
-------- -------- --------
Net income (loss)............................................................... (6,788) (1,880) 7,574
Charges related to convertible preferred stock.................................. (1,844) - -
-------- -------- --------
Income (loss) available to common stockholders.................................. $ (8,632) $ (1,880) $ 7,574
======== ======== ========
Income (loss) per common share applicable to common stockholders:
Basic........................................................................... $ (1.13) $ (0.25) $ 1.20
Diluted ........................................................................ $ (1.13) $ (0.25) $ 1.00
Weighted average number of common shares:
Basic........................................................................... 7,621 7,375 6,299
Diluted ........................................................................ 7,621 7,375 7,541
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
LeCROY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER
-------------- PAID-IN --------------- COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT INCOME (LOSS) EARNINGS TOTAL
------ ------ ------- ------ ------ ------------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 ................... 6,332 $64 $23,950 (451) $(2,334) $ 1,662 $15,817 $39,159
Comprehensive income:
Net income ............................... 7,574 7,574
Foreign currency translation ............. (3,631) (3,631)
------
Total comprehensive income ................. 3,943
Public sale of common stock ................ 354 3 7,717 7,720
Conversion of stock warrants................ 591 6 (6)
Stock option and stock purchase plans ...... 1,531 339 1,521 3,052
Tax benefit from exercise of stock options . 450 450
---- -- ------- ---- ---- ------- ------ ------
Balance at June 30, 1997 ................... 7,277 73 33,642 (112) (813) (1,969) 23,391 54,324
Comprehensive income:
Net loss.................................. (1,880) (1,880)
Foreign currency translation ............. (1,920) (1,920)
Unrealized loss on securities available
for sale................................ (1,458) (1,458)
------
Total comprehensive income ................. (5,258)
Stock option and stock purchase plans....... 257 3 2,729 112 813 3,545
Issuance of stock for business acquisition . 35 1,407 1,407
Tax benefit from exercise of stock options.. 89 89
----- -- ------- ------- ------ ------
Balance at June 30, 1998.................... 7,569 76 37,867 (5,347) 21,511 54,107
Comprehensive income:
Net loss.................................. (6,788) (6,788)
Foreign currency translation.............. (754) (754)
Unrealized gain on securities available 2,131 2,131
for sale................................ -----
(5,411)
Total comprehensive income..................
Stock option and stock purchase plans....... 136 1 1,300 1,301
Tax benefit from exercise of stock options.. 30 30
Issuance of warrants with preferred stock... 1,848 1,848
Charges related to convertible preferred 1,844 (1,844)
stock.......................................
Securities offering costs................... (20) (20)
---- --- ------- --------- ------- -------
Balance at June 30, 1999.................... 7,705 $77 $42,869 $ (3,970) $12,879 $ 51,855
===== === ======= ========= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
LeCROY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ (6,788) $ (1,880) $ 7,574
Adjustments for noncash items included in operating activities:
Depreciation and amortization.......................................... 4,769 3,818 3,205
Restructuring provisions............................................... 7,380 7,298 3,617
Deferred income taxes.................................................. _ 640 79
Non-recurring charges (credits) - acquisitions......................... (1,140) 3,100 _
Gain on disposal of fixed assets....................................... (14) _ _
Change in operating asset and liability components:
Accounts receivable.................................................... (1,874) (8,253) (4,258)
Inventories............................................................ (4,435) (9,333) (564)
Prepaid expenses and other assets...................................... (400) 487 (164)
Accounts payable, accrued warranty, deferred revenue and
accrued expenses....................................................... 2,778 3,595 495
Accrued employee compensation and benefits............................. (2,824) 550 1,084
Income taxes........................................................... (755) (1,539) 1,929
--------- --------- ---------
Net cash (used in) provided by operating activities.............................. (3,303) (1,517) 12,997
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................................... (7,330) (4,544) (5,402)
Business acquisitions, net of acquired cash ................................ _ (1,013) _
Investment in equity securities ............................................ _ (7,054) _
Purchase of intangible assets .............................................. (5,125) (4,700) _
Investment in computer software ............................................ (1,217) (1,952) _
Proceeds from disposal of property and equipment............................ _ 19 38
Due from officers........................................................... _ _ 35
--------- --------- ---------
Net cash used in investing activities............................................ (13,672) (19,244) (5,329)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short term debt............................................... (710) 2,332 1
Repayment of debt, capitalized leases and other............................. _ (76) (5,838)
Public sale of common stock................................................. _ _ 7,720
Borrowings under line of credit, net........................................ 6,600 _ _
Proceeds from sale of preferred stock....................................... 9,980 _ _
Proceeds from exercise of stock options and stock purchases................. 1,301 3,545 3,052
--------- --------- ---------
Net cash provided by financing activities........................................ 17,171 5,801 4,935
--------- --------- ---------
Effect of exchange rates on cash................................................. (300) (3,029) (3,083)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............................ (104) (17,989) 9,520
Cash and cash equivalents at beginning of the year.......................... 1,895 19,884 10,364
--------- --------- ---------
Cash and cash equivalents at end of the year................................ $ 1,791 $ 1,895 $ 19,884
========= ========= =========
Supplemental Cash Flow Disclosure
Cash paid during the year for:
Interest.............................................................. $ 662 $ 45 $ 514
Income taxes.......................................................... 1,797 2,631 1,389
Tax benefit of disqualifying dispositions of stock options................. 30 89 450
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Company develops, manufactures, sells and licenses signal analyzers,
principally high-performance digital oscilloscopes, LAN (Local Area
Networks)/WAN (Wide Area Networks) instruments and related products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of LeCroy
Corporation (the "Company") and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform with the current year. The fiscal 1997
consolidated financial statements have been restated to reflect the combination
in fiscal 1998 with an acquired business which has been accounted for by the
pooling of interests method.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
FISCAL YEAR ENDING DATES
The operations of the U.S. Company, LeCroy Corporation, have a fiscal year
end of the Saturday closest to June 30 (June 28, 1997, June 27, 1998, and July
3, 1999). For 1997 and 1998, the fiscal years represented a 52 week period. For
1999 the fiscal year represented a 53 week period. The majority of foreign
subsidiaries have a June 30 fiscal year end. The consolidated financial
statements' year-end references are stated as June 30.
REVENUE RECOGNITION
Substantially all revenue is recognized when products are shipped or
services are rendered to customers. Revenues from service contracts are
recognized ratably over the contract period. A deferral is recorded for
post-contract support and any other further deliverables included within the
sales contract agreement. This deferral is earned as contract elements are
completed. Accounts receivable have been reduced by estimated amounts for
allowances related to future charges for uncollected accounts and product
returns.
WARRANTY
Estimated future warranty obligations related to products are provided by
charges to operations in the period that the related revenue is recognized.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
CASH EQUIVALENTS
Cash equivalents represent highly liquid debt instruments with a maturity
of three months or less at the time of purchase. Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
primarily of short-term deposits in the United States and Europe with major
banks with investment levels and debt ratings set to limit exposure with any one
institution.
29
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARKETABLE SECURITIES
The Company classifies its equity investments as available for sale and
reports them at fair market value. Unrealized gains or losses are reported net
of tax and foreign exchange effect in stockholders' equity until disposition. At
June 30, 1999, cost is $7,054, gross unrealized gain is $329 and fair market
value is $7,383.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
are provided on the straight-line basis. The estimated useful lives are as
follows:
Building............................................... 20-32 years
Furniture, machinery and equipment...................... 3-12 years
INTANGIBLE ASSETS
The cost of product technology and manufacturing and distribution rights
acquired is being amortized primarily on units produced or shipped over the
contract period, generally five years, but in no event longer than their
expected useful lives. Excess of cost over fair market value of net assets
acquired is being amortized on a straight line basis over fifteen years.
CONCENTRATION OF CREDIT RISKS
The Company manufactures and sells electronic equipment, principally a line
of digital oscilloscopes, to research facilities, governmental agencies and the
test and measurement industry. Sales are to all regions of the United States as
well as to a multitude of foreign countries. The Company performs periodic
credit evaluations of its customers' financial condition. Credit losses have
been minimal and within management's expectations. 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.
FOREIGN EXCHANGE
The Company's foreign subsidiaries use their local currency as the
functional currency and translate all assets and liabilities at current exchange
rates and all income and expenses at average exchange rates. The adjustment
resulting from this translation is included in comprehensive income. Gains
(losses) in fiscal 1999, 1998 and 1997 resulting from foreign currency
transactions approximated $742, $(477) and $678, respectively, and are included
in other income, net.
HEDGING AND RELATED FINANCIAL INSTRUMENTS
The Company periodically utilizes foreign currency based borrowings in an
effort to hedge foreign exchange risks.
INCOME TAXES
Deferred tax assets and liabilities are recognized on the income reported
in the financial statements regardless of when such taxes are payable. These
deferred taxes are measured by applying current enacted tax rates. 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.
30
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB No. 25,
if the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
generally recognized.
PER SHARE INFORMATION
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if stock options or other contracts to issue
common stock were exercised and resulted in the issuance of common stock that
then shared in the earnings of the Company. Diluted EPS is computed using the
treasury stock method when the effect of common stock equivalents would be
dilutive. Common stock equivalents of 308,000 in fiscal 1999 and 679,000 in
fiscal 1998 are excluded from the loss per common share calculation because the
effect would be anti-dilutive.
COMPREHENSIVE INCOME (LOSS)
Effective July 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income or (loss) and its components in the financial
statements. The adoption of SFAS No. 130 had no effect on the Company's
financial position or results of operations. Comprehensive income (loss) for the
three years ended June 30, 1999, 1998 and 1997 included foreign currency
translation gains and (losses) of $(0.7), $(1.9) and $(3.6) million,
respectively, and unrealized gains and (losses) on marketable equity securites
classified as available for sale of $2.1 million, $(1.4) million and zero,
respectively. The cumulative foreign currency translation losses were $4.6
million at June 30, 1999 and $3.9 million at June 30, 1998. The cumulative
unrealized gains and (losses) on marketable equity securities classified as
available for sale were $0.7 million at June 30, 1999 and $(1.4) million at June
30, 1998. The unrealized gain (loss) on marketable equity securites classified
as available for sale includes deferred tax expense (benefit) of $0.4 million
and $(0.3) million for fiscal 1999 and 1998, respectively.
SEGMENT AND GEOGRAPHIC INFORMATION
Effective July 1, 1998 the Company adopted SFAS No. 131 "Disclosures abouts
Segments of an Enterprise and Related Information" which requires that an
enterprise disclose the factors that management considers most significant in
determining its reportable segments (see footnote 11).
2. RESTRUCTURING AND NON-RECURRING CHARGES
The operating results for the year ended June 30, 1999 includes total
restructuring and non-recurring charges of $11.3 million ($10.9 million after
taxes or $(1.44) per basic share) relating to the consolidation of the Company's
oscilloscope operations. The Company believes that this consolidation will
enhance operating efficiences and enable the Company to dedicate additional
resources to capitalize on several current breakthrough technologies.
Of the aforementioned $11.3 million pretax charges, $10.4 million relates
to restructuring costs. The restructuring costs include inventory write downs of
$2.2 million included in cost of sales, the accrual for the future minimum lease
payments for the Geneva Switzerland manufacturing facility of $3.4 million,
severance and employee benefit costs of $3.0 million for the reduction of 56
employees from the current workforce and the write down of plant assets and
capitalized management information system software and other costs of $1.8
million. As of June 30, 1999 approximately $3.9 million of these costs have been
paid. Of the aforementioned $3.9 million,
31
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
$1.5 million relates to severance and other employee benefits, $1.3 million
relates to inventory, $0.3 million relates to leases, $0.2 million relates to
plant assets and $0.6 million relates to management information system software
and other costs. The restructuring plan is expected to be completed by the end
of fiscal 2000. Associated with the restructuring efforts were $0.9 million of
additional costs incurred to redeploy manufacturing, engineering and employee
resources.
In the fourth quarter of fiscal 1998 the Company finalized a restructuring
plan amounting to $8.5 million ($7.9 million after taxes or $1.07 per basic
share) in response to continuing uncertainties in the Pacific Region. These
charges included inventory write downs of $2.7 million included in cost of
sales, the write down of plant assets, leases, and contracts of $2.9 million and
severance and employee benefit costs of $2.9 million from the reduction of 90
full and part-time employees of the Company's workforce. As of June 30, 1999
this plan has been substantially completed. In the fourth quarter of fiscal 1999
the Company recorded restructuring credits of $ 2.4 million relating to reversal
of restructuring accruals for severance and leases related to the decision to
continue certain European sales offices.
In January 1997, the Company adopted a strategic business plan to reduce
costs and improve asset utilization in its HEP business. In connection with the
plan, the Company took a series of reorganization actions resulting in
write-downs, principally for inventory and other asset revaluations, and
employee severance. The restructuring plan resulted in a charge to fiscal 1997
third quarter results of approximately $3.9 million ($2.5 million after taxes),
of which $0.6 million related to severance. At June 30, 1999, these
reorganization actions have been completed.
3. INVENTORIES
Inventories, including demonstration units in finished goods, are stated at
the lower of cost (first-in, first-out method) or market.
JUNE 30,
--------------
1999 1998
---- ----
Raw materials................................... $ 10,346 $11,377
Work in process................................. 5,854 6,206
Finished goods.................................. 12,920 9,099
-------- -------
$ 29,120 $26,682
The allowance for excess and obsolete inventory, included above,
amounted to $3,490 in 1999 and $5,087 in 1998 which includes $827 and $3,005 for
inventory writedowns as of June 30, 1999 and 1998, respectively, for
restructuring (see Note 2).
4. OTHER ASSETS
Other assets consist of the following:
JUNE 30,
------------
1999 1998
---- ----
Manufacturing and distribution rights, net ...... $ 9,470 $4,643
Computer software for internal use .............. 2,256 1,952
Excess of cost over net assets acquired, net .... 1,461 1,818
Deferred compensation............................ 327 270
Other............................................ 1,100 1,129
------- ------
$14,614 $9,812
The excess of cost over net assets acquired is net of accumulated amortization
of $411 and $77 for fiscal 1999 and fiscal 1998, respectively.
32
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. INCOME TAXES
The components of income (loss) before income taxes are as follows:
1999 1998 1997
---- ---- ----
Domestic............................... $(1,659) $(3,127) $ 940
Foreign................................ (3,980) 3,147 10,377
------- ------- -------
$(5,639) $ 20 $11,317
======= ======= =======
The provision for income taxes for the fiscal year June 30 is as follows:
1999 1998 1997
---- ---- ----
Current US............................. $ (59) $ 380 $ 222
Current Foreign........................ 543 880 3,442
Deferred Foreign....................... 665 640 79
------ ------ ------
$1,149 $1,900 $3,743
====== ====== ======
The reconciliation between U.S. federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. federal statutory rate................... $ (1,974) $ 7 $ 3,961
Increase (reduction) to statutory tax rate from:
Difference between U.S. and foreign rates....... (365) (1,111) (1,897)
Tax effect of restructuring.................... 1,966 2,344 --
Change in valuation allowances.................. 1,495 1,228 1,404
Other, net...................................... 27 (568) 275
-------- -------- -------
Income tax expense................................... $ 1,149 $ 1,900 $ 3,743
======== ======== =======
</TABLE>
Significant components of the Company's deferred tax assets as of June 30,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1999 1998
---- ----
<S> <C> <C>
Federal and state loss and credit carryforwards ................................. $ 5,018 $3,145
Foreign loss and credit carryforwards............................................ 1,633 1,211
Inventory and other reserves..................................................... 4,049 4,849
------- ------
Total deferred tax assets........................................................ 10,700 9,205
Valuation allowance.............................................................. (10,700) (9,205)
------- ------
Net deferred tax assets.......................................................... $ -- $ --
======= ======
</TABLE>
Included in current income taxes payable in 1999 and 1998 is $89 and $371,
respectively, of current deferred income taxes payable associated with foreign
inventory provisions and other foreign tax reserves.
