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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11906
MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2378738
- ------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
710 ROUTE 46 EAST, SUITE 206, FAIRFIELD, NEW JERSEY 07004
---------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(973) 808-3020
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 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 whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act ). Yes __ No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 11,912,958 shares
of common stock, no par value per share, at February 5, 2003.
PART I. FINANCIAL INFORMATION................................................................................... 3
Item 1. Financial Statements............................................................................. 3
Condensed Consolidated Balance Sheets (unaudited)....................................... 3
Condensed Consolidated Statements of Operations (unaudited)............................. 5
Condensed Consolidated Statements of Shareholders' Equity............................... 6
Condensed Consolidated Statements of Cash Flows (unaudited)............................. 7
Notes to Condensed Consolidated Financial Statements (unaudited)................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 36
Item 4. Controls and Procedures......................................................................... 37
PART II. OTHER INFORMATION...................................................................................... 38
Item 1. Legal Proceedings............................................................................... 38
Item 2. Changes in Securities and Use of Proceeds....................................................... 40
Item 6. Exhibits and Reports on Form 8-K................................................................ 41
SIGNATURES....................................................................................................... 44
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, MARCH 31,
($ IN THOUSANDS) 2002 2002
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,453 $ 3,760
Accounts receivable, trade, net of allowance for doubtful
accounts of $868 and $658, respectively 14,561 12,220
Inventories 15,309 16,026
Assets held for sale -- 36,632
Receivable from sale of Terraillon 1,377 --
Prepaid expenses and other current assets 2,734 2,088
------- -------
Total current assets 36,434 70,726
------- -------
PROPERTY AND EQUIPMENT, NET 12,169 14,287
------- -------
OTHER ASSETS:
Goodwill, net of accumulated amortization of $483 4,191 4,191
Other assets 416 408
------- -------
Total assets 4,607 4,599
------- -------
$53,210 $89,612
======= =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, MARCH 31,
($ IN THOUSANDS) 2002 2002
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ 9,207 $ 29,281
Accounts payable 11,772 13,232
Accrued compensation 1,641 1,435
Liabilities held for sale -- 12,800
Accrued expenses and other current liabilities 6,787 4,875
-------- --------
Total current liabilities 29,407 61,623
Other liabilities 1,016 1,162
-------- --------
Total liabilities 30,423 62,785
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Serial preferred stock; 221,756 shares authorized; none outstanding -- --
Common stock, no par value; 20,000,000 shares authorized; 11,912,958 and
11,864,958 shares issued and outstanding, respectively 5,502 5,502
Additional paid-in capital 43,068 42,346
Accumulated deficit (25,722) (20,586)
Accumulated other comprehensive loss (61) (435)
-------- --------
Total shareholders' equity 22,787 26,827
-------- --------
$ 53,210 $ 89,612
======== ========
See Notes to Condensed Consolidated Financial Statements
4
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the three months For the nine months
ended December 31 , ended December 31,
--------------------------- ----------------------------
($ in thousands, except share and per share amounts) 2002 2001 2002 2001
------------ ------------ ------------ ------------
As Restated As Restated
Note 3 Note 3
------------ ------------
Net sales $ 28,413 $ 26,549 $ 84,496 $ 76,085
Cost of goods sold 17,596 18,552 55,472 55,333
------------ ------------ ------------ ------------
Gross profit 10,817 7,997 29,024 20,752
------------ ------------ ------------ ------------
Operating expenses (income):
Selling, general and administrative 8,802 7,486 26,756 23,630
Research and development 433 1,573 1,997 4,568
Customer funded development (14) (439) (360) (1,338)
Goodwill and other impairments 779 779
Restructuring costs 96 -- 1,219 --
------------ ------------ ------------ ------------
Total operating expenses 9,317 9,399 29,612 27,639
------------ ------------ ------------ ------------
Operating income (loss) 1,500 (1,402) (588) (6,887)
Interest expense, net 425 686 1,770 2,658
Gain on sale of Wafer Fab (50) -- (159) --
Other expense (income) (10) (754) (160) (645)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting change 1,135 (1,334) (2,039) (8,900)
Income tax (benefit) 97 (14) 97 (56)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before cumulative
effect of accounting change 1,038 (1,320) (2,136) (8,844)
------------ ------------ ------------ ------------
Discontinued operations:
Income (loss) from operations of discontinued units -- (660) (3,910) (1,268)
Gain on disposition of discontinued units 570 -- 910 --
------------ ------------ ------------ ------------
Income (loss) from discontinued units 570 (660) (3,000) (1,268)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of accounting change 1,608 (1,980) (5,136) (10,112)
Cumulative effect of accounting change, net of taxes -- -- -- (248)
------------ ------------ ------------ ------------
Net income (loss) $ 1,608 $ (1,980) $ (5,136) $ (10,360)
============ ============ ============ ============
Income (loss) per common share - Basic and Diluted
Income (loss) from continuing operations $ 0.08 $ (0.11) $ (0.18) $ (0.88)
Income (loss) from discontinued units 0.05 (0.06) (0.25) (0.13)
Cumulative effect of accounting change -- -- -- (0.02)
------------ ------------ ------------ ------------
Net income (loss) $ 0.13 $ (0.17) $ (0.43) $ (1.03)
============ ============ ============ ============
Weighted average shares outstanding - Basic 11,912,958 11,562,000 11,908,336 10,085,000
============ ============ ============ ============
Weighted average shares outstanding - Diluted 12,230,213 11,562,000 11,908,336 10,085,000
============ ============ ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2002, AND THE NINE MONTHS ENDED DECEMBER 31, 2002
Retained
Additional Earnings Other
Common Paid-in (Accumulated Comprehensive Comprehensive
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Stock Capital Deficit) Loss Total Income (Loss)
----- ------- -------- ---- ----- -------------
BALANCE, APRIL 1, 2001 $ 5,502 $ 3,769 $ 8,461 $ (15) $ 17,717
Comprehensive loss, March 31, 2002:
Net loss -- -- (29,047) -- (29,047) $(29,047)
