| LECROY CORP Item 1A Risk Factors |
| 18 ITEM 1A RISK FACTORS An investment in our common stock involves a high degree of risk |
| You should carefully consider the risks described below together with all of the other information included in this Form 10-K when evaluating the Company and its business |
| If any of the following risks actually occurs, our business, financial condition, or results of operations could suffer |
| In that case, the trading price of our common stock could decline and our stockholders may lose all or part of their investment |
| RISKS RELATED TO OUR BUSINESS OUR OPERATING RESULTS ARE EXPECTED TO CONTINUE TO FLUCTUATE AND MAY NOT MEET OUR FINANCIAL GUIDANCE OR PUBLISHED ANALYST FORECASTS, WHICH MAY CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE SIGNIFICANTLY Our past operating results, including our gross profits, have fluctuated from fiscal period to fiscal period |
| We expect our future operating results and gross profits will continue to fluctuate from fiscal period to fiscal period due to a number of factors, many of which are outside our control and any of which could cause our stock price to fluctuate |
| The primary factors that affect our operating results include the following: o changes in overall demand for our products; o the timing of the announcement, introduction and market acceptance of new products by us or competing companies; o the timing and magnitude of research and development expenses; o changes in the estimation of the future size and growth rates of our markets; o changes in our production efficiency; o disruptions in operations at any of our facilities or the facilities of any of our contract manufacturers for any reason; o changes in the selling prices of our products; and o changes in foreign currency exchange risks |
| In addition, we have historically experienced somewhat lower activity during our first fiscal quarter than in other fiscal quarters which, we believe, is due principally to the lower level of orders and market activity during the summer months, particularly in Europe |
| We believe this seasonal aspect of our business is likely to continue in the future |
| OUR STOCK PRICE MAY BE VOLATILE IN THE FUTURE, AND OUR STOCKHOLDERS MAY BE UNABLE TO RESELL THEIR SHARES AT OR ABOVE THE PRICE THEY PAID The market price of our common stock fluctuates significantly |
| The stock price could fluctuate in the future due to a number of factors, some of which are beyond our control |
| These factors include: o historically low trading volume in our stock relative to alternative investments; o announcements of developments related to our business, including additions or departures of key personnel; o announcements of technological innovations or new products or enhancements by us or our competitors; 18 o sales by competitors, including sales to our customers; o sales of common stock into the public market, including those by directors and members of management; o developments in our relationships with our customers, partners, distributors and suppliers; o shortfalls or changes from analysts &apos expectations in revenue, gross profits, earnings or losses, or other financial results; o discontinuance of our recent stock repurchase program; o regulatory developments; o fluctuations in results of operations; o failure to meet our financial obligations under any loans or financing agreements; o trends in the seasonality of our sales; and o general conditions in our market or the markets served by our customers |
| In addition, in recent years the stock market in general and the market for shares of technology stocks in particular have experienced extreme price fluctuations, which have often been due largely to factors other than the operating performance of the affected companies |
| We cannot ensure that the market price of our common stock will not decline substantially, or otherwise continue to experience significant fluctuations in the future, including fluctuations that are unrelated to our operating performance |
| IF DEMAND FOR OUR PRODUCTS DOES NOT MATCH MANUFACTURING CAPACITY, WE MAY UNDERUTILIZE OUR CAPACITY OR, ALTERNATIVELY, BE UNABLE TO FULFILL ORDERS IN A TIMELY MANNER, AND IN EITHER SITUATION OUR OPERATING RESULTS MAY SUFFER The sale of our products is dependent, to a large degree, on customers whose industries are subject to cyclical trends in the demands for their products |
| We may not be able to adapt production capacity and related cost structures to rapidly changing market conditions in a timely manner |
| When demand does not meet expectations, manufacturing capacity will likely exceed production requirements |
| We have at times increased our production capacity and the overhead that supports production based on anticipated market demand which has not always developed as expected |
| As a result, we have periodically underutilized our capacity, which has adversely affected our earnings due to existing fixed costs |
| In addition, conversely, if during a market upturn we cannot increase manufacturing capacity to meet product demand, we will be unable to fulfill orders in a timely manner, which in turn may have a negative effect on operating results and our overall business |
| IF OUR OPERATING RESULTS DECLINE IN THE LONG-TERM, WE MAY BE REQUIRED TO ESTABLISH AN ADDITIONAL VALUATION ALLOWANCE AGAINST OUR NET DEFERRED TAX ASSETS We evaluate whether our deferred tax assets can be realized and assess the need for a valuation allowance on an ongoing basis |
| As of June 30, 2006, our Consolidated Balance Sheet includes approximately dlra15dtta5 million of deferred tax assets after valuation allowance related to the future tax benefit of certain temporary differences between our financial statements and our tax returns |