At June 30, 1999, the Company had a deferred tax asset of $10,700 (before
valuation allowance) consisting primarily of the future tax benefits from net
operating loss carryforwards, temporary differences, and other tax credits.
Realization of the deferred tax asset depends on the Company's ability to
generate future U.S. taxable income. Included in the total is $2,488 related to
employee stock option exercises, the benefit of which, if realized, will
increase paid-in-capital.
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS No. 109), the Company is required to recognize all or a
portion of its net deferred tax asset if it believes that it is more likely than
not, given the weight of all available evidence, that all or a portion of the
benefits of the carryforward losses
33
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
and tax credits will be realized. Management believes that it is more likely
than not that the Company will not realize any benefits from its net deferred
tax asset, and has recorded a 100% reserve against the asset at June 30, 1999.
Management will continue to assess the realizability of the deferred tax asset
at each interim and annual balance sheet date based on actual and forecasted
operating results.
In general it has been the practice of the Company to reinvest unremitted
earnings of foreign subsidiaries. The cumulative amount of undistributed
earnings of consolidated foreign subsidiaries for which U.S. federal income tax
has not been provided is $24,693 at June 30, 1999. These earnings, which reflect
full provision for non-U.S. income taxes, are anticipated to be reinvested
permanently outside the United States or will be remitted substantially free of
additional tax. Determining the U.S. income tax liability that might be payable
if these earnings were remitted is not practicable.
At June 30, 1999, the Company has a U.S. federal income tax net operating
loss carryforward of $8,525 available to offset future taxable income. The
carryforward has various expiration dates beginning in 2009 and ending in 2019.
Foreign tax net operating losses of $502 at June 30, 1999 are available to
offset future taxable income of certain foreign subsidiaries. The foreign losses
expire in future periods based on year and country of origin. Federal, State and
foreign tax credits expire at various dates beginning in 2002.
6. DEBT
At June 30, 1999, the Company had various foreign debt facilities
outstanding, the principal amount includes 2,509 Swiss Francs ($1,600)
outstanding under a 3,000 Swiss Franc multicurrency short term credit facility
at interest rates of 5.25% to 7.75% depending on the currency in which the
borrowing is denominated.
In March 1999, the Company amended and restated an unsecured $20 million
multicurrency revolving line of credit agreement with two commercial banks which
allows for borrowings in various currencies and provides for interest to be
payable quarterly at the highest of the prime rate, the federal funds rate (as
defined) plus 1/2 % or the Eurocurrency Interest Rate plus applicable
Eurocurrency margins (as defined). The agreement expires on January 31, 2002. At
June 30, 1999 the Company had borrowed $6.6 million under the agreement. The
agreement contains covenants that include maintaining specified financial ratios
and levels of EBITDA and limitations on capital expenditures. At June 30, 1999
the Company was in violation of certain financial covenants which have been
waived by the banks. A commitment fee is assessed on the unused line of credit,
payable at the end of each calendar quarter, at a rate of 3/16 of 1% per annum.
In September 1999 the agreement was amended to pledge substantially all of
the Company's domestic assets as collateral and to revise certain financial
covenants.
Interest income (expense), net, included in other income, net was $(578) in
fiscal 1999, $486 in fiscal 1998 and ($313) in fiscal 1997.
The Company's debt approximates fair value.
At June 30, 1999, the Company had short-term unused lines of credit
aggregating $1,439 for foreign operations.
7. CAPITAL STOCK AND OPTION PLANS
On March 31, 1997, the Company completed a secondary public offering of
1,684,500 shares of Common Stock, of which 1,330,808 shares were sold by certain
selling shareholders and 353,692 new shares were issued by the Company. Net
proceeds to the Company from this issuance amounted to $7.7 million, net of
related offering expenses, and were used primarily to repay outstanding advances
under its multicurrency revolving credit facility.
On March 28, 1995, in conjunction with the issuance of $4.5 million of
subordinated debentures, the Company sold warrants, at $.023 per warrant, to
purchase 695,652 shares of Common Stock, which were reserved for future
34
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
issuance, at an exercise price of $4.49 per share. Concurrent with the secondary
public offering in March 1997, these warrants were converted into 591,349 shares
of Common Stock based on the exercise price and the fair market value determined
by reference to the average closing price for the five trading days preceding
the date of exercise.
In July 1995, the Board of Directors amended and restated the Incentive
Stock Option Plan of 1993. Under the Amended and Restated 1993 Stock Incentive
Plan, 1,521,739 shares of Common Stock can be issued through the exercise of
stock options, increasing 5% annually each July 1 during the term of the Plan.
At July 1, 1999, a maximum of 2,892,283 shares were reserved for issuance for
both incentive stock options and nonqualified stock options. These options allow
full-time employees, including officers, to purchase shares of Common Stock at
prices equal to fair market value at the date of grant. For individuals who own
more than 10% of the Common Stock of the Company, the option price of the shares
may not be less than 110% of the fair market value on the date of grant. No more
than an aggregate of 2,608,696 shares of common stock may be issued pursuant to
the exercise of incentive stock options granted under the amended 1993 Plan.
This limitation does not apply to nonqualified stock options or restricted stock
awards that may be granted under the amended 1993 Plan. The vesting period and
expiration of each grant is 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 life of the options are either ten or eleven years from the date of
grant.
Under the Amended and Restated 1993 Stock Incentive Plan adopted July,
1995, "non-qualified" stock options can be issued to full-time employees,
including officers and non-employee consultants. Options must be granted at an
exercise price of at least 85% of the fair market value on the date of grant.
The vesting period and expiration of each grant is determined by the
Compensation Committee of the Board of Directors. Transactions for incentive and
"non-qualified" stock options for the Amended and Restated 1993 Stock Incentive
Plan for fiscal years 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
NUMBER OF PRICE EXERCISE
SHARES PER SHARE PRICE
--------- ---------- --------
<S> <C> <C> <C>
Outstanding at June 30, 1996..................................... 1,248,282 $ 6.33 - $19.63 $ 8.80
Granted.......................................................... 464,000 22.25 - 32.25 26.71
Exercised........................................................ (291,638) 6.33 - 22.25 7.71
Cancelled........................................................ (44,340) 6.33 - 22.25 10.53
---------- ----------------- -------
Outstanding at June 30, 1997..................................... 1,376,304 6.33 - 32.25 15.01
Granted.......................................................... 965,606 5.95 - 40.00 24.43
Exercised........................................................ (331,535) 5.95 - 22.25 8.16
Cancelled........................................................ (291,806) 6.33 - 40.00 32.01
---------- ----------------- -------
Outstanding at June 30, 1998..................................... 1,718,569 5.95 - 36.75 18.74
Granted.......................................................... 384,000 14.88 - 20.50 15.71
Exercised........................................................ (71,726) 6.33 - 15.75 6.84
Cancelled........................................................ (71,440) 6.33 - 36.25 19.64
---------- ----------------- -------
Outstanding at June 30, 1999..................................... 1,959,403 $ 5.95 - $36.75 $ 18.55
========== ================ =======
</TABLE>
On February 4, 1998 at the election of its U.S. optionees, LeCroy repriced
outstanding options to purchase 193,538 shares of common stock having exercise
prices ranging from $27.25 to $40 per share. The new exercise price is $22.63
per share, the closing price of the common stock on that date. On March 19, 1998
at the election of its Swiss optionees, LeCroy repriced outstanding options to
purchase 46,000 shares of common stock having exercise prices ranging from
$27.25 to $32.25 per share. The new exercise price is $19.38 per share, the
closing price of the common stock on that date. The repriced options are
included as cancelled and re-granted options in the table above.
35
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
AT JUNE 30, 1999 AT JUNE 30, 1999
---------------------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
RANGE SHARES PRICE LIFE (YEARS) SHARES PRICE
----- ------- ----- ------------ ------- -----
<S> <C> <C> <C> <C> <C>
$ 5.95 - $ 12.00 334,746 $ 6.68 5.35 326,268 $ 6.60
$ 12.01 - $ 24.00 1,483,657 19.88 8.31 419,879 20.35
$ 24.01 - $ 32.25 116,000 30.26 7.75 58,000 30.26
$ 32.26 - $ 36.75 25,000 36.75 8.25 -- --
---------- ------- -------- --------
Total 1,959,403 $ 18.55 804,147 $ 15.44
</TABLE>
Of the total options outstanding under the 1993 Plan, 804,147, 487,992 and
492,128 were exercisable at June 30, 1999, 1998 and 1997, respectively. Stock
options available for grant were 110,411, zero and zero at June 30, 1999, 1998
and 1997, respectively.
In October of 1998 the Board of Directors and stockholders terminated the
1995 Non-Employee Director Stock Option Plan ("1995 Plan") and adopted the 1998
Non-Employee Director Stock Option Plan ("1998 Plan"). Pursuant to the 1998 Plan
each non-employee director received a stock option grant of 15,000 shares
exercisable at market price on the date the plan was adopted. These options vest
ratably over a 36 month period. Additionally, each non-employee director will
receive an annual stock option grant of 5,000 shares exercisable at the market
price on the date of grant. These options vest immediately. A total of 500,000
shares of common stock can be issued during the term of the 1998 Plan. As of
June 30, 1999 no shares of common stock had been issued upon exercise of options
granted under the 1998 Plan and options for 60,000 shares of common stock were
outstanding at an exercise price of $14.875. Stock options issued pursuant to
the 1995 Plan vested according to the provisions of the plan on the date the
plan was terminated.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the Company had
been accounting for its employee stock options under the fair value method of
that Statement. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following assumptions
for 1999, 1998 and 1997, respectively: weighted-average risk-free interest rates
of 6.0% for 1999, 5.5% for 1998 and 6.5% for 1997; no dividends; volatility
factors of the expected market price of the Company's common stock of 0.582 for
1999, 0.389 for 1998 and 0.286 for 1997 and a weighted-average expected life of
the options of 4.7 years for 1999, 5.0 years for 1998 and 5.3 years for 1997.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options granted in 1999, 1998 and 1997 is amortized to expense over the options'
vesting period. The weighted-average grant date fair value of options granted
during fiscal years 1999, 1998 and 1997 were $8.47, $10.87, and $9.22,
respectively. The Company's pro forma information follows:
36
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) available to common stockholders ($12,999) ($ 4,308) $ 6,422
Pro forma income (loss) per common share attributable to common stockholders
Basic ..................................................................... ($ 1.71) ($ 0.58) $ 1.02
Diluted ................................................................... ($ 1.71) ($ 0.58) $ 0.85
</TABLE>
The pro forma disclosures presented above for fiscal year 1997 reflect
compensation expense for options granted in fiscal years 1996 and 1997. The pro
forma disclosures for fiscal year 1998 reflect compensation expense for options
granted in fiscal years 1996, 1997 and 1998. The pro forma disclosures for
fiscal year 1999 reflect compensation expense for options granted in fiscal
years 1996, 1997, 1998 and 1999. These amounts may not necessarily be indicative
of the pro forma effect of SFAS No. 123 for future periods in which options may
be granted.
8. STOCKHOLDERS 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 the Company's common stock
outstanding at the record date, November 18, 1998. Initially, the rights will
trade together with the common stock and will not be exercisable or separately
tradable. The rights will be exercisable if a person or group acquires, in the
future, 15 percent 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 percent discount to the share
price at that time. The amount 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.
LeCroy's 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 percent or more of LeCroy's common stock. The rights will expire
on November 2, 2008, unless redeemed prior to that date.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On June 30, 1999, the Company completed a private placement of 500,000
shares of convertible redeemable preferred stock for proceeds of $10 million.
The shares of the convertible redeemable preferred stock are convertible by the
holders into 500,000 shares of common stock at any time subsequent to the
closing. In connection with the redeemable preferred stock the Company has
issued 250,000 warrants to purchase shares of common stock at an exercise price
of $20. These warrants are exercisable at any time subsequent to the closing.
After the fifth anniversary of the closing the holders may redeem their shares
at cost plus a 12% compounding annual dividend. The shares automatically convert
to common stock on a one-for-one basis in the event of a firmly underwritten
public offering raising at least $20 million, provided that the price per share
is at least $28 if the public offering takes place prior to the first
anniversary of the closing, at least $36 prior to the second anniversary of the
closing and at least $40 if the offering takes place after the second
anniversary of the closing. The Company has agreed to register the conversion
shares and the warrant shares within 120 days of the closing.
On the date of the closing the Company used the Black Scholes option
pricing model to assign an aggregate value of $1.8 million to the 250,000
warrants. As such, $1.8 million of the $10 million proceeds was allocated to
additional paid in capital and the remaining $8.2 million was allocated to
redeemable preferred stock. The value assigned to the warrants of $1.8 million
will accrete to the value of the preferred stock over five years. This will
result in a non-cash charge to net income to arrive at net income available to
common stockholders of approximately $360,000 per year.
37
<PAGE>
LECROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On the date of the closing the Company's stock price was $23.688 per share.
This caused the conversion feature of the redeemable preferred stock to be "in
the money" on the date of closing. As a result, the intrinsic value of this
conversion feature was calculated to be $1.84 million. This $1.84 million was
treated as an additional preferred dividend to the preferred investors and was
charged to additional paid in capital on June 30, 1999. This additional
preferred dividend was deducted from net income to arrive at net income
available to common stockholders in the calculation of earnings per share for
fiscal 1999.
10. EMPLOYEE BENEFIT PLANS
The Company has a trusteed employee 401(k) savings plan for eligible U.S.
employees. Effective October 1, 1996, the Company, at its discretion, may match
up to 50% of employee contributions up to a maximum employer contribution of
2.5% of the employee's total compensation. For the years ended June 30, 1999,
and 1998 the Company has expended $313 and $322, respectively, in contributions
to the plan.
The Company's subsidiary in Switzerland maintains a defined contribution
plan which requires employee contributions based upon a percentage of the
employee's earnings currently ranging from 2.0% to 6.5%. The employer makes a
matching contribution based also upon a percentage of the employee's earnings
currently ranging from 3.5% to 11.0%. Company contributions amounting to $687 in
1999, $759 in 1998 and $795 in 1997 were charged to expense in each respective
period.
In July 1995, the Company adopted the 1995 Employee Stock Purchase Plan
and reserved for issuance an aggregate of 434,783 shares of Common Stock. The
Plan allows eligible employees to purchase Common Stock, through payroll
deductions, at prices equal to 85% of fair market value on the first or last
business day of the offering period, whichever is lower. The option to purchase
Stock will terminate on July 7, 2005. To date, 184,496 shares have been issued
under the Employee Stock Purchase Plan and 250,287 shares were available for
future issuance.
The Company maintains a qualified Employee Stock Ownership Plan ("ESOP" or
the "Plan") which has been established in accordance with the requirements and
provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") and
has been approved by the Internal Revenue Service ("IRS"). Annually, the Board
of Directors determines the contribution, if any, to the Employee Stock
Ownership Trust ("ESOT") which trust has been established under the Plan for the
purpose of administering and investing the funds contributed by the Company. For
the years ended June 30, 1999, 1998 and 1997, respectively, the Company did not
contribute to the ESOP, and does not intend to contribute in the future.
11. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in a single industry segment and is engaged in the
design, development and manufacture and sale of high-performance signal
analyzers.
Revenues are attributed to countries based on customer ship-to
addresses. Revenues by geographic area are as follows:
1999 1998 1997
---- ---- ----
North America $ 59,935 $ 57,984 $ 51,502
Europe 36,652 31,019 32,894
Other foreign 29,611 42,006 $ 41,005
----------- ----------- ----------
Total $ 126,198 $ 131,009 $ 125,401
=========== =========== ==========
38
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Total assets by geographic area are as follows:
1999 1998 1997
---- ---- ----
North America $ 69,644 $ 44,679 $ 41,660
Europe 25,502 32,973 30,576
Other foreign 7,068 11,458 7,153
----------- ----------- ----------
Total $ 102,214 $ 89,110 $ 79,389
=========== =========== ==========
Other foreign revenues consist principally of sales from Japan and Asia. One
customer accounted for 11% of the Company's revenue in fiscal 1998.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating leases from continuing operations covering plant,
certain office facilities, and equipment which expire at various dates through
2005. Future minimum annual lease payments, net of restructuring accruals of
$3,177, required during the years ending in fiscal 2000 through 2004 and later
years under noncancelable operating leases having an original term of more than
one year are $1,486, $1,270, $919, $829, $403 and $66, respectively. Aggregate
rental expense on noncancelable operating leases for the years ended June 30,
1999, 1998 and 1997 approximated $3,222, $3,083 and $2,851, respectively. The
Company has a 3,000 Swiss franc credit agreement which serves as security for
the lease on the Geneva facility.
TECHNOLOGY DISPUTE SETTLEMENT
In the normal course of business, the Company and its subsidiaries are
parties to various legal claims, actions and complaints. Included among these
claims in fiscal 1994 was an intellectual property claim in the form of a
lawsuit which alleged patent infringement with respect to some of the Company's
oscilloscope products. In February, 1994, the Company concluded negotiations to
resolve this dispute and avoid extensive litigation. The result was a settlement
and a license agreement. Minimum annual future royalty payments are $350 for ten
years with potential for higher additional amounts annually. These additional
amounts are contingent on future product sales as described in the settlement
agreement and cannot exceed an aggregate of $3,500. Royalty expenses, which
approximated $982 in 1999, $1,442 in 1998 and $1,329 in 1997, are included in
cost of sales.
ENVIRONMENTAL
The Company's subsidiary, Digitech Industries, Inc., was notified 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. At the time of the
merger (see Note 13), the Company recorded a $1.3 million provision for
environmental cleanup relating to monitoring and remediation of the Ridgefield
Site.
In May 1999 the Company, its subsidiary, Digitech Industries, Inc. and the
former owners of the Ridgefield site entered into an agreement with the current
owners of the Ridgefield Site. The current owners have purchased an insurance
policy providing for $2 million of coverage against certain environmental
liabilities related to the Ridgefield Site. This insurance policy names both the
Company and Digitech Industries as insured parties. The
39
<PAGE>
LeCROY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
current owners of the Ridgefield Site have 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 have also agreed to hold both the Company and Digitech Industries 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 has agreed to pay the former
owners of the Ridgefield Site $160,000 for compensation for the reduced sale
value of the property due to the environmental problems existing on the site.
As a result of the above agreement the Company has reversed $1,140 of the
original $1.3 million provision in the fourth quarter of fiscal 1999.
13. ACQUISITIONS
PURCHASE
In October 1997 the Company acquired all of the assets of Preamble
Instruments, Inc. of Beaverton, Oregon, a manufacturer of stand-alone
differential amplifiers and probes, for approximately $1.8 million, of which
approximately $411 was cash and 35,181 shares of the Company's common stock at
$39.99 per share. Incident to the acquisition was the purchase of incomplete
technology activities which resulted in a one-time pretax charge of $1.6
million. The purchased incomplete technology that had not reached technological
feasibility and which had no alternative future use was valued using a
risk-adjusted cash flow model. Acquired complete technology of approximately
$220 is being amortized over five years.
In April 1998 the Company acquired selected assets of its Korean sales
distributor, Woojoo Hi-Tech Corporation for approximately $1.6 million and an
additional amount not to exceed $1.7 million, contingent upon future revenues
achieved through the first quarter of fiscal year 2001. A non-compete agreement
of $0.6 million is being amortized over 30 months. The investment in excess of
fair market value of assets purchased of $0.8 million is being amortized over 15
years.
POOLING OF INTERESTS
In the second quarter of fiscal 1998 LeCroy acquired all of the common
stock of Digitech Industries, Inc. in exchange for 454,148 shares of the
Company's common stock. Digitech Industries, Inc. Inc., located in Danbury,
Connecticut, is involved in the design and development of a wide variety of test
equipment for the data communication and telecommunication industries.
Transaction costs and one time charges resulting from the merger of $1.9 million
($1.3 million net of tax) include a provision for environmental cleanup,
expenses for investment banker and professional fees, and write down of assets
associated with duplicate product lines (see Note 12.)
The acquisition referred to above has been accounted for by the
pooling-of-interest method and, accordingly, the accompanying financial
statements have been restated retroactively to include the financial position
and results of operations of Digitech.
40
<PAGE>
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized unaudited quarterly operating results for fiscal year 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------
FISCAL YEAR 1998 FISCAL YEAR 1999
-----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1998 1998 1998 1998 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenues
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Digital oscilloscopes and related
products........................... $26,985 $27,292 $21,458 $25,849 $24,126 $23,009 $25,534 $27,697
High energy physics products......... 1,024 1,761 1,856 1,526 1,498 2,038 2,313 1,513
Service and other.................... 1,713 1,751 1,449 1,625 1,505 1,730 1,781 1,847
------- ------- ------- ------- ------- ------- ------ -------
Test and measurement revenues... 29,722 30,804 24,763 29,000 27,129 26,777 29,628 31,057
LAN/WAN test instruments............. 1,249 4,948 981 1,042 2,166 3,055 2,566 (1,080)
License fees......................... 1,000 5,000 2,500 2,500 2,400
------- ------- ------- ------- ------- ------- ------- -------
Total revenues..................... 31,971 35,752 30,744 32,542 29,295 32,332 34,594 29,977
Cost of sales.......................... 13,459 15,377 11,717 16,443 13,887 15,119 18,429 15,392
------- ------- ------- ------- ------- ------- ------- -------
Gross profit......................... 18,512 20,375 19,027 16,099 15,408 17,213 16,165 14,585
Selling, general and administrative 10,691 11,289 11,090 11,006 10,983 10,069 11,596 12,240
expenses...............................
Research and development expenses...... 4,223 5,279 4,496 6,543 4,401 4,201 4,807 5,229
Restructuring and non-recurring
charges ............................. 5,852 8,546 (1,758)
Non-recurring charges - acquisitions .. 3,533 (1,140)
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss).............. 3,598 274 3,441 (7,302) 24 2,943 (8,784) 14
Other (income) expense, net........... 107 13 (287) 158 337 (150) (194) (157)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before taxes............. 3,491 261 3,728 (7,460) (313) 3,093 (8,590) 171
Provision (benefit) for income taxes... 1,007 78 1,118 (303) (94) 927 265 51
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $ 2,484 $ 183 $ 2,610 $(7,157) $ (219) $ 2,166 $(8,855) $ 120
======= ======= ======= ======= ======= ======= ======= =======
Income (loss) per share - basic........ $ .34 $ .02 $ .35 $ (.96) $ (.03) $ 0.28 $ (1.16) $ (.22)
======= ======= ======= ======= ======= ======= ======= =======
Income (loss) per share - diluted...... $ .31 $ .02 $ .33 $ (.96) $ (.03) $ 0.28 $ (1.16) $ ( .22)
======= ======= ======= ======= ======= ======= ======= =======
Weighted average common shares
-outstanding
Basic.................................. 7,223 7,348 7,429 7,478 7,572 7,605 7,629 7,683
Diluted................................ 8,024 8,070 7,904 7,478 7,572 7,861 7,629 7,683
</TABLE>
The quarter ended December 31, 1997 reflects a reclassification of $655 from
non-recurring charges-acquisitions to research and development expenses. The
quarter ended June 30, 1998 reflects inventory write downs of $2,697 included in
cost of sales from restructuring. The quarter ended March 31, 1999 reflects
inventory write downs of $2,170 included in cost of sales from restructuring.
The quarter ended June 30, 1999 reflects sales reversals of LAN/WAN test
instruments of which $487 were reported in the quarter ended December 31, 1998
and $1,054 were reported in the quarter ended March 31, 1999. The impact on
these quarters was not material.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
41
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors of the Company and with
respect to Item 405 disclosure of delinquent Form 3, 4 or 5 filers will be
contained in the Company's definitive Proxy Statement relating to its 1999
Annual Meeting of Stockholders, which is scheduled to be held October 28, 1999;
said information is incorporated herein by reference. The discussion of
executive officers of the Company is included in Item 4A in Part I of this
report under "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION.
A description of the compensation of the Company's executive officers
will be contained in the section captioned "Executive Compensation" of the Proxy
Statement for the Company's 1999 Annual Meeting of Stockholders, which is
scheduled to be held on October 28, 1999; said information is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
A description of the security ownership of certain beneficial owners and
management will be contained in the Proxy Statement for the Company's 1999
Annual Meeting of Stockholders, which is scheduled to be held on October 28,
1999; said information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain relationships and related transactions with management will be
contained in the Proxy Statement for the Company's 1999 Annual Meeting of
Stockholders, which is scheduled to be held on October 28, 1999; said
information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
(a) (1) FINANCIAL STATEMENTS--See Index to Financial Statements at Item 8
of this report.
(a) (2) FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is included elsewhere in
the financial statements or notes thereto.
42
<PAGE>
(a) (3) EXHIBITS
The following exhibits are filed with this report:
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger, dated as of August 3, 1995, between
the Registrant and LeCroy Merger Corporation, filed as Exhibit 2.1
to Form S-1 Registration Statement No. 33-95620, and is
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, and is incorporated herein by reference.
3.2 Current By-Laws of the Registrant, filed as Exhibit 3.3 to Form
S-1 Registration Statement No. 33-95620, and is incorporated
herein by reference.
10.1 Letter of Employment, dated as of August 23, 1993, between the
Registrant and Lutz. P. Henckels, filed as Exhibit 10.15 to Form
S-1 Registration Statement No. 33-95620, and is incorporated
herein by reference.
10.2 Letter of Employment, dated as of August 24, 1995, between the
Registrant and Lutz. P. Henckels, filed as Exhibit 10.30 to Form
S-1 Registration Statement No. 33-95620, and is incorporated
herein by reference.
10.3 Employee Agreement Regarding Inventions, Confidentiality and
Non-Competition, dated as of March 28, 1995, between the
Registrant and Lutz. P. Henckels, filed as Exhibit 10.12 to Form
S-1 Registration Statement No. 33-95620, and is incorporated
herein by reference.
10.4 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, and is incorporated
herein by reference.
10.5 Employee Agreement Regarding Inventions, Confidentiality and
Non-Competition, dated as of March 28, 1995, between the
Registrant and Brian V. Cake, filed as Exhibit 10.14 to Form S-1
Registration Statement No. 33-95620, and is incorporated herein by
reference.
10.6 LeCroy Corporation Amended and Restated 1993 Stock Incentive Plan
filed as Exhibit 10.1 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
10.7 LeCroy Corporation 1995 Non-Employee Director Stock Option Plan
filed as Exhibit 10.2 to Form S-1 Registration Statement No.
33-95620 dated August 9, 1995, and is incorporated herein by
reference.
10.8 LeCroy Corporation 1995 Employee Stock Purchase Plan filed as
Exhibit 10.3 to Form S-1 Registration Statement No. 33-95620, and
is incorporated herein by reference.
10.9 Settlement and License Agreement, dated as of December 9, 1993,
between the Registrant and Tektronix, Inc. filed as Exhibit 10.11
to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
10.10 Multicurrency Credit Agreement, dated as of December 12, 1995,
between the Registrant and The Chase Manhattan Bank, N.A. as agent
for the lenders named therein, filed as Exhibit 10.11 to Form 10-K
for the year ended June 30, 1997, and is incorporated herein by
reference.
10.11 Securities Purchase Agreement, dated as of March 28, 1995, between
the Registrant and the purchasers named therein filed as Exhibit
10.7 to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
10.12 Shareholders Agreement, dated as of March 28, 1995, among the
Registrant, Walter O. LeCroy, Jr. And the investors named therein
filed as Exhibit 10.8 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
10.13 Form of Common Stock Purchase Warrant filed as Exhibit 10.10 to
Form S-1 Registration Statement No. 33-95620, and is incorporated
herein by reference.
43
<PAGE>
10.14 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, and is incorporated
herein by reference.
10.15 Agreement dated as of August 2, 1995, amending the Securities
Purchase Agreement filed as Exhibit 10.12 hereto filed as Exhibit
10.34 to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
10.16 Agreement dated as of September 29, 1995, amending the Securities
Purchase Agreement filed as Exhibit 10.12 hereto filed as Exhibit
10.35 to Form S-1 Registration Statement No. 33-95620, and is
incorporated herein by reference.
10.17 LeCroy Corporation Employee Stock Ownership Trust Agreement,
between the Registrant and Cole Taylor Bank, dated September 13,
1995 filed as Exhibit 10.36 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
10.18 Amended and Restated LeCroy Corporation Employee Stock Ownership
Plan filed as Exhibit 10.37 to Form S-1 Registration Statement No.
33-95620, and is incorporated herein by reference.
10.19 OEM Purchase and Technology License Agreement, between the
Registrant and Guzik Technical Enterprises, Inc., dated February
19, 1997 filed as Exhibit 10.20 to Form S-3 Registration Statement
No. 333-22117, and is incorporated herein by reference.
10.20 Agreement and Plan of Merger and Reorganization between the
Registrant and Digitech Industries, Inc., dated December 10, 1997
filed as Exhibit 2 to Form S-3 Registration Statement No.
333-43699, and is incorporated herein by reference.
10.21 Amended and Restated Multicurrency Credit Agreement dated as of
March 31, 1999 between the Company, Chase Manhattan Bank and
BankBoston, filed as exhibit 1.1 to the quarterly report on Form
10-Q for the quarter ended March 31, 1999, and is incorporated
herein by reference.
10.22 Series A Convertible, Redeemable Preferred Stock Purchase
Agreement dated as of June 30, 1999 between the registrant and the
purchasers named therein.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule for the fiscal year ended June 30, 1999.
(b) REPORTS ON FORM 8-K
None.
44
<PAGE>
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
September 22, 1999 By /S/ JOHN C. MAAG
John C. Maag
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ CHARLES A. DICKINSON Chairman of the Board and Director September 22, 1999
- -----------------------------------
Charles A. Dickinson
/S/ LUTZ P. HENCKELS President, Chief Executive Officer September 22, 1999
- ----------------------------------- and Director
Lutz P. Henckels (Principal Executive Officer)
/S/ JOHN C. MAAG Vice President--Finance, Chief September 22, 1999
- ----------------------------------- Financial Officer, Secretary
John C. Maag and Treasurer
(Principal Accounting Officer)
/S/ ROBERT E. ANDERSON Director September 22, 1999
- -----------------------------------
Robert E. Anderson
/S/ WALTER O. LECROY, Jr. Director September 22, 1999
- -----------------------------------
Walter O. LeCroy, Jr.