Currency translation adjustment -- -- -- (420) (420) (420)
--------
Comprehensive loss $(29,467)
========
Reversal of tax benefit on exercise
of options -- (1,534) -- -- (1,534)
2,530,000 common shares issued in
secondary offering, net of
expenses -- 30,874 -- -- 30,874
503,692 common shares issued upon
acquisition -- 6,800 -- -- 6,800
182,434 common shares issued upon
exercise of options -- 429 -- -- 429
315,492 common shares issued in
private placement -- 2,008 -- -- 2,008
-------- -------- -------- -------- --------
BALANCE, MARCH 31, 2002 5,502 42,346 (20,586) (435) 26,827
Comprehensive income (loss) (unaudited):
Net(loss)(unaudited) -- -- (5,136) -- (5,136) $ (5,136)
Currency translation adjustment(unaudited) -- -- -- 374 374 374
--------
Comprehensive (loss) (unaudited) $ (4,762)
========
Proceeds from exercise of stock options
(unaudited) -- 117 -- -- 117
Warrants issued for professional
service (unaudited) 153 -- -- 153
Warrants issued for debt (unaudited) -- 452 -- -- 452
-------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 (unaudited) $ 5,502 $ 43,068 $(25,722) $ (61) $ 22,787
======== ======== ======== ======== ========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE NINE MONTHS ENDED DECEMBER 31,
---------------------------
2002 2001
-------- --------
Note 3
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (5,136) (10,360)
Adjustments to reconcile net loss to net cash provided by operating activities
of continuing operations:
Loss from discontinued operations 3,910 1,268
Depreciation and amortization 2,622 3,046
Assets write off 668
Deferred rent -- 113
Warrants issued for professional services 153 --
Amortization of debt discount 304
Gain on sale of Wafer Fab (159) --
Gain on disposition of discontinued units (910) --
Net changes in operating assets and liabilities:
Accounts receivable, trade (2,341) (1,560)
Inventories 717 4,367
Prepaid expenses and other current assets (646) 1,182
Other assets (30) (351)
Accounts payable (1,460) (4,448)
Accrued expenses and other liabilities 1,969 685
-------- --------
Net cash provided by (used in) operating activities (339) (6,058)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,149) (4,690)
Proceeds from sale of Wafer Fab 3,300 --
Proceeds from sale of Terraillon 16,668 --
Cash received from receiver 892 --
Acquisition of business, net of cash acquired -- (10,669)
-------- --------
Net cash provided by (used in) investing activities 19,711 (15,359)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under bank line of credit agreement 2,450 21,135
Borrowing under bridge loan 8,848
Borrowings under capital lease -- 1,539
Repayments of capital lease obligations (162) (173)
Repayments of debt (31,512) (22,065)
Warrants issued for debt 452
Proceeds from exercise of options and warrants 117 429
Proceeds from issuance of common stock -- 30,984
-------- --------
Net cash provided by (used in) financing activities (19,807) 31,849
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS, CONTINUING OPERATIONS (435) 10,432
Effect of exchange rates 374 --
Cash used for discontinued operations (1,246) (10,159)
Cash and cash equivalents, beginning of period 3,760 466
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD 2,453 739
======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest 2,240 2,316
Income taxes -- 676
Noncash transactions
Common stock issued in connection with acquisition -- 6,800
Common stock subscription receivable -- 2,000
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. INTERIM FINANCIAL STATEMENTS:
Basis of presentation:
These interim financial statements were prepared pursuant to accounting
principles for interim financial information, the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and
Exchange Commission. Accordingly, while they conform with the measurement and
classification provisions of accounting principles generally accepted in the
United States, they do not include the footnote information required by
accounting principles generally accepted in the United States for annual
financial statements. Preparation of these financial statements requires
management to make estimates and assumptions, which affect the amounts reported.
Actual results could differ from those estimates. In the opinion of management,
all accrual adjustments and disclosures necessary to make these interim
financial statements not misleading have been included. Reference is made to the
annual financial statements included in the Company's Annual Report on Form 10-K
for the fiscal year ended March 31, 2002 as amended by Amendment No.1 thereto.
Operating results for the nine months ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2003.
Description of business:
Measurement Specialties, Inc., a New Jersey corporation ("MSI" or "the
Company"), is a designer and manufacturer of sensors and sensor-based consumer
products. The Company produces a wide variety of sensors that use advanced
technologies to measure precise ranges of physical characteristics, including
pressure, motion, force, displacement, angle, flow and distance. The Company has
a Sensor segment and a Consumer Products segment. The Sensor segment designs and
manufactures sensors for leading original equipment manufacturers for
electronic, automotive, medical, military and industrial applications. Sensor
products include pressure sensors, custom microstructures and accelerometers.
The Consumer Products segment designs and manufactures sensor based consumer
products, which are sold to leading retailers and distributors in both the
United States and Europe. Consumer products include bathroom and kitchen scales,
tire pressure gauges and distance estimators.
Liquidity and Going Concern:
The Company has incurred a net loss of $29,047 for the year ended March 31,
2002, and a net loss of $5,136 for the nine months ended December 31, 2002.
The Company is currently the defendant in a class action lawsuit and is also the
subject of a formal investigation being conducted by the Division of Enforcement
of the United States Securities and Exchange Commission, Further, the United
States Attorney for the District of New Jersey is conducting an inquiry into the
matters being investigated by the SEC. (See Note 10)
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements included in this report do not contain
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
Current Developments:
As a result of the Company's failure to timely file its Annual Report on Form
10-K for the fiscal year ended March 31, 2002, the trading of our common stock
on the American Stock Exchange (AMEX) was
8
suspended from July 15, 2002 until November 1, 2002. On August 21, 2002, the
Company received a letter from the AMEX indicating that the Company was no
longer in compliance with AMEX listing guidelines due to its failure to furnish
certain reports and information to shareholders and that the Company's
securities were, therefore, subject to being delisted from the AMEX. The Company
appealed that determination and requested a hearing.