| Realization of our deferred tax assets is mainly dependent on our ability to generate future taxable income |
| As of June 30, 2006, we recorded a valuation allowance of approximately dlra0dtta3 million to reserve for those deferred tax assets we believe are not more likely than not to be realized in future periods |
| An additional valuation allowance would be recorded if it was deemed more likely than not that some or all of our deferred assets will not be realized |
| If we establish additional valuation allowances, we would record a tax expense in our Consolidated Statements of Operations, which would have an adverse impact on our operating results |
| WE FACE RISKS FROM FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES VERSUS THE US DOLLAR AND THE COST OF CURRENCY EXCHANGE, WHICH AFFECT OUR REVENUE, COST OF REVENUE AND OPERATING MARGINS AND COULD RESULT IN EXCHANGE LOSSES A large portion of our sales and expenses are denominated in foreign currencies |
| We purchase materials from suppliers and sell our products around the world and maintain investments in foreign subsidiaries, all denominated in a variety of currencies |
| As a consequence, we are exposed to risks from fluctuations in foreign currency exchange rates with respect to a number of 19 currencies, changes in government policies and legal and regulatory requirements, political instability, transportation delays and the imposition of tariffs and export controls |
| Changes in the relation of foreign currencies to the US dollar will affect revenues, our cost of revenue and operating margins and could result in exchange losses |
| Among the more significant potential risks to us of relative fluctuations in foreign currency exchange rates is the relationship among and between the US dollar, European monetary unit (Euro), Swiss franc, British pound, Swedish krona, Japanese yen, Korean won, and Singapore dollar |
| We have a program of entering into foreign exchange forward contracts to minimize the risks associated with currency fluctuations on assets, liabilities or other transactions denominated in other than the functional currency of us or our subsidiaries |
| It cannot be assured, however, that this program will effectively offset all of our foreign currency risk related to these assets or liabilities |
| These foreign exchange forward contracts do not qualify for hedge accounting |
| As a consequence, there can be no assurance that fluctuations in foreign currency exchange rates in the future will not result in mismatches between local currency revenues and expenses, and will not adversely affect our results of operations |
| Moreover, fluctuations in exchange rates could affect the demand for our products |
| No assurance can be given that our strategies will prevent future currency fluctuations from having a material adverse affect on our business, financial condition, results of operations or liquidity |
| WE FACE NUMEROUS RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS, WHICH COULD CAUSE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS SINCE APPROXIMATELY TWO-THIRDS OF OUR REVENUES ARE DERIVED FROM INTERNATIONAL SALES We market and sell our products and services outside the United States, and currently have employees located in China, France, Germany, Italy, Japan, Singapore, South Korea, Sweden, Switzerland and the United Kingdom |
| Many of our customers and licensees are located outside the United States |
| As part of our strategy, we have expanded our international sales, particularly in China |
| We face numerous risks in doing business outside the United States, including: o dependence on sales representatives or foreign distributors and their sales channels; o longer accounts receivable collection cycles; o less effective and less predictable recognition, protection and enforcement of intellectual property rights, specifically in areas of Asia and particularly in China; o trade protection measures, import or export licensing requirements, tariffs and other trade barriers; o highly cyclical business environments; o unusual or burdensome foreign laws or regulatory requirements or unexpected changes to those laws or requirements; o strengthening of the US dollar, which could make our products more expensive; o changes in the political or economic condition of a specific country or region, particularly in emerging markets; and o potentially adverse tax consequences |
| Such factors could cause our future international sales to decline |
| Our business practices in international markets are also subject to the requirements of the Foreign Corrupt Practices Act |
| If any of our employees are found to have violated these requirements, we could be subject to significant fines and other penalties |
| Our products are also subject to United States export control restrictions |
| In certain cases, we may not be permitted to export products without obtaining an export license |
| US export laws also prohibit the export of our products to a number of countries deemed by the United States to be hostile |
| The export of our high-performance oscilloscopes from the United States, which accounts for a material portion of our internationally derived revenue, is also subject to regulation under the Treaty for Nuclear Non-Proliferation |
| However, only a small portion of those oscilloscopes are sold in countries where that treaty restricts the end-user |
| These restrictions may make foreign competitors facing less stringent controls on their products more competitive in the global market |