/S/ DOUGLAS A. KINGSLEY Director September 22, 1999
- -----------------------------------
Douglas A. Kingsley
/S/ WILLIAM G. SCHEERER Director September 22, 1999
- -----------------------------------
William G. Scheerer
/S/ ALLYN C. WOODWARD JR. Director September 22, 1999
- ---------------------------
Allyn C. Woodward, Jr.
</TABLE>
45
<PAGE>
SCHEDULE II
LeCROY CORPORATION
Valuation and Qualifying Accounts
Years Ended June 30, 1997, 1998 and 1999
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance at
Beginning charged to (1)(2) End
Description of period Operations Deductions/Other of period(3)
- ----------- ---------- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
Against trade receivables--
Year ended June 30, 1997
Allowance for doubtful accounts........ $ 38 $ 237 $ (58) $ 217
Year ended June 30, 1998
Allowance for doubtful accounts..... 217 364 (13) 568
Year ended June 30, 1999
Allowance for doubtful accounts..... 568 502 (552) 518
Against inventories--
Year ended June 30, 1997
Allowance for excess and obsolete... 2,493 2,973 (734) 4,732
Year ended June 30, 1998
Allowance for excess and obsolete... 4,732 3,433 (3,078) 5,087
Year ended June 30, 1999
Allowance for excess and obsolete... 5,087 3,626 (5,223) 3,490
Against deferred tax assets--
Year ended June 30, 1997
Valuation allowance................ 2,915 1,407 -- 4,322
Year ended June 30, 1998
Valuation allowance................ 4,322 4,883 -- 9,205
Year ended June 30, 1999
Valuation allowance................ 9,205 1,495 -- 10,700
<FN>
- ------------
(1) Accounts written-off.
(2) Merchandise disposals and/or impact of foreign currency.
(3) Inventory reserves include $827 and $3,005 of restructuring reserves as of
June 30, 1999 and June 30, 1998, respectively. Accounts receivable reserves
include $211 of restructuring reserves as of June 30, 1998.
</FN>
</TABLE>
46
EXHIBIT 21
LeCROY CORPORATION
Subsidiaries of the Company
The following are the subsidiary companies of the Company as of August 1,
1999, all of which are 100% owned:
Name Jurisdiction of Incorporation
- ---- -----------------------------
Digitech Industries, Inc. Connecticut
LeCroy, S.A. Switzerland
LeCroy, Ltd. England
LeCroy, G.m.b.H. Germany
LeCroy, S.A.R.L. France
LeCroy, S.R.L. Italy
LeCroy Foreign Sales Corporation U.S. Virgin Islands
LeCroy Japan Corporation Japan
Vigilant Networks, Inc. Delaware
LeCroy Corporation Hong Kong
LeCroy Korea Ltd. South Korea
Preamble Instruments, Inc. Delaware
47
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-3144) pertaining to the Amended and Restated 1993
Stock Incentive Plan, the 1995 Non Employee Director Stock Option Plan and the
1995 Employee Stock Purchase Plan of LeCroy Corporation of our report dated
August 2, 1999, except for the last sentence of the second paragraph of note 6,
as to which the date is September 7, 1999, with respect to the consolidated
financial statements and schedule of LeCroy Corporation included in the Annual
Report (Form 10-K) for the year ended July 3, 1999.
ERNST & YOUNG LLP
Hackensack, New Jersey
September 20, 1999
48
LECROY CORPORATION
STOCK PURCHASE AGREEMENT
DATED AS OF JUNE 30, 1999
<PAGE>
LECROY CORPORATION
STOCK PURCHASE AGREEMENT
Dated as of June 30, 1999
INDEX
ARTICLE I PURCHASE AND SALE OF SHARES 1
1.1 Purchase and Sale 1
-----------------
1.2 Purchase and Sale of Warrant 1
----------------------------
1.3 The Conversion Shares 2
---------------------
1.4 Closing 2
-------
1.5 Use of Proceeds 2
---------------
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY 2
2.1 Organization and Corporate Power 2
--------------------------------
2.2 Authorization 3
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2.3 Government Approvals 3
--------------------
2.4 Authorized and Outstanding Stock 3
--------------------------------
2.5 Subsidiaries 5
------------
2.6 Securities Law Compliance 5
-------------------------
2.7 Commission Documents; Financial Information 5
-------------------------------------------
2.8 Absence of Certain Events; No Material Adverse Change 6
-----------------------------------------------------
2.9 Litigation 7
----------
2.10 Compliance with Laws and Other Instruments 7
------------------------------------------
2.11 Taxes 8
-----
2.12 Intentionally Omitted 8
---------------------
2.13 Intentionally Omitted 8
---------------------
2.14 Patents, Trademarks, etc. 8
-------------------------
2.15 Intentionally Omitted 9
---------------------
2.16 Governmental and Industrial Approvals 9
-------------------------------------
2.17 Federal Reserve Regulations 9
---------------------------
2.18 Contracts and Commitments 9
-------------------------
2.19 Intentionally Omitted 9
---------------------
2.20 Intentionally Omitted 9
---------------------
2.21 No Brokers or Finders 9
---------------------
2.22 Transactions with Affiliates 10
----------------------------
2.23 Intentionally Omitted 10
---------------------
2.24 Restrictions on Subsidiaries 10
----------------------------
2.25. Intentionally Omitted 10
---------------------
<PAGE>
2.26 U.S. Real Property Holding Corporation 10
--------------------------------------
2.27 Intentionally Omitted. 10
---------------------
2.28 Corporate Records 10
-----------------
2.29 Intentionally Omitted. 10
---------------------
2.30 Intentionally Omitted 10
---------------------
2.31 Management Presentation 10
-----------------------
2.32 Disclosures 11
-----------
ARTICLE III AFFIRMATIVE COVENANTS OF THE COMPANY 11
3.1 Accounts and Reports 11
--------------------
3.2 Payment of Taxes 12
----------------
3.3 Intentionally Omitted. 13
----------------------
3.4 Compliance with Laws, etc. 13
--------------------------
3.5 Inspection 13
----------
3.6 Corporate Existence; Ownership of Subsidiaries 13
----------------------------------------------
3.7 Compliance with ERISA 13
---------------------
3.8 Intentionally Omitted 14
---------------------
3.9 Intentionally Omitted 14
---------------------
3.10 Board of Directors Meetings 14
---------------------------
3.11 Rule 144A Information 14
---------------------
3.12 Regular Course of Business 14
--------------------------
3.13 Registration of Conversion Shares and Warrant Shares. 14
----------------------------------------------------
ARTICLE IV NEGATIVE COVENANTS OF THE COMPANY 15
4.1 Distributions 15
-------------
4.2 Dealings with Affiliates 16
------------------------
4.3 Limitation on Restrictions on Subsidiary Dividends and Other
------------------------------------------------------------
Distributions 16
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4.4 No Conflicting Agreements 16
-------------------------
4.5 Intentionally Omitted 16
---------------------
4.6 Intentionally Omitted 16
---------------------
4.7 Other Negative Covenants 16
------------------------
ARTICLE V INVESTMENT REPRESENTATIONS 17
5.1 Representations and Warranties 17
------------------------------
5.2 Permitted Sales; Legends 18
------------------------
ARTICLE VI CONDITIONS OF PURCHASERS' OBLIGATION 19
6.1 Effect of Conditions 19
--------------------
6.2 Representations and Warranties 19
------------------------------
<PAGE>
6.3 Performance 20
-----------
6.4 Amendment to Amended Certificate of Incorporation 20
-------------------------------------------------
6.5 Warrant Agreement 20
-----------------
6.6 Opinion of Counsel 20
------------------
6.7 Certified Documents, etc 20
------------------------
6.8 No Material Adverse Change 20
--------------------------
6.9 Registration Rights Agreement 20
-----------------------------
6.10 Board Election 20
--------------
6.11 Consents and Waivers 20
--------------------
6.12 Series A Preferred Stock Certificates 21
-------------------------------------
ARTICLE VII CONDITIONS OF THE COMPANY'S OBLIGATION 21
7.1 Effect of Conditions 21
--------------------
7.2 Representations and Warranties; Performance 21
-------------------------------------------
ARTICLE VIII PREEMPTIVE RIGHT 21
8. Purchase Rights 21
---------------
8.1 Right of Purchase 21
-----------------
8.2 Right of Over-Allotment 21
-----------------------
8.3 Definition of New Securities 22
----------------------------
8.4 Notice from the Company 22
-----------------------
8.5 Sale by the Company 22
-------------------
8.6 Termination of Rights 23
---------------------
ARTICLE IX CERTAIN DEFINITIONS 23
ARTICLE X TERMINATION 25
10.1 Termination by Mutual Written Consent 25
-------------------------------------
10.2 Termination for Breach 25
----------------------
10.3 Termination for Delay 26
---------------------
10.4 Rights After Termination 26
------------------------
ARTICLE XI MISCELLANEOUS 26
11.1 Survival of Representations 26
---------------------------
11.2 Parties in Interest 26
-------------------
11.3 Shares Owned by Affiliates 26
--------------------------
11.4 Amendments and Waivers 27
----------------------
11.5 Notices 27
-------
<PAGE>
11.6 Expenses 28
--------
11.7 Counterparts 28
------------
11.8 Effect of Headings 28
------------------
11.9 Adjustments 28
-----------
11.10 Governing Law 28
-------------
11.11 Confidentiality 28
---------------
11.12 Assignment 29
----------
11.13 Waiver of Jury Trial 29
--------------------
<PAGE>
June 30, 1999
To: The Persons Listed on
Schedule 1.1 attached hereto
Re: Series A Convertible Redeemable Preferred Stock
Gentlemen:
LeCroy Corporation, a Delaware corporation (the "Company"), hereby
agrees with you as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Purchase and Sale. Subject to the terms and conditions hereinafter
set forth, at the Closing (as defined below) the Company shall issue and sell to
each of the persons listed on Schedule 1.1 hereto (collectively, the
"Purchasers" and individually, a "Purchaser"), and each Purchaser shall purchase
from the Company, the number of shares of the Company's Series A Convertible
Redeemable Preferred Stock, $.01 par value per share (the "Series A Preferred
Stock"), set forth opposite the name of such Purchaser on Schedule 1.1, for the
aggregate purchase price set forth opposite the name of such Purchaser on such
Schedule 1.1. The aggregate number of shares to be sold and purchased pursuant
to this Section 1.1 shall be Five Hundred Thousand (500,000) for an aggregate
purchase price of Ten Million Dollars ($10,000,000) payable as provided in
Section 1.4. The Series A Preferred Stock shall have the rights, terms and
privileges set forth in the Certificate of Designation attached hereto as
Exhibit A (the "Certificate of Designation"), which shall be filed with, and
approved by, the Secretary of State of Delaware (the Company's Certificate of
Incorporation, as amended to date, including such Certificate of Designation,
shall be referred to herein as the "Amended Certificate of Incorporation"). The
shares of Series A Preferred Stock purchased pursuant to this Section 1.1 (the
"Purchased Shares") shall be convertible following the Closing (as hereinafter
defined) in accordance with the Company's Amended Certificate of Incorporation
into 500,000 of the then outstanding shares of the Company's common stock, par
value $.01 per share ("Common Stock"). Terms used herein as defined terms that
are not defined in the context hereof shall have the meaning set forth in
Article IX.
1.2 Purchase and Sale of Warrant. At the Closing, the Company will sell
to each Purchaser a warrant (collectively, the "Warrant") at an aggregate price
of $.01 to purchase an aggregate of 250,000 shares of Common Stock. The Warrant
will be issued pursuant to a Warrant Agreement in the form of Exhibit B attached
hereto (the "Warrant Agreement"). The warrants to
<PAGE>
be issued to each Purchaser is set forth in Schedule 1.1. The number of shares
of Common Stock issuable upon exercise of the Warrant purchased pursuant to this
Section 1.2 are referred to herein as the "Warrant Shares."
1.3 The Conversion Shares. The Company has authorized and reserved and
hereby covenants that it will continue to reserve, free of any preemptive rights
or encumbrances, a sufficient number of its authorized but previously unissued
shares of Common Stock to satisfy the rights of conversion of the holders of the
Purchased Shares and the issuance of the Warrant Shares. The shares of Common
Stock issued or issuable upon conversion of the Purchased Shares are referred to
herein as the "Conversion Shares."
1.4 Closing. Subject to the satisfaction or waiver of the conditions
set forth in Articles VI and VII hereof, a closing (the "Closing") of the sale
and purchase of the Purchased Shares specified in Section 1.1 above shall take
place at the offices of Hutchins, Wheeler & Dittmar, A Professional Corporation,
101 Federal Street, Boston, Massachusetts, at 10:00 A.M., on June 30, 1999, or
such other date, time and place as shall be mutually agreed upon by the Company
and the Purchasers (the "Closing Date"). At the Closing, the Company will
deliver the Purchased Shares being acquired by each Purchaser in the form of a
certificate issued in such Purchaser's name, upon receipt by the Company of
payment of the full purchase price therefor by or on behalf of each Purchaser to
the Company by wire transfer of immediately available funds.
1.5 Use of Proceeds. As an integral part of the purpose and structure
of the financing contemplated herein, the Company shall use the proceeds
received upon the sale of the Purchased Shares at the Closing to fund general
working capital, including, but not limited to, working capital for product
development, possible acquisitions of businesses, repayment of debt, enhancement
of the Company's sales and marketing capabilities, and research and development,
all as determined by the Company's Board of Directors, subject to compliance
with the covenants and agreements contained herein and in the Company's Amended
Certificate of Incorporation.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY
In order to induce the Purchasers to purchase the Purchased Shares and
the Warrant, the Company makes the following representations and warranties
which shall be true, correct and complete in all respects on the date hereof.
2.1 Organization and Corporate Power. The Company and each of its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or formation
and has all requisite corporate power and authority
<PAGE>
to own its properties and to carry on its business as presently conducted. The
Company and each of its Subsidiaries is duly licensed or qualified to do
business as a foreign corporation in each jurisdiction wherein the character of
its property, or the nature of the activities presently conducted by it, makes
such qualification necessary and where the failure to so qualify would have a
Material Adverse Effect.
2.2 Authorization. The Company has all necessary corporate power and
has taken all necessary corporate action required for the due authorization,
execution, delivery and performance by the Company of this Agreement, the
Certificate of Designation, the Warrant Agreement, the Registration Rights
Agreement referred to in Section 6.9 (the "Registration Rights Agreement") and
any other agreements or instruments executed by the Company in connection
herewith or therewith (collectively, the "Related Agreements"), and the
consummation of the transactions contemplated herein or therein, and for the due
authorization, issuance and delivery of the Purchased Shares, the Warrant, the
Warrant Shares issuable upon exercise of the Warrant and the Conversion Shares
issuable upon conversion of the Purchased Shares. Sufficient shares of
authorized but unissued Common Stock have been reserved for issuance upon
conversion of the Purchased Shares and the Warrant Shares. The issuance of the
Purchased Shares and the Warrant does not, the Warrant Shares issuable upon
exercise of the Warrant and the Conversion Shares issuable upon conversion of
the Purchased Shares will not, require any further corporate action and is not
and will not be subject to any preemptive right, right of first refusal,
conversion rights or demands of any character relating to the capital stock of
the Company. This Agreement, the Related Agreements and the other agreements and
instruments executed by the Company in connection herewith or therewith will
each be a valid and binding obligation of the Company enforceable in accordance
with its terms.