In a letter dated December 27, 2002, the AMEX indicated that the pending hearing
was moot based on the determination by the staff of the AMEX that the Company
has evidenced compliance with applicable AMEX continued listing requirements.
Accordingly, the Company's hearing file with the AMEX has been closed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of MSI and its
wholly-owned subsidiaries (the "Subsidiaries"): Measurement Limited, organized
in Hong Kong ("ML"); Jingliang Electronics (Shenzhen) Co. Ltd. ("JL"), organized
in the People's Republic of China ("China"); IC Sensors Inc., a California
corporation ("IC Sensors"); Measurement Specialties, U.K. Limited ("Schaevitz,
UK"), organized in the United Kingdom; and Terraillon Holdings Limited,
organized in Ireland, and its wholly-owned subsidiaries ("Terraillon"); all
collectively referred to as the "Company." As discussed in Note 7, the Company
placed Schaevitz UK in receivership in June 2002 and sold Terraillon in
September 2002; accordingly, the results from these operations are reflected as
discontinued operations. All significant intercompany balances and transactions
have been eliminated.
Reclassifications:
Certain reclassifications have been made to conform prior years to the current
period's presentation.
Derivative Instruments:
The Company adopted SFAS 133, as amended, as of April 1, 2001. The cumulative
effect of the adoption of the accounting principle was $248 and was recorded in
the first quarter of the fiscal year ended March 31, 2002.
Recent Accounting Pronouncements:
In December 2002, the Financial Accounting Standards Board Issued Statement No.
148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123", ("SFAS 148"). SFAS 148 amends FASB
Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and
provides alternative methods for accounting for a change by registrants to the
fair value method of accounting for stock-based compensation. Additionally, SFAS
148 amends the disclosure requirements of SFAS 123 to require disclosure in the
significant accounting policy footnote of both annual and interim financial
statements of the method of accounting for stock-based compensation and the
related pro-forma disclosures when the intrinsic value method continues to be
used. The statement is effective for fiscal years beginning after December 15,
2002, and disclosures are effective for the first fiscal quarter beginning after
December 15, 2002. The Company has not completed the process of evaluating the
impact of adopting such statement and therefore the Company is unable to
disclose the impact that adopting such statement will have on its financial
position and the results of operations when such Statement is adopted.
On July 29, 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred, rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease
9
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. SFAS 146 is required to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company is currently
evaluating the impact of this standard.
The Company's current policy is to accrue restructuring and other costs at the
commitment date of a plan in accordance with the provisions of Emerging Issues
Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" and Staff Accounting
Bulletin No. 100, "Restructuring and Impairment Charges." Accordingly, the
Company has provided for certain restructuring costs during the year ended March
31, 2002 and the nine months ended December 31, 2002 (see Note 4).
The Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections," effective May
15, 2002. The Statement rescinds SFAS No. 4 which required all gains and losses
from extinguishment of debt to be aggregated and, when material, classified as
an extraordinary item net of related income tax effect. SFAS No. 145 also amends
Statement 13 to require that certain lease modifications having economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The Company does not expect this Statement will
have a material effect on its financial position or results of operations.
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," effective April 1, 2002. This standard supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The standard retains the previously existing
accounting requirements related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands on the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale.
The Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations,"
effective April 1, 2002. This standard addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated assets' retirement costs.
3. RESTATEMENT:
Based on the advice of its auditors and discussion with the Securities and
Exchange Commission, the Company determined it was necessary to conduct a
thorough re-examination of its historical determination of inventory values and
cost of goods sold. As a result of additional procedures employed, a number of
errors in the Company's historical inventory valuation relating to the
absorption of manufacturing costs were discovered. Various types of calculation
and application errors were found at each of the Company's business units. These
errors varied by quarter, type and cause. The errors and causes thereof are
included in the following general categories:
- Failure to analyze and account for standard cost variances properly
and on a timely basis;
- Failure to use readily available accounting and costing records to
determine manufacturing costs;
- Inclusion of inappropriate expenses in inventory cost pools;
- Apparent mathematical errors (including amounts used in calculations
that could not be reconciled to the Company's underlying accounting
records);
- Failure to adjust inventories to the lower of cost or market; and
10
- Use of inconsistent parameters to determine cost pools that relate
to inventory at each reporting period.
Accordingly, the Company has restated its financial statements for the fiscal
year ended March 31, 2001, its results of operations for the nine months ended
December 31, 2001 and its previously issued selected financial information for
each of the quarterly periods in the fiscal year ended March 31, 2001 and the
first three quarters in the fiscal year ended March 31, 2002. The effect of the
restatement was a reduction of our previously reported inventory values and
operating income and a corresponding increase to costs of goods sold aggregating
approximately $8,200 for the fiscal year ended March 31, 2001; an increase of
our previously reported inventory values and operating income and a
corresponding reduction to costs of goods sold aggregating approximately $11,418
for the three months ended December 31, 2001, and $6,746 for the nine months
ended December 31, 2001.
In connection with the restatement and due in part to the cessation of
operations of Arthur Andersen LLP, the previous auditors of the Company's
financial statements for the fiscal year ended March 31, 2001, the Company
requested its current auditors to conduct a reaudit of its financial statements
for the fiscal year ended March 31, 2001. The reaudit resulted in the following
additional adjustments for the three and nine months ended December 31, 2001:
reclassification of certain costs included in selling, general, and
administrative expenses to revenue of $364 and $833, respectively; amortization
of patents of $59 and $177, respectively; straight-lining of lease expense in
accordance with SFAS No. 13 of $14 and $113, respectively; and certain other
adjustments. As a result of the above adjustments, the Company recalculated its
tax provision resulting in a reduction of a previously reported tax benefit of
$1,992 for the three months ended December 31, 2001 and $2,775 for the nine
months ended December 31, 2001. In addition, the results of operations for the
three and nine months ended December 31, 2001 have been adjusted to reclassify
the results of discontinued operating units.