| We cannot be certain that the US government will approve any pending or future 20 export license requests |
| In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, could be revised |
| Our international sales and, because approximately two-thirds of our revenue is derived from sales outside the United States, our sales in general, could be materially harmed by our inability to obtain required licenses or by the costs of compliance |
| We may be greatly impacted by the political, economic, and military conditions in China, Taiwan, North Korea, and South Korea |
| These countries have recently conducted military exercises in or near the others &apos territorial waters and airspace |
| Such disputes may continue or escalate, resulting in economic embargoes, disruptions in shipping, or even military hostilities |
| This could severely harm our business by interrupting or delaying shipment of our products to or through these areas and/or reducing our sales in these areas |
| In particular, several key integrated circuits that we use are made by International Business Machines ( "e IBM "e ) |
| Although we have not experienced significant production delays attributable to supply changes, we believe that, for integrated circuits in particular, alternative sources of supply would be difficult to develop over a short period of time |
| Because we have no direct control over our third-party suppliers, interruptions or delays in the products and services provided by these third parties may be difficult to remedy in a timely fashion |
| In addition, if such suppliers are unable or unwilling to deliver the necessary parts or products, we may be unable to redesign or adapt our technology to work without such parts or find alternative suppliers or manufacturers |
| In such events, we could experience interruptions, delays, increased costs, or quality control problems |
| WE DEPEND UPON KEY PERSONNEL AND QUALIFIED FUTURE HIRES TO IMPLEMENT OUR EXPANSION STRATEGY, AND IF WE ARE UNABLE TO RETAIN OR ATTRACT PERSONNEL WE MAY NOT BE ABLE TO MANAGE AND OPERATE SUCCESSFULLY AND WE MAY NOT BE ABLE TO MEET OUR STRATEGIC OBJECTIVES Our success depends on the efforts and abilities of senior management and key employees in the sales, marketing, research and development, and manufacturing areas |
| Many of these employees would be difficult to replace |
| We do not have employment contracts with some of our key personnel |
| If we cannot retain existing key managers and employ additional qualified senior employees, our business, financial condition, and results of operations could be materially and adversely affected |
| We do not maintain "e key man "e life insurance policies on any of our personnel |
| Future expansion of operations will require us to attract, train and retain new personnel |
| In addition, we may be limited by non-solicitation agreements entered into by our key personnel with respect to hiring employees from our competitors |
| These factors could increase our operating expenses |
| If we are unable to recruit or retain a sufficient number of qualified employees, or the costs of compensation or employee benefits increase substantially, our business, results of operations or financial condition could be materially and adversely affected |
| WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR INTELLECTUAL AND PROPRIETARY RIGHTS, WHICH WOULD DEPRIVE US OF A COMPETITIVE ADVANTAGE AND THEREBY NEGATIVELY IMPACT OUR ABILITY TO COMPETE As a technology-based company, our success depends on developing and protecting our intellectual property |
| We rely generally on patent, copyright, trademark and trade secret laws in the United States and abroad |
| Electronic equipment as complex as most of our products, however, is generally not patentable in its entirety |
| We also license intellectual property from third parties and rely on those parties to maintain and protect their technology |
| We cannot be certain that actions we take to establish and protect proprietary rights will be adequate, particularly in countries where intellectual property rights are not highly developed or protected |
| If we are unable to adequately protect our technology, or if we are unable to continue to obtain or maintain licenses for protected technology from third parties, it may be difficult to design alternatives to such technology without incurring significant costs |
| Thus, the loss of intellectual property rights to technology could have a material adverse effect on our business, results of operations or financial condition |
| From time to time, in the ordinary course of business, we receive notices from third parties regarding intellectual property infringement or take action against others with regard to intellectual property rights |
| Even where we are successful in defending or pursuing such claims, we may incur significant costs |
| In the event of a successful claim against us, we could lose our rights to needed technology or be required to pay license fees for the infringed rights, either of which could have an adverse impact on our business |
| 21 WE LICENSE CERTAIN INTELLECTUAL PROPERTY FROM THIRD PARTIES, AND THE LOSS OF THESE LICENSES COULD DELAY DEVELOPMENT OF FUTURE PRODUCTS OR PREVENT THE SALE OR ENHANCEMENT OF EXISTING PRODUCTS We rely on licenses of intellectual property for our businesses, including technology used in our products |
| We cannot ensure that these licenses will be available in the future on favorable terms or at all |
| The loss of these licenses or the ability to maintain any of them on acceptable terms could delay development of future products or prevent the further sale or enhancement of existing products |