2.3 Government Approvals. No consent, approval, license or
authorization of, or designation, declaration or filing with, any court or
governmental authority is or will be required on the part of the Company in
connection with the execution, delivery and performance by the Company of this
Agreement, any of the Related Agreements and any other agreements or instruments
executed by the Company in connection herewith or therewith, or in connection
with the issuance of the Purchased Shares and Warrant or the issuance of the
Warrant Shares upon exercise of the Warrant or the issuance of the Conversion
Shares upon conversion of the Purchased Shares, except for (i) those which have
already been made or granted and (ii) the filing of a Form D and a registration
statement with the Securities and Exchange Commission (the "Commission") and any
applicable state securities commission.
2.4 Authorized and Outstanding Stock.
(a) The authorized capital stock of the Company (immediately
prior to the Closing and the transactions contemplated by Sections 1.1 and 1.2
hereof) will consist of (i) 45,000,000 shares of Common Stock and (ii) 5,000,000
shares of preferred stock of which 500,000 has been designated as Series A
Preferred Stock.
<PAGE>
(b) The issued and outstanding capital stock of the Company
(immediately prior to the Closing and the transactions contemplated by Sections
1.1 and 1.2 hereof) will consist of (i) 7,674,256 shares of Common Stock and
(ii) no shares of Series A Preferred Stock. In addition, (i) 500,000 shares of
Common Stock have been reserved for issuance upon the conversion of the Series A
Preferred Stock, (ii) options to purchase 1,960,403 shares of Common Stock have
been granted and are unexercised under the Company's Amended and Restated 1993
Stock Incentive Plan, and options for 106,493 shares of Common Stock are
available for future grants under the Company's Amended and Restated 1993 Stock
Incentive Plan, (iii) options to purchase 60,000 shares of Common Stock have
been granted and are unexercised under the Company's 1995 Non-Employee Director
Stock Option Plan, and options for 440,000 shares of Common Stock are available
for future grants under the Company's 1995 Non-Employee Director Stock Option
Plan. All of the issued and outstanding shares of Common Stock are, and when
issued in accordance with the terms hereof, the Purchased Shares, the Warrant
Shares and the Conversion Shares will be, duly authorized and validly issued and
fully paid and non-assessable, with no personal liability attaching to the
ownership thereof and will be free and clear of all Liens, claims, charges,
Encumbrances, or transfer restrictions imposed by or through the Company, except
for restrictions imposed by Federal or state securities or "blue sky" laws and
except for those imposed pursuant to this Agreement or the Registration Rights
Agreement. The designations, powers, preferences, rights, qualifications,
limitations and restrictions in respect of each class or series of capital stock
of the Company are as set forth in the certified corporate charter of the
Company delivered under Section 6.7 hereof and all such designations, powers,
preferences, rights, qualifications, limitations and restrictions are valid,
binding and enforceable in accordance with their terms and in accordance with
applicable law.
(c) Except as set forth in Schedule 2.4(c) hereto or as
provided in this Agreement, (i) no subscription, warrant, option, convertible
security or other right (contingent or otherwise) to purchase or acquire any
shares of capital stock of the Company is authorized by the Company or
outstanding against the Company, (ii) there is not any commitment of the Company
to issue any subscription, warrant, option, convertible security or other such
right or to issue or distribute to holders of any shares of its capital stock
any evidences of indebtedness or assets of the Company, (iii) the Company has no
obligation (contingent or otherwise) to purchase, redeem or otherwise acquire
any shares of its capital stock or any interest therein or to pay any dividend
or make any other distribution in respect thereof and (iv) there are no
agreements, written or oral, between the Company and any holder of its capital
stock or among any holders of its capital stock, relating to the acquisition,
disposition or voting of the capital stock of the Company. No person or entity
is entitled to (i) any preemptive right, right of first refusal or similar
rights granted by the Company with respect to the issuance of any capital stock
of the Company. Except as provided in the Registration Rights Agreement, no
person or entity currently holds rights granted by the Company with respect to
the registration of any capital stock of the Company under the Securities Act of
1933, as amended (the "Act"). All of the issued and outstanding shares of the
Company's capital stock have been offered, issued and sold by the Company in
compliance with applicable Federal and state securities laws.
<PAGE>
2.5 Subsidiaries. Except as set forth in Schedule 2.5, the Company has
no Subsidiaries nor any investment or other interest in any Person. Except as
set forth on Schedule 2.5, the Company owns of record and beneficially, free and
clear of all Liens, charges, restrictions, claims and Encumbrances of any
nature, all of the issued and outstanding capital stock of each of its
Subsidiaries.
2.6 Securities Law Compliance. Assuming the representations and
warranties of the Purchasers set forth in Section 5.1 hereof are true and
correct in all material respects, the offer and sale of the Purchased Shares,
the Warrant, the Warrant Shares and the Conversion Shares (collectively, the
"Issuable Securities") pursuant to this Agreement will be exempt from the
registration requirements of the Act. Neither the Company nor any person acting
on its behalf has, in connection with the offering of the Issuable Securities,
engaged in (i) any form of general solicitation or general advertising (as those
terms are used within the meaning of Rule 502(c) under the Act), (ii) any action
involving a public offering within the meaning of Section 4(2) of the Act, or
(iii) any action that would require the registration under the Act of the
offering and sale of the Issuable Securities pursuant to this Agreement or that
would violate applicable state securities or "blue sky" laws. The Company has
not made and will not prior to the Closing make, directly or indirectly, any
offer or sale of the Issuable Securities or of securities of the same or similar
class as the Issuable Securities if, as a result, the offer and sale
contemplated hereby could fail to be entitled to exemption from the registration
requirements of the Act. As used herein, the terms "offer" and "sale" have the
meanings specified in Section 2(3) of the Act.
2.7 Commission Documents; Financial Information.
(a) The Company has made available to the Purchasers true and
complete copies of all SEC Documents filed with the Commission prior to the date
hereof. As of their respective filing dates, the SEC Documents complied in all
material respects with the requirements of the Act, the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and the rules and regulations of the
Commission thereunder applicable to such SEC Documents, and as of their
respective dates none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company and its Subsidiaries included in the SEC Documents
comply as of their respective dates as to form in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto (except as may be indicated in the notes thereto
or, in the case of the unaudited statements, as permitted by Form 10-Q
promulgated by the Commission), and present fairly as of their respective dates
the consolidated financial position of the Company and the Subsidiaries as at
the dates thereof and the consolidated results of their operations and their
consolidated cash flows for each of the respective periods, in conformity with
GAAP. As used in this Agreement, the consolidated balance sheet of the Company
and its Subsidiaries at March 31, 1999 previously provided to the Purchasers is
hereinafter referred to as the "Balance Sheet," and March 31, 1999 is
hereinafter referred to as the "Balance Sheet Date."
<PAGE>
(b) Except as and to the extent expressly set forth in the
Balance Sheet, or the notes, schedules or exhibits thereto, or as disclosed in
the SEC Documents, (i) as of the Balance Sheet Date, neither the Company nor the
Subsidiaries had any material liabilities or obligations (whether absolute,
contingent, accrued or otherwise) that would be required to be included on a
balance sheet or in the notes, schedules or exhibits thereto prepared in
accordance with GAAP and (ii) since the Balance Sheet Date, the Company and its
Subsidiaries have not incurred any such material liabilities or obligations
other than in the ordinary course of business.
2.8 Absence of Certain Events; No Material Adverse Change. Except as
disclosed in the SEC Documents filed with the Commission prior to the date
hereof, since the Balance Sheet Date, each of the Company and its Subsidiaries
has conducted its business operations in the ordinary course and there has not
occurred any event or condition having, or that is reasonably likely to have, a
Material Adverse Effect. Without limiting the generality of the foregoing, other
than as is disclosed in the SEC Documents filed with the Commission prior to the
date hereof or on Schedule 2.8 hereto, since the Balance Sheet Date there has
not occurred:
(a) any change or agreement to change the character or
nature of the business of the Company or any of its Subsidiaries;
(b) any purchase, sale, transfer, assignment, conveyance or
pledge of the assets or properties of the Company or any of its Subsidiaries,
except in the ordinary course of business;
(c) any waiver or modification by the Company or any of its
Subsidiaries of any right or rights of substantial value, or any payment, direct
or indirect, in satisfaction of any liability, in each case, having a Material
Adverse Effect;
(d) any liability, contract, agreement, license or other
commitment entered into or assumed by or on behalf of the Company or any of its
Subsidiaries relating to the business, assets or properties of the Company or
any of its Subsidiaries, whether oral or written, except in the ordinary course
of business;
(e) any loan, advance or capital expenditure by the Company or
any of its Subsidiaries, except for loans, advances and capital expenditures
made in the ordinary course of business;
(f) any change in the accounting principles, methods,
practices or procedures followed by the Company in connection with the business
of the Company or any change in the depreciation or amortization policies or
rates theretofore adopted by the Company in connection with the business of the
Company and its Subsidiaries;
<PAGE>
(g) any declaration or payment of any dividends, or other
distributions in respect of the outstanding shares of capital stock of the
Company or any of its Subsidiaries (other than dividends declared or paid by any
Subsidiary of the Company);
(h) any issuance of any shares of capital stock of the Company
or any of its Subsidiaries or any other change in the authorized capitalization
of the Company or any of its Subsidiaries, except as contemplated by this
Agreement or except pursuant to employee benefit plans, programs or arrangements
in existence on the date hereof, in the ordinary course of business consistent
with past practice;
(i) any grant or award of any options, warrants, conversion
rights or other rights to acquire any shares of capital stock of the Company or
any of its Subsidiaries, except as contemplated by this Agreement or except
pursuant to employee benefit plans, programs or arrangements in existence on the
date hereof, in the ordinary course of business consistent with past practice;
or
(j) entering into any commitment (contingent or otherwise) to
do any of the foregoing.
2.9 Litigation. Except as otherwise set forth on Schedule 2.9, there is
no litigation or governmental proceeding or investigation pending or, to the
knowledge of the Company, threatened, against the Company or any Subsidiary or
affecting any of the Company's or such Subsidiary's properties or assets, or to
the knowledge of the Company against any officer or key employee of the Company
or any Subsidiary in his or her capacity as such. Neither the Company, any
Subsidiary, nor any officer or key employee of the Company, any Subsidiary in
his or her capacity as such is, to the knowledge of the Company, in default with
respect to any order, writ, injunction, decree, ruling or decision of any court,
commission, board or other government agency.
2.10 Compliance with Laws and Other Instruments. The Company and its
Subsidiaries are in compliance with all of the provisions of this Agreement and
of its charter and by-laws, and in all material respects with the provisions of
each mortgage, indenture, lease, license, other agreement or instrument, and
each judgment, decree, judicial order, statute, and regulation (whether issued
under domestic, foreign or international law) by which any of them is bound or
to which any of them or any of their respective properties are subject except
where the failure to be in such compliance would not result in a Material
Adverse Effect. Neither the execution, delivery or performance of this Agreement
and the Related Agreements, nor the offer, issuance, sale or delivery of the
Purchased Shares and Warrant, or the Warrant Shares upon exercise of the Warrant
or the Conversion Shares upon conversion of the Purchased Shares, with or
without the giving of notice or passage of time, or both, will violate, or
result in any breach of, or constitute a default under, or result in the
imposition of any encumbrance upon any asset of the Company or any Subsidiary
pursuant to any provision of the Company's or such Subsidiary's charter or
by-laws, or any statute, rule or regulation, contract, lease, judgment,
<PAGE>
decree or other document or instrument by which the Company or any Subsidiary is
bound or to which the Company or any Subsidiary or any of their respective
properties are subject, or, to the knowledge of the Company, will cause the
Company or any Subsidiary to lose the benefit of any right or privilege it
presently enjoys or, to the knowledge of the Company, cause any Person who is
expected to normally do business with the Company or any Subsidiary to
discontinue to do so on the same basis.
2.11 Taxes. The Company and each Subsidiary has filed all Tax returns
(including statements of estimated Taxes owed) required to be filed within the
applicable periods for such filings and has paid all Taxes required to be paid,
and has established adequate reserves (net of estimated Tax payments already
made) for the payment of all Taxes payable in respect to the period subsequent
to the last periods covered by such returns. Except as set forth on Schedule
2.11, no deficiencies for any Tax are currently assessed against the Company or
any Subsidiary, and no Tax returns of the Company or any Subsidiary have been
audited during the last three (3) years, and, there is no such audit pending or,
to the knowledge of the Company, contemplated. There is no Tax Lien, whether
imposed by any federal, state or local Taxing authority, outstanding against the
assets, properties or business of the Company or any Subsidiary except for such
Tax Liens as are currently being contested in good faith and by appropriate
proceedings diligently conducted, and for which adequate reserves have been set
aside in accordance with GAAP. For the purposes of this Agreement, the terms
"Tax" and "Taxes" shall include all federal, state, local and foreign taxes,
including income, franchise, property, sales, withholding, payroll and
employment taxes.
2.12 Intentionally Omitted.
2.13 Intentionally Omitted.
2.14 Patents, Trademarks, etc. The Company and its Subsidiaries own or
possess adequate licenses or other rights to use all patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, trade names, copyrights, manufacturing processes, formulae, trade
secrets and know how (collectively, "Intellectual Property") necessary to the
conduct of their business as conducted and as proposed to be conducted, and no
claim is pending or, to the knowledge of the Company, threatened to the effect
that the operations of the Company infringe upon or conflict with the asserted
rights of any other person under any Intellectual Property. No claim is pending
or, to the knowledge of the Company, threatened to the effect that any such
Intellectual Property owned or licensed by the Company, or which the Company or
any Subsidiary otherwise has the right to use, is invalid or unenforceable by
the Company or such Subsidiary. All technical information developed by and
belonging to the Company and its Subsidiaries which has not been patented or
copywritten has been kept confidential. Neither the Company nor any Subsidiary
has granted or assigned to any other person or entity any right to manufacture,
assemble or sell the products or proposed products or to provide the services or
proposed services of the Company or such Subsidiary. No current or former
stockholder, employee, officer or director of the Company or any of its
Subsidiaries has
<PAGE>
(directly or indirectly) any right, title or interest in any of the Intellectual
Property other than such right which such Person may enjoy as a stockholder of
the Company.
2.15 Intentionally Omitted.
2.16 Governmental and Industrial Approvals. The Company and each of its
Subsidiaries has all the permits, licenses, orders, franchises and other rights
and privileges of all federal, state, local or foreign governmental or
regulatory bodies necessary for the Company and such Subsidiaries to conduct
their respective businesses as presently conducted. All such permits, licenses,
orders, franchises and other rights and privileges are in full force and effect
and no suspension or cancellation of any of them is threatened, and none of such
permits, licenses, orders, franchises or other rights and privileges will be
affected by the consummation of the transactions contemplated in this Agreement
and the Related Agreements.
2.17 Federal Reserve Regulations. Neither the Company nor any of its
Subsidiaries has engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation G of the
Board of Governors of the Federal Reserve System), and no part of the proceeds
of the sale of the Purchased Shares will be used to purchase or carry any margin
security or to extend credit to others for the purpose of purchasing or carrying
any margin security or in any other manner which would involve a violation of
any of the regulations of the Board of Governors of the Federal Reserve System.
2.18 Contracts and Commitments. All of the material contracts of the
Company or any of its Subsidiaries that are required to be described in the SEC
Documents or to be filed as exhibits thereto prior to the date hereof are
described in the SEC Documents filed prior to the date hereof or filed as
exhibits thereto and are in full force and effect. All material contracts to
which the Company or its Subsidiaries are parties on or prior to the date hereof
which will be required to be described or filed as an exhibit in the SEC
Documents required to be filed following the date hereof have been provided to
the Purchasers or are listed on Schedule 2.18 and are in full force and effect.