The following is a summary of the significant effects of the restatement of
results for the three and nine months ended December 31, 2001:
ADJUSTED FOR
PREVIOUSLY AS DISCONTINUED
REPORTED RESTATED OPERATIONS (1)
-------- -------- --------
Consolidated statements of operations data:
Sales $ 43,022 $ 42,658 $ 26,549
Cost of goods sold 42,602 31,184 18,552
Selling, general and administrative 11,318 10,189 7,486
Loss from continuing operations
before income taxes and cumulative
effect of accounting change (13,348) (1,990) (1,334)
Benefit for income taxes (2,002) (10) (14)
Loss from continuing operations
before cumulative effect of accounting change (11,346) (1,980) (1,320)
Loss from operations of discontinued units -- -- (660)
Net loss (11,346) (1,980) (1,980)
Loss per common share: --
Basic and Diluted (0.98) (0.17) (0.17)
11
NINE MONTHS ENDED DECEMBER 31, 2001
(UNAUDITED)
---------------------------------------------
AS RESTATED,
ADJUSTED FOR
PREVIOUSLY AS DISCONTINUED
REPORTED RESTATED OPERATIONS (1)
--------- --------- ---------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales $ 103,761 $ 102,928 $ 76,085
Cost of goods sold 83,960 77,214 55,333
Selling, general and administrative 29,578 28,197 23,630
Loss from continuing operations
before income taxes and cumulative
effect of accounting change (16,630) (10,161) (8,900)
Benefit for income taxes (2,824) (49) (56)
Loss from continuing operations
before cumulative effect of accounting change (13,806) (10,112) (8,844)
Loss from operations of discontinued units -- -- (1,268)
Loss from continuing operation before
cumulative effect of accounting change (13,806) (10,112) (10,112)
Cumulative effect of accounting change, net
of taxes -- (248) (248)
Net loss (13,806) (10,360) (10,360)
Loss per common share:
Basic and Diluted (1.37) (1.03) (1.03)
AS OF DECEMBER 31, 2001
(UNAUDITED)
-----------------------------------------
AS RESTATED,
ADJUSTED FOR
PREVIOUSLY AS DISCONTINUED
REPORTED RESTATED OPERATIONS (1)
-------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Inventories $ 28,486 $ 27,726 $ 18,312
Goodwill 21,902 14,707 7,572
Trademarks 0 9,930 453
Accrued expenses and other current liabilities 9,449 11,181 8,130
Other liabilities 748 861 847
Accumulated retained earnings 2,419 (1,899) (1,899)
Stockholders' equity 51,470 47,446 47,446
(1) The consolidated statement of operations data and consolidated balance sheet
data have been adjusted to reclassify the results of discontinued operating
units and assets and liabilities held for sale.
4. RESTRUCTURING AND OTHER COSTS:
During the quarter ended March 31, 2002, management and the Board of Directors
approved a plan of reduction of workforce and a reduction of operating capacity
at certain locations. The following table summarizes the restructuring charges:
12
Restructuring cost Payments made
for the during the Balance as of
Balance as of nine months ended nine months ended December 31,
March 31, 2002 December 31, 2002 December 31, 2002 2002
-------------- ----------------- ----------------- ----
Severance (106 employees) $ 85 $ -- $ (85) $ --
Severance (49 employees) -- 150 (150) --
Lease termination 839 (2) 837
------- ------- -------- -------
Total $ 85 989 $ (237) $ 837
======= ------- ======== =======
Write down of fixed assets 230
-------
Total $ 1,219
=======
5. INVENTORIES:
Inventories are summarized as follows:
DECEMBER 31, MARCH 31,
2002 2002
------- -------
RAW MATERIALS $ 6,373 $ 7,111
WORK-IN-PROCESS 2,770 1,986
FINISHED GOODS 6,166 6,929
------- -------
$15,309 $16,026
======= =======
6. LONG-TERM DEBT:
Bridge Loan
On October 31, 2002, the Company received a $9,300 bridge loan from Castletop
Capital, L.P., a limited partnership controlled by Morton Topfer, Chairman of
the Company's Board of Directors. The proceeds from this loan were used to repay
all of the Company's obligations under its previous term loan and revolving
credit facility. The loan is evidenced by a Senior Secured Note originally due
January 31, 2003 and does not include a revolving credit facility. Interest on
the note initially accrued at a rate of 7% per annum (subject to a 2% increase
upon the occurrence of an event of default under the note). Castletop Capital
also received a warrant to purchase up to 297,228 shares of the Company's common
stock for an exercise price equal to the average closing price of the Company's
common stock on the American Stock Exchange for the first five trading days
after October 31, 2002 ($1.64 per share). This warrant has a term of 5 years.
The exercise price and number of shares subject to the warrant may be adjusted
under certain circumstances (see Note 12 "Subsequent Events", for a discussion
of the amendment to this bridge loan).
The relative estimated fair value of the warrant of $452 was recorded as debt
discount, which is being charged to interest expense over the life of the debt.
Interest expense associated with the warrant of $304 was recorded for the three
months ended December 31, 2002.
13
7. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE, AND GAIN OR
LOSS ON SALE OF ASSETS:
As more fully discussed below, the Company sold all of the outstanding stock of
Terraillon, previously a component of the Company's Consumer segment, in
September 2002 and sold the assets, principally property and equipment, related
to its IC Sensors silicon wafer fab manufacturing operations, previously a
component of the Company's Sensor segment, in July 2002. The assets held for
sale in the amount of $36,632 at March 31, 2002 and liabilities held for sale in
the amount of $12,800 at March 31, 2002 represent the assets and liabilities
from these operations. Since these businesses were disposed of by December 31,
2002, the assets and liabilities have been removed from the balance sheet. The
amounts for Terraillon on the consolidated statements of operations for the
three and nine months ended December 31, 2002 and 2001 have been reclassified as
discontinued operations to reflect the disposal of this operating unit.