| Such loss could adversely affect our business, results of operations and financial condition |
| POTENTIAL ACQUISITIONS, STRATEGIC ALLIANCES, AND JOINT VENTURES MAY RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED In the normal course of business, we engage in discussions with third parties relating to possible acquisitions, strategic alliances and joint ventures |
| On October 29, 2004, we acquired all of the outstanding shares of common stock of CATC As a result of our acquisition of CATC or other transactions which may be consummated, our financial results may differ from the investment communityapstas expectations in a given quarter and year |
| In addition, acquisitions and strategic alliances may require us to integrate a different company culture, management team and business infrastructure |
| We may have difficulty developing, manufacturing and marketing the products of the newly-acquired company in a way that enhances the performance of our combined businesses or product lines to realize the value from expected synergies |
| Depending on the size and complexity of an acquisition, our successful integration of the entity depends on a variety of factors, including: o the retention of key employees; o the management of facilities and employees in different geographic areas; o the retention of key customers; and o the integration or coordination of different research and development, product manufacturing and sales programs and facilities |
| Any impairment of the value of purchased assets or goodwill could have a significant negative impact on our future operating results |
| All of these efforts require varying levels of management resources, which may divert our attention from other business operations |
| Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions |
| If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted |
| WE MAY NOT BE ABLE TO OBTAIN THE CAPITAL WE NEED TO MAINTAIN OR GROW OUR BUSINESS Our ability to execute our long-term strategy may depend to a significant degree on our ability to obtain long-term debt and equity capital |
| We have no commitments for additional borrowings at this time, other than dlra46dtta5 million remaining under the Revolver with The Bank of New York and the other lenders party thereto, or for sales of equity, other than under our existing employee benefit plans |
| We cannot determine the precise amount and timing of our funding needs at this time |
| We may be unable to obtain future additional financing on terms acceptable to us, or at all |
| If we fail to comply with certain covenants relating to our indebtedness, we may need to refinance our indebtedness or repay it |
| We also may need to refinance our indebtedness at maturity |
| We may not be able to obtain additional capital on favorable terms to refinance our indebtedness |
| The following factors could affect our ability to obtain additional financing on favorable terms, or at all: o our results of operations; 22 o general economic conditions and conditions in our industry; o the perception in the capital markets of our business; o our ratio of debt to equity; o our financial condition; o our business prospects; and o changes in interest rates |
| In addition, certain covenants relating to our dlra100dtta0 million credit facility impose limitations on additional indebtedness |
| If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures and reduce research and development expenditures |
| Any such actions could have a material adverse effect on our business, financial condition, results of operations and liquidity |
| WE COULD INCUR SUBSTANTIAL COSTS AS A RESULT OF VIOLATIONS OF OR LIABILITIES UNDER ENVIRONMENTAL LAWS Our operations and products are subject to laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes and the cleanup of contaminated sites |
| Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities |
| We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party claims for property damage and personal injury as a result of violations of or liabilities under environmental laws or noncompliance with environmental permits |
| Our former subsidiary, Digitech Industries, Inc, has been involved in environmental remediation activities, the liability for which was retained by us and entirely reserved for after the sale of the Vigilant Networks business and the residual assets of Digitech |
| Any liability beyond what is currently expected and reserved for could have a material adverse affect on our results of operations |
| WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS, AND FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT CONTRACTS COULD HARM OUR BUSINESS BY LEADING TO A REDUCTION IN REVENUE ASSOCIATED WITH THESE CUSTOMERS We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government |
| The laws governing government contracts differ from the laws governing private contracts |
| For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts |
| We are also subject to investigation for compliance with the regulations governing government contracts |
| A failure to comply with these regulations might result in suspension of these contracts, or administrative penalties |
| WE HAVE A CREDIT FACILITY THAT CONTAINS FINANCIAL COVENANTS, AND THE FAILURE TO COMPLY WITH THESE COVENANTS COULD HARM OUR FINANCIAL CONDITION BECAUSE OUR CREDIT FACILITY MAY BE UNAVAILABLE TO US We have a dlra100dtta0 million credit facility with The Bank of New York and the other lenders party thereto |
| We are subject to financial covenants under our credit facility, including interest coverage ratio, minimum total net worth, leverage ratio and fixed charge coverage ratio requirements |