Neither the Company nor any of its Subsidiaries nor, to the knowledge of the
Company, any other party is in material breach of or in default under any such
contract.
2.19 Intentionally Omitted.
2.20 Intentionally Omitted.
2.21 No Brokers or Finders. No person has or will have, as a result of
the transactions contemplated by this Agreement, any right, interest or claim
against or upon the Company or any of its Subsidiaries for any commission, fee
or other compensation as a finder or broker because of any act or omission by
the Company or any of its Subsidiaries.
2.22 Transactions with Affiliates. Except as set forth on Schedule
2.22, there are no loans, leases or other agreements, understandings or
continuing transactions between the
<PAGE>
Company or any Subsidiary on the one hand, and any officer or director of the
Company or any Subsidiary or any person owning one percent (1%) or more of the
Common Stock of the Company or any respective family member or affiliate of such
officer, director or stockholder on the other hand.
2.23 Intentionally Omitted.
2.24 Restrictions on Subsidiaries. Except as set forth on Schedule
2.24, there are no restrictions on the Company or any of its Subsidiaries which
prohibit or otherwise restrict the transfer of cash or other assets between the
Company and any of its Subsidiaries or between any Subsidiaries of the Company.
2.25. Intentionally Omitted.
2.26 U.S. Real Property Holding Corporation. Neither the Company nor
any Subsidiary is now or has ever been a "United States real property holding
corporation," as defined in Section 897(c)(2) of the Code and Section 1.897-2(b)
of the Regulations promulgated by the Internal Revenue Service, and the Company
or any Subsidiary has filed with the Internal Revenue Service all statements, if
any, with its United States income Tax returns which are required under Section
1.897-2(h) of such Regulations.
2.27 Intentionally Omitted.
2.28 Corporate Records. The minute books of the Company and each of its
Subsidiaries contain accurate, complete and current copies of all charter
documents and of all minutes of meetings, resolutions and other proceedings of
its board of directors and stockholders, duly signed by the Secretary, an
Assistant Secretary or another appropriate officer, all directors or all
stockholders, as appropriate. The stock record book of the Company and each of
its Subsidiaries are also complete, correct and current. The Company has made
available true, correct and complete copies of such minute books and stock
record books to the Purchasers.
2.29 Intentionally Omitted.
2.30 Intentionally Omitted.
2.31 Management Presentation. The Company has previously delivered to
each Purchaser a copy of the Company's Management Presentation attached hereto
as Schedule 2.31 (the "Management Presentation"). The description in the
Management Presentation of the Company's business is true and correct in all
material respects as of the date of the specific document of the Management
Presentation in which such description is found. The pro forma financial
information and financial projections included in the Management Presentation
were prepared with due care based on assumptions believed by the Company to be
reasonable, and
<PAGE>
presents the Company's good faith estimate of future results. Schedule 2.31
lists the assumptions and risks of pro forma financial information.
2.32 Disclosures. Neither this Agreement, any Schedule or Exhibit to
this Agreement, the Related Agreements or the Financial Statements contains any
untrue statement of a material fact or omits a material fact necessary to make
the statements made herein or therein, in light of the circumstances in which
made, not misleading. There is no fact known to the Company which, in the
Company's reasonable business judgment on the date hereof, materially and
adversely affects the business, or financial condition of the Company or its
properties or assets, which has not been set forth herein or in any other
document delivered in connection herewith.
ARTICLE III
AFFIRMATIVE COVENANTS OF THE COMPANY
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that it will observe the following covenants on and after
the date hereof and for so long as the Purchasers hold any shares of Series A
Preferred Stock, unless the Advent Representative otherwise consents:
3.1 Accounts and Reports. The Company will, and will cause each of its
Subsidiaries to, maintain a standard system of accounts in accordance with GAAP
consistently applied and the Company will, and will cause each of its
Subsidiaries to, keep full and complete financial records. The Company will
furnish to each Purchaser the information set forth in this Section 3.1.
(a) Within one hundred twenty (120) days after the end of each
fiscal year, a copy of the audited annual consolidated financial statement
(including income statements and balance sheets) and cash flow statements of the
Company and its Subsidiaries as of the end of such year, prepared in accordance
with GAAP, duly certified by an independent public accountant of national
recognition selected by the Board of Directors of the Company and accompanied by
a written discussion and analysis by management, including any relevant
supporting documentation and data of such financial statements.
(b) Within forty-five (45) days after the end of each calendar
quarter (other than the last quarter in each fiscal year) an unaudited
consolidated quarterly financial statement (including income statements, balance
sheets, cash flow statements, and comparisons to budget) of the Company and its
Subsidiaries as of the end of such quarter, setting forth in each case in
comparative form the corresponding figures for the corresponding period of the
preceding fiscal year for the Company and each of its Subsidiaries, as the case
may be, all in reasonable detail and prepared in accordance with GAAP (except
for normal year end adjustments and the absence of footnotes) and certified to
by the Chief Financial Officer of the Company.
<PAGE>
(c) At the time of delivery of each annual statement, a
certificate, executed by either the president or chief financial officer of the
Company stating (i) that such officer has caused this Agreement to be reviewed
and has no knowledge of any default by the Company or any Subsidiary in the
performance or observance of any of the provisions of this Agreement or, if such
officer has such knowledge, specifying such default, and (ii) with respect to
the delivery of annual statements, a statement as to the then conversion value
of the Purchased Shares and the number of Conversion Shares into which each
share of Series A Preferred Stock may then be converted.
(d) Promptly upon receipt thereof and review by the Company's
Board of Directors, any written report, so called "management letter," and any
other communication submitted to the Company or any Subsidiary by its
independent public accountants relating to the business, prospects or financial
condition of the Company and its Subsidiaries;
(e) Promptly after the commencement thereof, notice of (i) all
actions, suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
affecting the Company or any Subsidiary which, if successful, could have a
Material Adverse Effect; and (ii) all material defaults by the Company or any
Subsidiary (whether or not declared) under any agreement for money borrowed
(unless waived or cured within applicable grace periods);
(f) Promptly upon sending, making available, or filing the
same, all reports and financial statements which the Company (or any Subsidiary)
shall send or make available generally to the stockholders of the Company as
such or to the Commission; and
(g) Such other information with regard to the business,
properties or the condition or operations, financial or otherwise, of the
Company or its Subsidiaries as the Purchasers may from time to time reasonably
request.
3.2 Payment of Taxes. The Company will pay and discharge (and cause any
Subsidiary to pay and discharge) all Taxes, assessments and governmental charges
or levies imposed upon it, the Company and the Subsidiaries or upon their
respective income or profits, or upon any properties belonging to each of them,
prior to the date on which penalties attach thereto, and all lawful claims
which, if unpaid, might become a Lien or charge upon any properties of the
Company (or any Subsidiary), provided that neither the Company nor any
Subsidiary shall be required to pay any such Tax, assessment, charge, levy or
claim which is being contested in good faith and by proper proceedings if the
Company or such Subsidiary shall have set aside on its books adequate reserves
with respect thereto.
3.3 Intentionally Omitted.
<PAGE>
3.4 Compliance with Laws, etc. The Company will comply (and cause each
of its Subsidiaries to comply) with all applicable laws, rules, regulations and
orders of any governmental authority, the noncompliance with which could result
in a Material Adverse Effect.
3.5 Inspection. Upon prior notice, at any reasonable time during normal
business hours and from time to time, the Company and each of its Subsidiaries
will permit any one or more of the Purchasers, or any of their authorized agents
or representatives, to examine and make copies of and extracts from the records
and books of account of and visit the properties of the Company and any of its
Subsidiaries and to discuss the Company's affairs, finances and accounts with
any of its officers or directors; provided that any Person or Persons exercising
rights under this Section 3.5 shall (i) use all reasonable efforts to ensure
that any such examination or visit results in a minimum of disruption to the
operations of the Company or any of its subsidiaries and (ii) prior to the
Company disclosing or providing access to information with respect to the
Company, shall agree in writing to keep all proprietary information of the
Company or any of its subsidiaries disclosed to him in the course of such
inspection confidential in a manner consistent with prudent business practices
and treatment of such Person's or Persons' own confidential information. The
rights granted under this Section 3.5 shall be in addition to any rights which
any Purchaser may have under applicable law in its capacity as a stockholder of
the Company.
3.6 Corporate Existence; Ownership of Subsidiaries. The Company will,
and will cause its Subsidiaries to, at all times preserve and keep in full force
and effect their corporate existence, and rights and franchises material to the
business of the Company and its Subsidiaries, taken as a whole, and will
qualify, and will cause each of its Subsidiaries to qualify, to do business as a
foreign corporation in any jurisdiction where the failure to do so would have a
Material Adverse Effect; provided, however, that the Company may merge or
liquidate one or more of its Subsidiaries into the Company or into another
Subsidiary. The Company or a Subsidiary shall at all times own of record and
beneficially, free and clear of all Liens, charges, restrictions, claims and
Encumbrances of any nature, all of the issued and outstanding capital stock of
each of its Subsidiaries, except for LeCroy Newco Corporation.
3.7 Compliance with ERISA. The Company will comply (and cause each of
its Subsidiaries to comply) in all material respects with all minimum funding
requirements applicable to any pension or other employee benefit plans which are
subject to ERISA or to the Code, and comply in all other material respects with
the provisions of ERISA and the Code, and the rules and regulations thereunder,
which are applicable to any such plan. Neither the Company nor any of its
Subsidiaries will permit any event or condition to exist which could permit any
such plan to be terminated under circumstances which cause the Lien provided for
in Section 3068 of ERISA to attach to the assets of the Company or any of its
Subsidiaries.
3.8 Intentionally Omitted.
3.9 Intentionally Omitted.
<PAGE>
3.10 Board of Directors Meetings. The Company shall use its best
efforts to cause the election of, and to thereafter continue in office, the
Advent Representative (as defined below) as a member of its Board of Directors.
The Advent Representative will be nominated by Advent Global GECC III Limited
Partnership, and shall initially be Douglas A. Kingsley. The Amended Certificate
of Incorporation (and all subsequent amendments and restatements thereof) or
By-laws of the Company shall at all times provide for indemnification of the
directors and limitations on the liability of the directors to the fullest
extent permitted under applicable state law. The Company shall reimburse the
Advent Representative for his reasonable travel expenses, including the cost of
airfare and any necessary meals and lodging, incurred in connection with
attending meetings of the Board of Directors. In addition, the Company shall
maintain at all times a Compensation Committee and an Audit Committee of the
Board of Directors. A vacancy in the directorship to be occupied by the Advent
Representative shall be filled only by a nominee of the Purchasers holding a
majority of Purchased Shares who must be appointed by the Board of Directors in
accordance with the by-laws of the Company. The Advent Representative shall be a
member of the Compensation Committee and shall have those responsibilities as
may be determined from time to time by a majority of the entire Board of
Directors.
3.11 Rule 144A Information. The Company shall, upon the written request
of any Purchaser, provide to such Purchaser and to any prospective institutional
transferee of the Purchased Shares or Warrant designated by such Purchaser, such
financial and other information as is available to the Company or can be
reasonably obtained by the Company without material expense and as such
Purchaser may reasonably determine is required to permit such transfer to comply
with the requirements of Rule 144A promulgated under the Act.
3.12 Regular Course of Business. The Company agrees that on and after
the date hereof the Company and each of its Subsidiaries will carry on its
business diligently and in the ordinary course and substantially in the same
manner as heretofore carried on and will use its best efforts to preserve its
present business organization intact, keep available the services of its present
officers, agents and employees, keep its insurable properties insured against
liability and the perils of casually, fire and extended coverage, maintain
adequate insurance against other hazards and risks and preserve its present
relationships with suppliers, customers and other persons having business
dealings with it.
3.13 Registration of Conversion Shares and Warrant Shares. The Company
shall, within one hundred twenty (120) calendar days from the date hereof, file
with the Commission a registration statement on Form S-3 (or any successor form
to Form S-3) for a public resale offering by the Purchasers of the Conversion
Shares and Warrant Shares issuable to the Purchasers and shall use its best
efforts to cause such registration statement to become and remain effective for
the period ending on the first to occur of (x) the date the resale of all of the
Conversion Shares and Warrant Shares registered thereunder is complete or (y)
the fifth anniversary of the date hereof. Such registration shall be effected
pursuant to the terms of the Registration Rights Agreement attached hereto as
Exhibit C.
<PAGE>
ARTICLE IV
NEGATIVE COVENANTS OF THE COMPANY
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that it will comply (and will cause each Subsidiary to
comply) with each of the provisions of this Article IV on and after the date
hereof until conversion of all the Series A Preferred Stock.
4.1 Distributions. No dividends shall be declared or paid or set aside
for payment on any shares of any class or classes of stock of the Company or any
series thereof ranking, as to dividends, on a parity with or junior to the
Series A Preferred Stock for any period unless full cumulative dividends have
been or contemporaneously are declared and paid, or declared and sum sufficient
for the payment thereof set apart for such payment, on the Series A Preferred
Stock for all dividend payment periods terminating on or prior to the date of
payment of such full cumulative dividends. When dividends are not paid in full,
as aforesaid, upon the shares of the Series A Preferred Stock and any other
shares of any class or classes of stock or series thereof ranking on a parity as
to dividends with the Series A Preferred Stock, all dividends declared upon
shares of the Series A Preferred Stock and any other shares of such class or
classes or series thereof ranking on a parity as to dividends with the Series A
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share on the Series A Preferred Stock and such other shares shall
in all cases bear to each other the same ratio that accrued and unpaid dividends
per share on the shares of the Series A Preferred Stock and such other shares
bear to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Series A Preferred
Stock which may be in arrears. In addition, when and if the Board of Directors
shall declare a dividend payable with respect to the then outstanding shares of
Common Stock of the Corporation, the holders of the Series A Preferred Stock
shall be entitled to the amount of dividends per share as would be payable on
the largest number of whole shares of Common Stock into which each share of
Series A Preferred Stock could then be converted (such number to be determined
as of the record date for the determination of holders of Common Stock entitled
to receive such dividend). Declared and unpaid dividends on the Series A
Preferred Stock will be payable upon the liquidation or winding up of the
Corporation first to the holders of Series A Preferred Stock and then to the
holders of Common Stock.
4.2 Dealings with Affiliates. Except as set forth on Schedule 4.2 and
except for transactions made on an arms-length basis, or through the Company's
normal and customary dealings, the Company will not enter into any transaction
including, without limitation, any loans or extensions of credit or royalty
agreements with any officer or director of the Company or any Subsidiary or
holder of any class of capital stock of the Company, or any member of their
respective immediate families or any corporation or other entity directly or
indirectly controlled by one or more of such officers, directors or stockholders
or members of their immediate families, except for (i) advances in reasonable
amounts made to employees of the Company or any
<PAGE>
Subsidiary for valid business purposes, provided that such advances are repaid
to the Company within ninety (90) days, and (ii) advances made to employees of
the Company, upon approval of the Board of Directors, related to such employees'
exercise of stock options.
4.3 Limitation on Restrictions on Subsidiary Dividends and Other
Distributions. Except as set forth on Schedule 4.3, the Company shall not permit
any of its Subsidiaries, directly or indirectly, to create or suffer to exist or
become effective any Encumbrances or restrictions on the ability of any of its
Subsidiaries to (i) pay dividends or make any other distributions on its capital
stock or any other interest or participation in its profit owned by any of the
Company or any of its Subsidiaries, or pay any indebtedness owed by any of the
Subsidiaries, (ii) make loans or advances to the Company, or (iii) transfer any
of its properties or assets to the Company.