The Company placed its United Kingdom subsidiary, Schaevitz UK (previously a
component of the Company's Sensor segment), into receivership on June 5, 2002
pursuant to the terms of a Mortgage Debenture dated February 28, 2001, as the
Company was no longer in a position to support its losses. The receiver's
function was to dispose of Schaevitz UK's business and assets for the best price
possible. The book debt recoveries and sale proceeds were applied in settlement
of the receiver's remuneration, costs and expenses, the preferential creditors'
claims, (i.e., the claims of the Inland Revenue, Customs & Excise and employee
claims up to certain statutory limits) and then to (i) claims by the Company's
lenders in accordance with UK insolvency legislation (the Insolvency Act 1986)
and (ii) priority arrangements. Schaevitz UK's landlord has a potential
dilapidations claim of up to 350 Pounds Sterling (approximately $575 United
States dollars based on market exchange rates as of February 4, 2003) against
Schaevitz UK that arose on the expiration of the lease of 543/544 Ipswich Road
Trading Estate, Slough, Berkshire, England on June 23, 2002. The Company is
currently in negotiations with the landlord regarding this matter. The results
of operations of Schaevitz UK are reflected in discontinued operations from
April 1, 2002 through the June 5, 2002 date of liquidation. During the nine
months ended December 31, 2002, the Company incurred approximately $3,577 of
costs and expenses in connection with the liquidation of Schaevitz UK, which
consisted of writedown of prepaid pension costs of $2,309 and receiver and other
costs of $1,268. The amount recovered from the liquidation was approximately
$892.
In July 2002, the Company sold the assets, principally property and equipment,
related to its silicon wafer fab manufacturing operation in Milpitas, CA to
Silicon Microstructures, Inc. (SMI), a wholly-owned subsidiary of Elmos
Semiconductor AG. The wafer fab operation was formerly part of the Company's IC
Sensors division. The price paid by SMI for the assets was approximately $5,250,
consisting of approximately $3,370 in cash and $1,880 in prepaid credit for
products and services, subject to reduction under certain circumstances.
Approximately $900 of the cash purchase price was used to satisfy an outstanding
equipment lease obligation. The prepaid credit for products and services, if
utilized, will be accounted as a component of wafer costs. The gain on this sale
was approximately $159, net of tax, and has been reflected in the Condensed
Consolidated Statements of Operations as "Gain on Sale of Wafer Fab" for the
nine months ended December 31, 2002.
In September 2002, the Company sold all of the outstanding stock of Terraillon
Holdings Limited, a European manufacturer of branded consumer bathroom scales,
to Fukuda S.a.r.l, an investment holding company incorporated in Luxembourg, for
$22,300. On January 24, 2003, the Company received $1,384 of the funds that had
been placed in escrow at the time of closing to secure certain of the Company's
indemnification obligations. The estimated gain at the time of sale was
approximately $340, net of tax, and subject to further adjustments. As a result
of final settlement of escrowed amounts, the Company recorded an additional gain
of $265, as certain amounts previously provided for are no longer required.
14
The following is a summary of the components of assets and liabilities held for
sale:
Assets held for sale:
MARCH 31, 2002
----------------------------------------------------
Terraillon Schaevitz, UK Wafer Fab Total
------- ------- ------- -------
Cash and cash equivalents $ 401 $ 381 $- $ 782
Accounts receivable 5,735 1,959 -- 7,694
Inventories 6,023 920 -- 6,943
Other current assets 1,433 101 -- 1,534
------- ------- ------- -------
13,592 3,361 -- 16,953
------- ------- ------- -------
PROPERTY AND EQUIPMENT 1,883 -- 4,955 6,838
Less accumulated depreciation and
amortization 1,043 -- 1,737 2,780
------- ------- ------- -------
840 -- 3,218 4,058
------- ------- ------- -------
OTHER ASSETS:
Goodwill, net 4,074 -- -- 4,074
Trademarks 9,477 -- -- 9,477
Other assets -- 2,070 -- 2,070
------- ------- ------- -------
13,551 2,070 -- 15,621
------- ------- ------- -------
Total assets 27,983 5,431 3,218 36,632
------- ------- ------- -------
Liabilities held for sale:
Current portion of long-term debt 2,534 -- 943 3,477
Accounts payable 5,102 918 -- 6,020
Accrued compensation 537 98 -- 635
Accrued expenses and other currrent
liabilities 2,068 344 -- 2,412
------- ------- ------- -------
Total current liabilities 10,241 1,360 943 12,544
OTHER LIABILITIES:
Long-term debt, net of current portion 249 -- -- 249
Other liabilities 7 -- -- 7
------- ------- ------- -------
Total liabilities $10,497 $ 1,360 $ 943 $12,800
======= ======= ======= =======
15
A summary of the results of operations of the discontinued operating units
follows:
2001
------------------------------------------
TERRAILLON SCHAEVITZ, UK TOTAL
-------- -------- --------
Net sales $ 14,241 $ 1,868 $ 16,109
Cost of goods sold 10,917 1,715 12,632
-------- -------- --------
Gross profit 3,324 153 3,477
Operating expenses (income):
Selling, general and administrative 2,156 547 2,703
Research and development (41) 118 77
Restructuring costs -- -- --
-------- -------- --------
Total operating expenses 2,115 665 2,780
Operating income (loss) 1,209 (512) 697
Interest expense (income), net 14 (30) (16)
Other expense 587 782 1,369
-------- -------- --------
Income (loss) before income taxes 608 (1,264) (656)
Provision for income taxes
4 -- 4
-------- -------- --------
Net income (loss) from discontinued operations $ 604 $ (1,264) $ (660)
======== ======== ========
FOR THE NINE MONTHS ENDED DECEMBER 31,
----------------------------------------------------------------------------
2002 2001
----------------------------------- -------------------------------------
TERRAILLON SCHAEVITZ, UK TOTAL TERRAILLON SCHAEVITZ, UK TOTAL
-------- -------- -------- -------- -------- --------
Net sales $ 18,678 $ 905 $ 19,583 $ 21,310 $ 5,533 $ 26,843
Cost of goods sold 13,244 617 13,861 16,617 5,264 21,881
-------- -------- -------- -------- -------- --------
Gross profit 5,434 288 5,722 4,693 269 4,962
Operating expenses :
Selling, general and administrative 5,835 149 5,984 3,298 1,269 4,567
Research and development -- 68 68 -- 361 361
Restructuring costs -- 3,577 3,577 -- -- --
-------- -------- -------- -------- -------- --------
Total operating expenses 5,835 3,794 9,629 3,298 1,630 4,928
Operating income (loss) (401) (3,506) (3,907) 1,395 (1,361) 34
Interest expense, net (25) 2 (23) 22 (30) (8)
Other (income) expense 27 (7) 20 536 767 1,303
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes (399) (3,511) (3,910) 837 (2,098) (1,261)
Provision for income taxes -- -- -- 7 -- 7
-------- -------- -------- -------- -------- --------
Net income (loss) from discontinued operations $ (399) $ (3,511) $ (3,910) $ 830 $ (2,098) $ (1,268)
======== ======== ======== ======== ======== ========
(1) Terraillon was acquired in August 2001.