| Failure to comply with the financial covenants under our credit facility may adversely affect our business, results of operations, liquidity and financial condition |
| ISSUANCE OF SHARES IN CONNECTION WITH FINANCING TRANSACTIONS OR UNDER STOCK PLANS WILL DILUTE CURRENT STOCKHOLDERS Pursuant to our stock plans, our management is authorized to grant restricted stock awards or stock options to our employees, directors and consultants |
| Our stockholders will incur dilution upon exercise of any outstanding stock options |
| In addition, if we raise additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to our existing stockholders will result, and new investors could have rights superior to existing stockholders |
| ANTI-TAKEOVER PROVISIONS UNDER OUR STOCKHOLDER RIGHTS PLAN, CHARTER DOCUMENTS AND DELAWARE LAW COULD DELAY OR PREVENT A CHANGE OF CONTROL AND COULD ALSO LIMIT THE MARKET PRICE OF OUR STOCK 23 Our stockholder rights plan, certificate of incorporation and bylaws contain provisions that could delay or prevent a change of control of our company that our stockholders might consider favorable |
| Certain provisions of our certificate of incorporation and bylaws allow us to: o authorize the issuance of preferred stock which can be created and issued by the board of directors without prior stockholder approval, with rights senior to those of the common stock; o provide for a classified board of directors, with each director serving a staggered three-year term; o prohibit stockholders from filling board vacancies, calling special stockholder meetings, or taking action by written consent; and o require advance written notice of stockholder proposals and director nominations |
| In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15prca or more of our outstanding voting stock |
| These and other provisions in our certificate of incorporation, bylaws and stockholder rights plan and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including delay or impede a merger, tender offer, or proxy contest involving our company |
| Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline |
| WE FACE BURDENS RELATING TO THE RECENT TREND TOWARD STRICTER CORPORATE GOVERNANCE AND FINANCIAL REPORTING STANDARDS Recently adopted or new legislation or regulations that follow the trend of imposing stricter corporate governance and financial reporting standards, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, have led to an increase in our costs of compliance |
| A failure to comply with these new laws and regulations may impact market perception of our financial condition, could materially harm our business and could cause the market price of our common stock to decline |
| Additionally, it is unclear what additional laws or regulations may develop, and we cannot predict the ultimate impact of any future changes |
| WE MUST SUCCESSFULLY EXECUTE OUR STRATEGY TO INTRODUCE NEW PRODUCTS One of our key strategies is to expand our addressable portion of the oscilloscope and protocol analysis markets by introducing new products such as sampling oscilloscopes and protocol exercisers and probes |
| We have in the past withdrawn product lines due to implementation and financial concerns |
| The success of our new product offerings will depend on a number of factors, including our ability to identify customers &apos existing and future needs properly and quickly, timely manufacture and deliver products that address these needs in sufficient volumes, differentiate offerings from competitors &apos offerings, price products competitively and anticipate competitors &apos developments of new products or technological innovations |
| WITHOUT THE TIMELY INTRODUCTION OF COMPETITIVE PRODUCTS, OUR PRODUCTS MAY BECOME TECHNOLOGICALLY OBSOLETE We generally sell our products in industries that are characterized by rapid technological changes, frequent new product announcements and introductions and changing industry standards |
| The development of new, technologically advanced products is a complex and uncertain process requiring high levels of innovation, highly skilled engineering and development personnel and accurate anticipation of technological and market trends |
| Consequently, product development delays are typical in our industry |
| If we fail to introduce competitive products in a timely manner, customers may defer placing orders in anticipation of future releases or may purchase products from competitors |
| Product development delays may result from numerous factors, including: o changing product specifications and customer requirements; o unanticipated engineering complexities; o difficulties with or delays by contract manufacturers or suppliers of key components or technologies; o difficulties in allocating engineering resources and overcoming resource limitations; and o difficulties in hiring and retaining necessary technical personnel |
| 24 Without the timely introduction of new products, services and enhancements, our products may become technologically obsolete, in which case our revenue and operating results could suffer |
| IF WE DEVOTE RESOURCES TO DEVELOPING PRODUCTS FOR EMERGING COMMUNICATIONS STANDARDS THAT ULTIMATELY ARE NOT WIDELY ACCEPTED, OUR BUSINESS COULD BE HARMED Our future growth depends, in part, upon our ability to develop, manufacture and sell in volume advanced verification systems for existing, emerging and yet unforeseen communications standards |
| We have little or no control over the conception, development or adoption of new standards |
| Moreover, even in relation to currently emerging standards, the markets are rapidly evolving and we have virtually no ability to impact the adoption of those standards |