4.4 No Conflicting Agreements. The Company agrees that neither it nor
any Subsidiary will, without the consent of a majority in interest of the
Purchasers, enter into or amend any agreement, contract, commitment or
understanding which would restrict or prohibit the exercise by the Purchasers of
any of their rights under this Agreement.
4.5 Intentionally Omitted.
4.6 Intentionally Omitted.
4.7 Other Negative Covenants. The Company hereby further
covenants and agrees that it will not:
(a) Create or authorize the creation of any additional class
or series of shares of stock or equity unless the same ranks junior to the
Series A Preferred Stock as to conversion, redemption, the distribution of
assets on the liquidation, dissolution or winding up of the Company, or increase
the authorized amount of the Series A Preferred Stock or any series thereof or
increase the authorized amount of any additional class or series of shares of
stock unless the same ranks junior to the Series A Preferred Stock as to
conversion, redemption, or the distribution of assets on the liquidation,
dissolution or winding up of the Company, or create or authorize any obligation
or security convertible into shares of Series A Preferred Stock or into shares
of any other class or series of stock unless the same ranks junior to the Series
A Preferred Stock as to conversion, redemption or the distribution of assets on
the liquidation, dissolution or winding up of the Company, whether any such
creation, authorization or increase shall be by means of amendment to the
Amended Certificate of Incorporation or by merger, consolidation or otherwise;
(b) Amend, alter or repeal its Amended Certificate of
Incorporation, By-laws or other organizational documents in any manner, or take
any other corporate action, that would alter, change or adversely affect the
terms, conditions, rights or privileges of the Series A Preferred Stock, except
any amendment to its Amended Certificate of Incorporation in
<PAGE>
connection with the creation of an additional class or series of shares
permitted pursuant to Section 4.7(a);
(c) Redeem, purchase or otherwise acquire for value (or pay
into or set aside for a sinking fund for such purpose) any of the Common Stock
of any class, any other capital stock of the Company, or any of the Company's
options, warrants or convertible or exchangeable securities except that these
provisions shall not prohibit the Company from completing any redemption
permitted by the Certificate of Incorporation and except for acquisitions of
securities of employees of the Company or its affiliates; or
(d) within one (1) year following the Closing, merge or
consolidate with or into any other corporation or sell, lease or convey all or
substantially all of its property or business without obtaining the prior
written consent of the Purchasers.
ARTICLE V
INVESTMENT REPRESENTATIONS
5.1 Representations and Warranties. Each Purchaser hereby severally as
to itself (but not jointly) represents and warrants to the Company,
understanding and agreeing that the Company is entering into this Agreement in
part in reliance on such representations and warranties, as follows:
(a) Such Purchaser is an "Accredited Investor" as that term is
defined in Rule 501(a) of Regulation D promulgated under the Act;
(b) Such Purchaser is duly authorized to execute this
Agreement and the Related Agreements, and assuming due execution and delivery by
the Company of the Agreement and the Related Agreements, this Agreement and the
Related Agreements to which such Purchaser is a party constitute legal, valid
and binding obligations of such Purchaser, enforceable against such Purchaser in
accordance with their respective terms;
(c) Such Purchaser has been advised by the Company that none
of the Purchased Shares or Warrant have been registered under the Act, that the
Purchased Shares and Warrant will be issued on the basis of the statutory
exemption provided by Section 4(2) of the Act or Regulation D promulgated
thereunder, or both, relating to transactions by an issuer not involving any
public offering and under similar exemptions under certain state securities
laws, that this transaction has not been reviewed by, passed on or submitted to
any federal or state agency or self-regulatory organization where an exemption
is being relied upon, and that the Company's reliance thereon is based in part
upon the representations made by such Purchaser in this Agreement and the
Related Agreements. Such Purchaser acknowledges that he, she or it has been
informed by the Company of, or is otherwise familiar with, the nature of the
limitations imposed by the Act and the rules and regulations thereunder on the
transfer of securities;
<PAGE>
(d) Such Purchaser has been further advised and understands
that no public market now exists for the Purchased Shares or Warrant and that a
public market may never exist for the Purchased Shares and Warrant and may cease
to exist for the Conversion Shares;
(e) Such Purchaser is purchasing the Purchased Shares and
Warrant for investment purposes, for its own account and not with a view to, or
for sale in connection with, any distribution thereof in violation of federal or
state securities laws;
(f) By reason of its business or financial experience, such
Purchaser has the capacity to protect its own interest in connection with the
transactions contemplated hereunder;
(g) Such Purchaser is aware of the Company's business affairs
and financial condition and has acquired sufficient information about the
Company to reach an informed and knowledgeable decision to acquire the Purchased
Shares and Warrant; provided, however, that nothing in this Section 6.1 shall be
deemed to vitiate or limit the representations, warranties and covenants of the
Company contained in this Agreement; and
(h) No person has or will have, as a result of the
transactions contemplated by this Agreement, any right, interest or claim
against or upon any Purchaser, the Company, or any of its Subsidiaries for any
commission, fee or other compensation as a finder or broker because of any act
or omission by such Purchaser.
5.2 Permitted Sales; Legends. Notwithstanding the foregoing
representations, the Company agrees that it will permit (i) a distribution of
Purchased Shares, Conversion Shares or Warrant Shares by a partnership to one or
more of its partners or investors or a limited liability company and its
members, where no consideration is exchanged therefor by such members, partners,
or to a retired or withdrawn partner who retires or withdraws after the date
hereof in full or partial distribution of his interest in such partnership, or
to the estate of any such partner or the transfer by gift, will or intestate
succession of any partner to his spouse or to the siblings, lineal descendants
or ancestors of such partner or his spouse, or to a trust created for the
benefit of one or more of the foregoing, if the transferee agrees in writing to
be subject to the terms hereof to the same extent as if it were an original
Purchaser hereunder, and (ii) a sale or other transfer of any of the Purchased
Shares, Conversion Shares, the Warrant Shares or the Warrant upon obtaining
assurance satisfactory to the Company that such transaction is exempt from the
registration requirements of, or is covered by an effective registration
statement under, the Act and applicable state securities or "blue-sky" laws,
including, without limitation, receipt of an unqualified opinion to such effect
of counsel reasonably satisfactory to the Company. The certificates representing
the Purchased Shares shall bear a legend evidencing such restriction on transfer
substantially in the following form:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("the Act"), and have been
acquired for investment and not with
<PAGE>
a view to, or in connection with, the sale or distribution thereof.
Such shares may not be sold, offered for sale, pledged or hypothecated
in the absence of such registration unless (a) the Corporation receives
an opinion of counsel reasonably satisfactory to it stating that such
sale or transfer is exempt from the registration and prospectus
delivery requirements of the Act, (b) it is established to the
satisfaction of the Corporation that such sale or transfer is in a
transaction which is exempt under, or otherwise in compliance with,
such laws or (c) the Corporation receives a "no action" letter or
similar declaration from the Securities and Exchange Commission to the
effect that such sale or transfer without registration will not result
in a recommendation by said Commission that action be taken with
respect thereto. Copies of the agreements covering the purchase of
these shares and restricting the sale, assignment, transfer, or other
disposition of, or the voting of, the shares represented by this
certificate may be obtained at no cost by written request made by the
holder of record of this certificate to the Secretary of the
Corporation at the principal executive offices of the Corporation.
The Corporation is authorized to issue more than one class of stock.
Stockholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions
granted to or imposed upon each class or series of shares authorized to
be issued and upon the holders thereof from the principal office of the
Corporation."
ARTICLE VI
CONDITIONS OF PURCHASERS' OBLIGATION
6.1 Effect of Conditions. The obligation of the Purchasers to purchase
and pay for the Purchased Shares and the Warrant at the Closing, if any, shall
be subject at their election to the satisfaction of each of the conditions
stated in the following Sections of this Article VI.
6.2 Representations and Warranties. The representations and warranties
of the Company contained in this Agreement shall be true and correct on the date
of the Closing, and the Purchasers shall have received a certificate dated as of
such Closing and signed on behalf of the Company to that effect.
6.3 Performance. The Company shall have performed and complied with all
of the agreements, covenants and conditions contained in this Agreement required
to be performed or complied with by it at or prior to the Closing, and the
Purchasers shall have received a certificate dated as of such Closing and signed
on behalf of the Company to that effect.
6.4 Amendment to Amended Certificate of Incorporation. The Amended
Certificate of Incorporation of the Company shall have been amended by the
filing with, and acceptance by, the Secretary of State of Delaware of the
Certificate of Designation.
<PAGE>
6.5 Warrant Agreement. A Warrant Agreement in the form attached hereto
as Exhibit B shall have been executed by the Company and each of the Purchasers.
6.6 Opinion of Counsel. The Purchasers shall have received an opinion,
dated the date of the Closing, from Bingham Dana LLP, counsel to the Company, in
the form attached hereto as Exhibit D.
6.7 Certified Documents, etc. Counsel for the Purchasers shall have
received a copy of the Company's Certificate of Incorporation, as amended,
certified by the Secretary of State of the State of Delaware and copies of the
Company's By-Laws certified by its Secretary, as well as any and all other
documents, including certificates as to votes adopted and incumbency of officers
and certificates from appropriate authorities as to the legal existence and good
standing of the Company and its Subsidiaries, which the Purchasers or their
counsel may reasonably request.
6.8 No Material Adverse Change. The business, properties, assets or
condition (financial or otherwise) of the Company and its Subsidiaries shall not
have been materially adversely affected since the date of this Agreement,
whether by fire, casualty, act of God or otherwise, and there shall have been no
other changes in the business, properties, assets or condition (financial or
otherwise), of the Company or any of its Subsidiaries that would have a material
adverse effect on their respective businesses or assets.
6.9 Registration Rights Agreement. The Company and the Purchasers shall
have executed the Registration Rights Agreement in the form of Exhibit C
attached hereto.
6.10 Board Election. Concurrently with the Closing, the Advent
Representative shall have been appointed as a Director of the Company.
6.11 Consents and Waivers. The Company shall have obtained all consents
or waivers necessary to execute this Agreement and the other agreements and
documents contemplated herein, to issue the Purchased Shares, and the Warrant
and to carry out the transactions contemplated hereby and thereby. All corporate
and other action and governmental filings necessary to effectuate the terms of
this Agreement, the Related Agreements, the Purchased Shares, the Conversion
Shares, the Warrant and the Warrant Shares and other agreements and instruments
executed and delivered by the Company in connection herewith shall have been
made or taken.
6.12 Series A Preferred Stock Certificates. The Company shall have
delivered a stock certificate to each Purchaser representing that number of
shares of Series A Preferred Stock set forth beside such Purchaser's name on
Schedule 1.1 attached hereto.
<PAGE>
ARTICLE VII
CONDITIONS OF THE COMPANY'S OBLIGATION
7.1 Effect of Conditions. The Company's obligation to sell the
Purchased Shares and the Warrant shall be subject at its election to the
satisfaction of each of the conditions stated in the following Sections of this
Article VII.
7.2 Representations and Warranties; Performance. The representations
and warranties of the Purchasers contained in this Agreement shall be true and
correct on the date of the Closing with the same effect as though made on and as
of that date and, with respect to the Company's obligation to issue and deliver
Purchased Shares and Warrant to any Purchaser, such Purchaser shall have
tendered payment for the Purchased Shares at the Closing by wire transfer to an
account designated in writing by the Company in accordance with Section 1.4
hereof.
ARTICLE VIII
PREEMPTIVE RIGHT
8. Purchase Rights.
8.1 Right of Purchase. The Company hereby grants to each
Purchaser so long as it shall own, of record or beneficially, or have the right
to acquire from the Company, any Series A Preferred Stock, the right to purchase
all or part of his or its Pro Rata Share of New Securities (as such term is
defined herein) which the Company, from time to time, proposes to sell and
issue. For purposes of this purchase right, the term "Pro Rata Share" shall mean
the ratio of the number of shares of Series A Preferred Stock (calculated on a
fully converted basis, including without limitation the Conversion Shares and
Warrant Shares) which such Purchaser owns to the total number of shares of
Series A Preferred Stock (calculated on a fully converted basis) and shares of
Common Stock then outstanding.
8.2 Right of Over-Allotment. The Purchasers shall have a right
of over-allotment pursuant to this Section 8.2 such that to the extent a
Purchaser does not exercise its or his purchase right in full hereunder, such
additional shares of New Securities which such Purchaser did not purchase may be
purchased by the other Purchasers in proportion to the total number of shares of
Series A Preferred Stock, which each such other Purchaser owns or has the right
to acquire from the Company compared to the total number of shares of Series A
Preferred Stock which all such other Purchasers own or have the right to acquire
from the Company.
8.3 Definition of New Securities. "New Securities" shall mean
any capital stock of the Company whether now authorized or not, and rights,
options or warrants to purchase capital stock, and securities of any type
whatsoever that are, or may become convertible into or exchangeable for capital
stock, issued on or after the date hereof; provided, however, that the term "New
Securities" does not include (a) securities purchased under this Agreement, the
Warrant, the Warrant Shares or the Conversion Shares, (b) Common Stock issued as
a stock dividend to holders of Common Stock or upon any stock split, subdivision
or
<PAGE>
combination of shares of Common Stock, (c) shares (or options or rights to
acquire such shares) of the Company's Common Stock (such number of shares shall
be proportionately adjusted to reflect any stock dividend, stock split or other
form of recapitalization occurring after the date hereof) reserved for issuance
upon exercise of options pursuant to the Company's Amended and Restated 1993
Stock Incentive Plan and the Company's 1995 Non-Employee Director Stock Option
Plan that have been or may be granted by the Company's Board of Directors, and
(d) securities issued pursuant to an acquisition or Strategic Financing,
provided that (i) any such transaction is approved by a majority of the
Company's Board of Directors. For purposes of this Section 8.3, the term
"Strategic Financing" shall mean any sale or issuance of capital stock of the
Company in connection with an operational, technical or strategic contract,
agreement, partnership or joint venture wherein the primary purpose of such a
transaction is not to raise funds, but rather to develop a strategic partnering
or alliance with the Company.
8.4 Notice from the Company. In the event the Company proposes
to undertake an issuance of New Securities, it shall give each Purchaser written
notice of its intention, describing the type of New Securities and the price and
the terms upon which the Company proposes to issue the same. Each Purchaser
shall have twenty (20) business days from the date of receipt of any such notice
to agree to purchase up to their Pro Rata Share of such New Securities (and any
over-allotment amount pursuant to the operation of Section 8.2 hereof) for the
price and upon the terms specified in the notice by giving written notice to the
Company and stating therein the quantity of New Securities to be purchased.
8.5 Sale by the Company. In the event any Purchaser fails to
exercise in full his or its purchase right (after giving effect to the
over-allotment provision of Section 8.2 hereof), the Company shall have ninety
(90) days thereafter to sell the New Securities with respect to which such
Purchaser purchase right was not exercised, at a price and upon terms no more
favorable to the purchasers thereof than specified in the Company's notice. To
the extent the Company does not sell all the New Securities offered within said
ninety (90) day period, the Company shall not thereafter issue or sell such New
Securities without first again offering such securities to each Purchaser in the
manner provided above.
8.6 Termination of Rights. The rights granted under this
Article VIII shall expire immediately prior to, and shall not apply in
connection with the conversion of all of the Purchased Shares.