16
8. PER SHARE INFORMATION AND STOCK OPTION ISSUED:
Basic per share information is computed based on the weighted average common
shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or conversion
of stock options and warrants, less the shares that may be repurchased with the
funds received from their exercise. Diluted earnings per share is not presented
in fiscal periods for which the results are antidilutive. Excluded from earnings
per share is 183,030 equivalent shares for the nine months ended December 31,
2002 and 365,605 and 475,660 equivalent shares for the three and nine months
ended December 31, 2001, respectively, as their inclusion would be antidilutive.
For the three months ended December 31, 2002, a total of 317,255 equivalent
shares were added to the common shares outstanding to arrive at diluted earnings
per share. The breakdown of these additional equivalent shares is 200,225
equivalent shares for warrants, and 117,030 equivalent shares for stock options.
In November 2002, the Company issued approximately 839,000 employee stock
options. These options were issued under the 1995 and 1998 option plans. These
options have a four year vesting schedule with an exercise price of $1.64 per
share (the fair value per share of our common stock on the day of issuance).
9. SEGMENT INFORMATION:
The Company has two businesses (segments), a Sensor business and a Consumer
Products business.
The Company's Sensor business designs, manufactures, and markets sensors for
original equipment manufacturer applications. These products include pressure
sensors, custom microstructures, accelerometers, tilt/angle sensors, and
displacement sensors for electronic, automotive, military, and industrial
applications.
The Company's Consumer Products business manufactures and markets sensor-based
consumer products. These products include bathroom and kitchen scales, tire
pressure gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive, and ultrasonic
technologies.
Segment data have been presented on a basis consistent with how business
activities are reported internally to management.
The accounting policies of the segments are substantially the same as those
described in Note 1.
The Company has no material intersegment sales.
The following comparisons reflect the result from continuing operations.
The following is information related to industry segments:
17
THREE MONTHS ENDED DECEMBER 31,
----------------------
2002 2001
-------- --------
Net sales
Consumer Products $ 14,812 $ 14,207
Sensors 13,601 12,342
-------- --------
Total 28,413 26,549
-------- --------
Operating income (loss)
Consumer Products 2,496 1,668
Sensors 4,008 (1,559)
-------- --------
Total segment operating income (loss) 6,504 109
Unallocated expenses (5,004) (1,511)
-------- --------
Total operating income (loss) 1,500 (1,402)
Interest expense, net of interest income 425 686
Gain on sale of wafer fab (50)
Other income (10) (754)
-------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of
accounting change $ 1,135 $ (1,334)
======== ========
NINE MONTHS ENDED DECEMBER 31,
----------------------
2002 2001
-------- --------
Net sales
Consumer Products $ 44,451 $ 38,317
Sensors 40,045 37,768
-------- --------
Total 84,496 76,085
-------- --------
Operating income (loss)
Consumer Products 7,254 2,631
Sensors 4,611 (6,394)
-------- --------
Total segment operating income (loss) 11,865 (3,763)
Unallocated expenses (12,453) (3,124)
-------- --------
Total operating loss (588) (6,887)
Interest expense, net of interest income 1,770 2,658
Gain on wafer fab sales (159)
Other income (160) (645)
-------- --------
Loss from continuing operations before
income taxes and cumulative effect of
accounting change $ (2,039) $ (8,900)
======== ========
18
DECEMBER 31, MARCH 31,
2002 2002
------- -------
Segment Assets
Consumer products $15,008 $15,634
Sensors 34,233 35,152
Unallocated 2,592 2,194
Assets held for sale -- 36,632
Receivable from sale of Terraillon 1,377
------- -------
Total $53,210 $89,612
======= =======
10. COMMITMENTS AND CONTINGENCIES:
CLASS ACTION LAWSUIT
On March 20, 2002, a class action lawsuit was filed on behalf of purchasers of
the Company's common stock in the United States District Court for the District
of New Jersey against Measurement Specialties and certain present and former
officers and directors. The complaint was subsequently amended to include the
underwriters in the Company's August 2001 public offering and former auditors.
The lawsuit alleges violations of the federal securities laws including, among
other things, that the registration statement related to the Company's August
2001 public offering and the Company's periodic SEC filings misrepresented or
omitted material facts and that certain of the Company's officers made false or
misleading statements of material fact. The lawsuit seeks an unspecified award
of money damages. After March 20, 2002, nine additional similar class actions
were filed in the same court. The ten lawsuits have been consolidated into one
case under the caption In re: Measurement Specialties, Inc. Securities
Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs filed a Consolidated Amended
Complaint on September 12, 2002. The underwriters have made a claim for
indemnification under the underwriting agreement. The parties are currently
briefing motions to dismiss the case.
The Company intends to defend the foregoing lawsuit vigorously, but cannot
predict the outcome and is not currently able to evaluate the likelihood of
success or the range of potential loss, if any. However, if the Company were to
lose this lawsuit, judgment would likely have a material adverse effect on its
consolidated financial position, results of operations and cash flows. Although
the Company has Directors and Officers insurance policies that provide aggregate
coverage of $10,000 for the period during which the claims were filed, the
Company's carrier has denied coverage for this matter. The Company intends to
contest this position. No assurance, however, can be given that this insurance
coverage will be available or adequate to cover losses, if any, arising out of
this litigation.