| As a result, there is significant uncertainty as to whether markets for new and emerging standards ultimately will develop at all or, if they do develop, their potential size or future growth rate |
| We may incur significant expenses and dedicate significant time and resources to develop products for standards that fail to gain broad acceptance |
| Failure of a standard for which we devote substantial resources to gain widespread acceptance would likely harm our business |
| IF WE FAIL TO MAINTAIN AND EXPAND OUR RELATIONSHIPS WITH THE CORE OR PROMOTER COMPANIES IN OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY DEVELOPING AND MARKETING CERTAIN PROTOCOL ANALYZER PRODUCTS It is important to our success that we establish, maintain and expand our relationships with technology and infrastructure leader companies developing emerging communications standards in our target markets |
| We must work closely with these companies to gain valuable insights into new market demands, obtain early access to standards as they develop and help us design new or enhanced products |
| Generally, we do not enter into contracts obligating these companies to work or share their technology |
| Industry leaders could choose to work with other companies in the future |
| If we fail to establish, maintain and expand our industry relationships, we could lose first-mover advantage with respect to emerging standards and it would likely be more difficult for us to develop and market products that address these standards |
| RISKS RELATED TO OUR INDUSTRY WE OPERATE IN HIGHLY COMPETITIVE MARKETS AND THIS COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS The oscilloscope and protocol analysis markets are highly competitive and characterized by rapid and continual advances in technology |
| Our principal competitors in these markets are Tektronix and Agilent |
| Both of our principal competitors have substantially greater sales and marketing, development and financial resources |
| We believe that Tektronix, Agilent and other competitors each offer a wide range of products that attempt to address most sectors of the oscilloscope and many sectors of the protocol analysis markets |
| We have historically engaged in intense competition with Tektronix |
| Some of our senior managers, including our chief executive officer and chief operating officer, are former employees of Tektronix |
| In fiscal 1994, we settled litigation with Tektronix alleging that our oscilloscope products infringed certain patents held by Tektronix by entering into a license agreement for the right to use that intellectual property |
| In fiscal 2005, we settled intellectual property litigation with Tektronix in which both sides claimed patent infringement |
| This settlement is described in more detail in Note 22 to the Consolidated Financial Statements |
| We believe that the principal bases of competition in the oscilloscope and protocol analysis markets are a productapstas performance (bandwidth, sample rate, memory length and processing power), its price and quality, the vendorapstas name recognition and reputation, product availability and the quality of post-sale support |
| If any of our competitors surpass us or are perceived to have surpassed us with respect to one or more of these factors, we may lose customers |
| We also believe that our success will depend in part on our ability to maintain and develop the advanced technology used in our oscilloscope products and protocol analyzers and our ability to offer high-performance products timely and at a favorable "e price-to-performance "e ratio |
| We cannot assure that we will continue to compete effectively |
| 25 A PROLONGED ECONOMIC DOWNTURN COULD MATERIALLY HARM OUR BUSINESS BY DECREASING CAPITAL SPENDING Negative trends in the general economy, including trends resulting from actual or threatened military action by the United States and threats of terrorist attacks in the United States and abroad, could cause a decrease in capital spending in many of the markets we serve |
| In particular, a downward cycle affecting the computer and semiconductor, data storage devices, automotive and industrial, and military and aerospace markets would likely result in a reduction in demand for our products and would have a material adverse effect on our business, results of operations, financial condition and liquidity |
| In addition, if customers &apos markets decline, we may not be able to collect outstanding amounts due to us |
| Such declines could harm our consolidated financial position, results of operations, cash flows and stock price, and could limit our ability to maintain profitability |
| WE COULD BE AFFECTED BY GOVERNMENT REGULATION AND OTHER LEGAL UNCERTAINTIES We manufacture our products in the United States, and sell our products and purchase parts, components and sub-assemblies in a number of countries |
| We are therefore subject to various significant international, federal, state and local regulations, including but not limited to health and safety, product content, labor and import/export regulations |
| For example, the export of high-performance oscilloscopes from the United States is subject to regulation under the Treaty for Nuclear Non-Proliferation |
| These regulations are complex, change frequently and have tended to become more stringent over time |
| We may be required to incur significant expenses to comply with these regulations or to remedy violations of these regulations |
| Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations |
| In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products |