ARTICLE IX
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
<PAGE>
"Act" shall have the meaning set forth in Section 2.4(c).
"Advent Representative" shall have the meaning set forth in
Section 3.10.
"Agreement" means this Stock Purchase Agreement as from time to time
amended and in effect between the parties.
"Closing" and "Closing Date" shall the meanings set forth in
Section 1.4.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall have the meaning set forth in Section 2.3.
"Common Stock" will include (a) the Company's Common Stock as
authorized on the date of this Agreement, (b) any other capital stock of any
class or classes of the Company authorized on or after the date hereof, the
holders of which shall have the right, without limitation as to amount, either
to all or to a share of the balance of current dividends and liquidating
dividends after the payment of dividends and distributions on any shares
entitled to preference, and (c) any other securities of the Company into which
or for which any of the securities described in (a) or (b) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger, sale
of assets or otherwise.
"Company" means and shall include LeCroy Corporation, a Delaware
corporation, its predecessors, successors and assigns.
"Confidential Information" shall have the meaning set forth in
Section 11.11.
"Conversion Shares" shall have the meaning set forth in Section 1.3.
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability, defect of title or other claim, charge or
encumbrance of any nature whatsoever on any property or property interest.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Intellectual Property" shall have the meaning set forth in
Section 2.14.
<PAGE>
"Knowledge" of the Company and similar terms shall mean the actual
knowledge of the Company's Chief Executive Officer, the Chief Financial Officer
and those members of the Company's senior management who report directly to the
Company's Chief Executive Officer.
"Lien" means, with respect to any asset, any mortgage, deed of trust,
pledge, hypothecation, assignment, security interest, lien, charge, restriction,
adverse claim by a third party, title defect or encumbrance of any kind
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any assignment or other conveyance of any right to receive
income and any assignment of receivables with recourse against assignor), any
filing of any financing statement as debtor under the Uniform Commercial Code or
comparable law of any jurisdiction and any agreement to give or make any of the
foregoing.
"Material Adverse Effect" shall mean a material adverse effect upon the
business, condition (financial or otherwise), assets or results of operations of
the Company and the Subsidiaries taken as a whole.
"Permitted Recipients" shall have the meaning set forth in
Section 11.11.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, trust or unincorporated organization or a
government or agency or political subdivision thereof.
"Purchased Shares" shall have the meaning set forth in Section 1.1.
"Purchaser" shall have the meaning set forth in Section 1.1.
"Registration Rights Agreement" shall have the meaning set forth in
Section 2.2.
"Related Agreements" shall have the meaning set forth in Section 2.2.
"SEC Documents" means all reports, schedules, registration statements
and other documents (including all exhibits and schedules thereto) filed by the
Company with the Commission.
"Series A Preferred Stock" shall have the meaning set forth in
Section 1.1.
"Subsidiary" or "Subsidiaries" means any corporation, association or
other business entity of which the Company and/or any of its other Subsidiaries
(as herein defined), directly or indirectly owns at the time more than fifty
percent (50%) of the outstanding voting shares of every class of such
corporation or trust other than directors' qualifying shares.
"Tax" and "Taxes" shall have the meaning set forth in Section 2.11.
<PAGE>
"Warrant" shall have the meaning set forth in Section 1.2.
"Warrant Agreement" shall have the meaning set forth in Section 1.2.
"Warrant Shares" shall have the meaning set forth in Section 1.2.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Written Consent. This Agreement may be
terminated, and the transactions contemplated hereby abandoned, at any time
prior to the Closing by the written agreement of the Company and the Purchasers.
10.2 Termination for Breach. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time before the Closing
(or any date to which such Closing may have been extended by the written
agreement of the parties obligated to perform at such Closing) by any party
obligated to perform at such Closing if the conditions for its benefit set forth
in Article VI or VII, as the case may be, have not been satisfied on or prior to
such Closing and if the conditions for the benefit of the other parties have
been satisfied or waived, and if such performing party shall have given written
notice of termination to the non-performing party.
10.3 Termination for Delay. Unless earlier terminated in accordance
with Section 10.1 or 10.2, this Agreement may be terminated and the transactions
contemplated hereby may be abandoned by the Company or the Purchasers if the
Closing does not occur by June 30, 1999, provided, however, that the right to
terminate this Agreement under this Section 10.3 shall not be available to any
party whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Closing to occur on or before such
date.
10.4 Rights After Termination. Upon termination of this Agreement under
this Article X, the parties shall be released from all obligations arising
hereunder, except as to any liability for misrepresentations, breach or default
in connection with any warranty, representation, covenant, duty or obligation
given, occurring or arising prior to the date of termination and except as to
the Company's obligations under Section 11.6 hereof.
ARTICLE XI
MISCELLANEOUS
11.1 Survival of Representations. The representations, warranties,
covenants and agreements made herein or in any certificates or documents
executed in connection herewith shall survive the execution and delivery hereof
and the Closing of the transaction contemplated hereby
<PAGE>
until the earlier of (i) five (5) years from the date hereof, or (ii) the
conversion of all of the Purchased Shares.
11.2 Parties in Interest. Except as otherwise set forth herein, all
covenants, agreements, representations, warranties and undertakings contained in
this Agreement shall be binding on and shall inure to the benefit of the
respective successors and assigns of the parties hereto (including permitted
transferees of any of the Purchased Shares). Except as may be required to be
disclosed by order of a court or otherwise required by law, the parties agree to
maintain in confidence the terms of the purchase of the Purchased Shares
hereunder, except that the Purchasers may disclose such terms to their investors
in the ordinary course and except that the Company may disclose such terms to
its stockholders, accountants, bankers and advisors in the ordinary course.
11.3 Shares Owned by Affiliates. For the purposes of applying all
provisions of this Agreement which condition the receipt of information or
access to information or exercise of any rights upon ownership of a specified
number or percentage of shares, the shares owned of record by any affiliate of a
Purchaser shall be deemed to be owned by such Purchaser. For the purpose of this
Agreement, the term "affiliate" shall mean any Person controlling, controlled by
or under common control with, a Purchaser and any general or limited partner of
a Purchaser. Without limiting the foregoing, each Purchaser shall be considered
an affiliate of each other Purchaser.
11.4 Amendments and Waivers. Amendments or additions to this Agreement
may be made and compliance with any term, covenant, agreement, condition or
provision set forth herein may be omitted or waived (either generally or in a
particular instance and either retroactively or prospectively) upon the written
consent of the Company and the holders of a majority of the Conversion Shares,
assuming for such purposes the conversion of all shares. Prompt notice of any
such amendment or waiver shall be given to any Person who did not consent
thereto. This Agreement (including the Schedules and Exhibits annexed hereto,
which are an integral part of this Agreement) constitutes the full and complete
agreement of the parties with respect to the subject matter hereof.
11.5 Notices. All notices, requests, consents, reports and demands
shall be in writing and shall be hand delivered, sent by facsimile or other
electronic medium, or mailed, postage prepaid, to the Company or to the
Purchasers at the address set forth below or to such other address as may be
furnished in writing to the other parties hereto:
The Company: LeCroy Corporation
700 Chestnut Ridge Road
Chestnut Ridge, NY 10977-6499
Attention: President
Tel: (914) 425-2000
Fax: (914) 578-6061
<PAGE>
with copy to: Bingham Dana LLP
150 Federal Street
Boston, MA 02110
Attention: Roger Feldman, Esq.
Tel: (617) 951-8000
Fax: (617) 951-8736
The Purchasers: The address set forth opposite the Purchaser's name on
Schedule 1.1 attached hereto.
with copy to: Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, Massachusetts 02110
Attention: Anthony J. Medaglia, Jr., P.C.
Tel: (617) 951-6600
Fax: (617) 951-1295
11.6 Expenses. Each party hereto will pay its own expenses in
connection with the transactions contemplated hereby, provided, however, that
the Company shall pay the Purchasers' reasonable costs and expenses for legal
counsel in connection with the investigation, preparation, execution and
delivery of this Agreement (and due diligence related thereto) and the other
instruments and documents to be delivered hereunder and the transactions
contemplated hereby and thereby on the date of the Closing; provided, further,
that in no case shall such costs and expenses exceed $20,000.
11.7 Counterparts. This Agreement and any exhibit hereto may be
executed in multiple counterparts, each of which shall constitute an original
but all of which shall constitute but one and the same instrument. One or more
counterparts of this Agreement or any exhibit hereto may be delivered via
telecopier, with the intention that they shall have the same effect as an
original counterpart hereof.
11.8 Effect of Headings. The article and section headings herein are
for convenience only and shall not affect the construction or interpretation
hereof.
11.9 Adjustments. All provisions of this Agreement shall be
automatically adjusted to reflect any stock dividend, stock split or other such
form of recapitalization.
11.10 Governing Law. This Agreement shall be deemed a contract made
under the laws of The Commonwealth of Massachusetts and together with the rights
and obligations of the parties hereunder, shall be construed under and governed
by the laws of such state. Each of the parties hereto agrees that any action or
proceeding brought to enforce the rights or obligations of any party hereto
under this Agreement may be commenced and maintained in any court of competent
jurisdiction located in The Commonwealth of Massachusetts, and that the United
<PAGE>
States District Court for Massachusetts shall have non-exclusive jurisdiction
over any such action, suit or proceeding brought by any of the parties hereto.
Each of the parties hereto further agrees that process may be served upon it by
certified mail, return receipt requested, addressed as more generally provided
in Section 11.5 hereof, and consents to the exercise of jurisdiction over it and
its properties with respect to any action, suit or proceeding arising out of or
in connection with this agreement or the transactions contemplated hereby or the
enforcement of any rights under this Agreement.
11.11 Confidentiality. Each Purchaser covenants and agrees that such
Purchaser shall maintain the confidentiality of all financial, confidential and
proprietary information of the Company ("Confidential Information") that is
provided to such Purchaser under this Agreement or that is otherwise provided to
such Purchaser by the Company and identified by the Company in writing to such
Purchaser as being of a confidential nature. For purposes hereof, "Confidential
Information" shall not include any information which (i) was available to or in
possession of such Purchaser or any employees thereof or any beneficial owner of
a partnership interest in such Purchaser (collectively referred to herein as
"Permitted Recipients") prior to the time of disclosure to such Purchaser by the
Company or its representatives, (ii) is or becomes generally available to the
public other than as a result of a disclosure by any of such Permitted
Recipients, or (iii) is or becomes available to such Permitted Recipients on a
nonconfidential basis by a third party which is not bound by a confidentiality
agreement with the Company. Notwithstanding the preceding sentence, a Purchaser
may (a) disclose such confidential information when required by law or
governmental order or regulation or when required by a subpoena or other
process, provided that such Purchaser shall use reasonable efforts to give the
Company prior notice thereof; (b) disclose such confidential information to the
extent necessary to enforce this Agreement; (c) disclose such confidential
information to its attorneys, accountants, consultants and other professionals
to the extent necessary to obtain their services in connection with its
investment in the Company, provided that the requirements of this Section 11.11
shall in turn be binding on any such attorney, accountant, consultant or other
professional; (d) disclose such confidential information as may be required by
any prospective purchaser of any Purchased Shares or Conversion Shares from such
Purchaser, provided that such proposed sale is in compliance with the
restrictions imposed by this Agreement and the Related Agreements and such
prospective purchaser agrees in writing to be bound by the provisions of this
Section 11.11; and (e) disclose such confidential information to any of its
affiliates, provided that the requirements of this Section 11.11 shall in turn
be binding on such affiliates.
11.12 Assignment. Each Purchaser has the right to assign or transfer
any of its rights pursuant to this Agreement in connection with (and in
proportion to) its transfer of securities purchased hereunder. The Company may
not assign or transfer any of its rights pursuant to this Agreement unless the
Company first obtains the express written consent of a majority of the
Purchasers.
11.13 Waiver of Jury Trial. Each of the Company and the Purchasers
hereby expressly waives its respective rights to a jury trial of any claim or
cause of action based upon or arising out of this agreement, any other related
agreements or any dealings between them relating to the
<PAGE>
subject matter of this Agreement. The Company and Purchasers also waive any bond
or surety or security upon such bond which might, but for this waiver, be
required of any party. The scope of this waiver is intended to be all
encompassing of any and all disputes that may be filed in any court and that
relate to the subject matter of this transaction, including without limitation,
contract claims, tort claims, breach of duty claims, and all other common law
and statutory claims. The Company and the Purchasers further warrant and
represent that each has reviewed this waiver with its legal counsel, and that
each voluntarily waives its jury trial rights following consultation with legal
counsel. This waiver is irrevocable and may only be modified either orally or in
amendments, renewals, supplements or modifications to this agreement, any other
related agreement or the Purchased Shares. In the event of litigation, this
Agreement may be filed as a written consent to a trial (without a jury) by the
court.
* * * * * * *
<PAGE>
LECROY CORPORATION
COUNTERPART SIGNATURE PAGE
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Company, whereupon, this letter shall become a binding agreement among us.
LECROY CORPORATION
By:_______________________________________
Name: John C. Maag
Title: Vice President-Finance, Chief Financial Officer,
Secretary and Treasurer
PURCHASERS:
ADVENT GLOBAL GECC III LIMITED PARTNERSHIP
By: Advent Global Management Limited Partnership,
General Partner
By: Advent International Limited Partnership,
General Partner
By: Advent International Corporation,
General Partner
By:
Douglas A. Kingsley
Senior Vice President
ENVIROTECH INVESTMENT FUND I LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
General Partner
By: Advent International Corporation,
General Partner
By:
Douglas A. Kingsley
Senior Vice President
ADWEST LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
General Partner
By: Advent International Corporation,
General Partner
By:
Douglas A. Kingsley
Senior Vice President
<PAGE>
OAKSTONE VENTURES LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
General Partner
By: Advent International Corporation,
General Partner
By:
Douglas A. Kingsley
Senior Vice President
ADVENT PARTNERS LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By: _______________________________________
Douglas A. Kingsley
Senior Vice President
<PAGE>
Schedule 1.1
<TABLE>
<CAPTION>
Purchaser Purchased Shares Consideration
- --------- ---------------- -------------
<S> <C> <C>
Advent Global GECC III Limited Partnership 350,000 $ 7,000,000
EnviroTech Investment Fund I Limited Partnership 71,250 $ 1,425,000
Adwest Limited Partnership 20,000 $ 400,000
Oakstone Ventures Limited Partnership 50,000 $ 1,000,000
Advent Partners Limited Partnership 8,750 $ 175,000
Totals 500,000 $10,000,000
</TABLE>
c/o Advent International Corporation
75 State Street
Boston, MA 02109
Attention: Douglas A. Kingsley
HWD2: 541005-8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-K for the fiscal year ended June 30, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 1791
<SECURITIES> 0
<RECEIVABLES> 32067
<ALLOWANCES> 518
<INVENTORY> 29120
<CURRENT-ASSETS> 65660
<PP&E> 37757
<DEPRECIATION> 23200
<TOTAL-ASSETS> 102214
<CURRENT-LIABILITIES> 35280
<BONDS> 0
0
8152
<COMMON> 77
<OTHER-SE> 51778
<TOTAL-LIABILITY-AND-EQUITY> 97320
<SALES> 119335
<TOTAL-REVENUES> 126198
<CGS> 62827
<TOTAL-COSTS> 62827
<OTHER-EXPENSES> 69010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 655
<INCOME-PRETAX> (5639)
<INCOME-TAX> 1149
<INCOME-CONTINUING> (6788)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6788)
<EPS-BASIC> (1.13)
<EPS-DILUTED> (1.13)
</TABLE>