SEC INVESTIGATION
In February 2002, Measurement Specialties, Inc., contacted the staff of the SEC
after discovering that its former Chief Financial Officer had made the
misrepresentation to senior management, the Board and the Company's auditors
that a waiver of the covenant default under the Company's credit agreement had
been obtained when, in fact, the lenders had refused to grant such a waiver.
Since February 2002, the Company and a Special Committee formed by its Board of
Directors has been cooperating with the staff of the SEC. In June 2002, the
staff of the Division of Enforcement of the SEC informed the Company that it is
conducting a formal investigation relating to matters reported in the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 2001. The
Company cannot predict how long the SEC investigation will continue or its
outcome.
19
UNITED STATES ATTORNEY INQUIRY
The Company has also learned that the Office of the United States Attorney for
the District of New Jersey is conducting an inquiry into the matters that are
being investigated by the SEC. The Company cannot predict how long the United
States Attorney's inquiry will continue or its outcome.
OTHER LITIGATION
In re Service Merchandise Company, Inc. (Service Merchandise Company, Inc. v.
Measurement Specialties, Inc.), United States Bankruptcy Court for the Middle
District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro. No.
301-0462A.
The Company is currently the defendant in a lawsuit filed in March 2001 by
Service Merchandise Company, Inc. ("SMC") and its related debtors (collectively,
the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
The Bankruptcy Court entered a stay of the action in May 2001, which was lifted
in February 2002. Citing 11 U.S.C. Section 547(b), the action alleges that the
Company received $645 from one or more of the Debtors during the ninety (90) day
period before the Debtors filed their bankruptcy petitions, that the transfers
were to the Company's benefit, were for or on account of an antecedent debt owed
by one or more of the Debtors, made when one or more of the Debtors were
insolvent, and that the transfers allowed the Company to receive more than it
would have received if the cases were cases under Chapter 7 of the United States
Bankruptcy Code. The action seeks to disgorge the sum of $645 from the Company.
It is not possible at this time to predict the outcome of the litigation or
estimate the extent of any damages that could be awarded in the event that the
Company is found liable to the estates of SMC or the other Debtors.
Robert L. DeWelt v. Measurement Specialties, Inc. et al., United States District
Court, District of New Jersey, Civil Action No. 02-CV-3431.
On July 17, 2002, Robert DeWelt, the Company's former acting Chief Financial
Officer and general manager of the Company's Schaevitz Division, filed a lawsuit
against Measurement Specialties, Inc. and certain of the Company's officers and
directors. Mr. DeWelt resigned on March 26, 2002 in disagreement with
management's decision not to restate certain of our financial statements. See
"Restatement" below for a discussion of Mr. DeWelt's resignation. The lawsuit
alleges a claim for constructive wrongful discharge and violations of the New
Jersey Conscientious Employee Protection Act. Mr. DeWelt seeks an unspecified
amount of compensatory and punitive damages. The Company has filed a Motion to
Dismiss this case. The Company intends to defend the foregoing lawsuit
vigorously, but cannot predict the outcome and is not currently able to evaluate
the likelihood of success or the range of potential loss, if any.
Hibernia Litigation
On or about July 23, 2002, Hibernia Capital Partners I, ilp and Hibernia Capital
Partners II, ilp filed a lawsuit against Measurement Specialties in the High
Court of Dublin. The Plenary Summons states that plaintiffs seek a declaration
that the plaintiffs entered into the share purchase agreement on June 7, 2001
for the sale of their shares in Terraillon Holdings Limited to Measurement
Specialties as a result of an operative misrepresentation and misstatement.
Plaintiffs further seek damages for misrepresentation and/or breach of contract
and/or breach of warranty and costs of the proceedings. On August 9, 2002, the
Company entered an Appearance, which is the equivalent of the acceptance of
service of process. On August 22, 2002, plaintiffs filed a Statement of Claim,
which is the equivalent of a complaint. The Company is still engaged in the
initial pleadings process wherein plaintiffs' claims and our defenses will be
set forth in detail. The Company intends to defend the foregoing lawsuit
vigorously, but cannot predict the outcome and are not currently able to
evaluate the likelihood of success or the range of potential loss, if any.
20
Semex, Inc. vs. Measurement Specialties, Inc. and AMP Incorporated, Court of
Common Pleas, Montgomery County, Pennsylvania.
On October 24, 2002, Semex, Inc. ("Semex") filed a lawsuit against Measurement
Specialties, Inc. and Amp Incorporated alleging breaches of the lease for the
Company's former facility in the Valley Forge, Pennsylvania. The Company is the
assignee of Amp Incorporated under the lease. The plaintiff alleges that the
Company owes at least $770,166 for certain payment defaults under the lease. The
plaintiff also seeks an unspecified amount of damages related to plaintiff's
allegations of, among other things, damage to the property, failure to remove
alterations and failure to conduct environmental testing. At this point in the
litigation, the Company cannot predict its outcome.
Czarnek & Orkin Laboratories, Inc. v. TRW, Inc. and Measurement Specialties,
Inc.
Czarnek & Orkin Laboratories, Inc. ("Orkin") submitted a demand for arbitration
with the American Arbitration Association on July 8, 2002. The demand indicates
that Orkin is seeking approximately $2,000,000 in royalty revenue. At issue is a
license agreement relating to the expected development and marketing of certain
sensor technology. The arbitration is scheduled to be held during the week of
February 10, 2003. At this point in the arbitration, the Company cannot predict
its outcome.
From time to time, we are subject to other legal proceedings and claims in the
ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
11. RELATED PARTY TRANSACTIONS:
In May 2002, the Company retained Corporate Revitalization Partners ("CRP") to
conduct its ongoing operational/financial restructuring efforts. In June 2002,
Frank Guidone, a Managing Director of CRP, became the Company's chief executive
officer. As of December 31, 2002 and as of February 1, 2003 on a cumulative
basis, the Company has incurred $1,879 and $2,110, respectively, in consulting
fees and expenses to CRP (excluding the success fees described in this
paragraph). In addition to consulting fees based on hours billed by CRP
consultants (at hourly rates that range from $0.175 to $0.275 and that are
capped at a maximum of 50 hours per consultant each week), CRP earned an
aggregate "success fee" of $138 ($0.38 was unpaid as of February 1, 2003) and
warrants exercisable to purchase an aggregate of 120,615 shares of the Company's
common stock (at an exercise price of $2.28/share) as a result of the
achievement of certain goals in connection with the Company's restructuring
program.
During the three and nine months ended December 31, 2002, the Company expensed
$0 and $153, respectively, relating to the CRP warrants.
See Note 6 for a discussion of the bridge loan from Castletop Capital, L.P., a
limited partnership controlled by Morton L. Topfer, Chairman of the Company's
Board of Directors.
12. SUBSEQUENT EVENTS:
REVOLVING CREDIT FACILITY
21
On January 31, 2003, the Company entered into a $15 million revolving credit
facility with Fleet Capital Corporation ("FCC"). The revolving credit facility
is secured by a lien on substantially all of the Company's assets. Interest
accrues on the principal amount of the Company's borrowings under this facility
at a fluctuating rate per year equal to the lesser of FCC's prime rate for
commercial loans plus one percent (subject to a two percent increase upon the
occurrence of an event of default under the loan agreement) or the maximum rate
permitted by applicable law. As of February 5, 2003, the interest rate
applicable to borrowings under the revolving credit facility was 5.25 percent.
The amount of borrowing available under the revolving credit facility is
determined in accordance with a formula based on certain of the Company's
accounts receivable and inventory. The revolving credit facility expires on
February 1, 2006. As of February 5, 2003, the Company had $4,618 of available
cash. In addition, as of February 5, 2003, there was $6,899 in outstanding
borrowings and the Company had the right to borrow an additional $2,123 under
the revolving credit facility.
The Company's revolving credit agreement requires it to meet certain financial
covenants during the term of the revolving credit facility. In addition to
certain affirmative and negative covenants, which include a restriction on the
payment of dividends, the Company is required to maintain a borrowing
availability of at least $2,000 through the filing of its quarterly report on
Form 10-Q for the three months ending June 30, 2003. In addition, beginning in
the same fiscal quarter, the Company is required to keep a minimum fixed charge
ratio of 1.0 to 1 at the end of each fiscal quarter. Fixed charge ratio is
defined as operating cash flow, which is EBITDA (earnings before interest,
taxes, depreciation and amortization) minus cash taxes paid and minus capital
expenditures, divided by the sum of scheduled principle payments and interest
expense during that period.
AMENDMENT TO BRIDGE LOAN (SEE NOTE 6)
We used a portion of the proceeds from the revolving credit facility to reduce
the principal amount outstanding under the bridge loan from $9,300 to $2,000.
Also, in connection with the revolving credit facility transaction, the terms of
the bridge loan were amended as follows:
- The maturity date of the Castletop note was extended to January 31,
2005;
- The non-default interest rate under the bridge loan was increased to
11%; and
- The security interest and rights of Castletop under the bridge loan
agreement were subordinated to those of FCC.
There were no amendments to the warrant issued as part of the bridge loan
transaction.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following discussion of our results of operations and financial condition
should be read together with the other financial information and consolidated
financial statements and related notes included in this Quarterly Report on Form
10-Q. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of factors.
Our fiscal year begins on April 1 and ends on March 31. References in this
report to the year 2002 or fiscal 2002 refer to the 12-month period from April
1, 2001 through March 31, 2002 and references in this report to the year 2003 or
fiscal 2003 refer to the 12-month period from April 1, 2002 through March 31,
2003.
OVERVIEW
22
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics, including pressure, motion,
force, displacement, tilt/angle, flow, and distance. We have two businesses, a
Sensor business and a Consumer Products business.
Our Sensor business designs, manufactures, and markets sensors for original
equipment manufacturer applications. These products include pressure sensors,
custom microstructures, accelerometers, tilt/angle sensors, and displacement
sensors for electronic, automotive, medical, military, and industrial
applications. Our Sensor business customers include leading manufacturers such
as Alaris Medical, Texas Instruments, Allison Transmission, Althen GmbH, and
Graco.
Our Consumer Products business manufactures and markets sensor-based consumer
products. These products include bathroom and kitchen scales, tire pressure
gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive, and ultrasonic
technologies. Our Consumer Products customers include leading retailers such as
Bed Bath & Beyond, Linens 'n Things, Sears, Costco and Target, and European
resellers such as Laica, Ole Bodtcher Hanson, and Babyliss.
RESTATEMENT
Background - Examination of Inventory Valuation; Capitalized Overhead
Calculations
In August 2001, we determined that the implementation of a more comprehensive
and standardized cost accounting system was necessary as a result of the
expansion of our company through recent acquisitions, and we hired an
experienced cost accountant, Robert DeWelt, to, among other things, implement
this system. This process included updating standard inventory costs at two of
our locations. After review and analysis, management, in November 2001,
completed the update of standard costs for these two locations and revised the
estimated capitalized overhead calculations used in valuing the inventory
located there, but concluded that a more complete analysis, including an
examination of inventory valuation at our other locations, was necessary. The
review process also raised questions regarding the appropriateness of our
inventory costing methodology.
After the termination of our Chief Financial Officer in February 2002, we
briefly retained PricewaterhouseCoopers (PwC) as a consultant with regard to the
appropriateness of our inventory costing methodology, including specifically the
methodology used in allocating fixed manufacturing expenses to inventory and
cost of sales. PwC was not engaged to, nor did they, reach a conclusion or
render any type of opinion regarding this matter. Additionally, because of PwC's
limited role, they were not involved in our final resolution of this issue.
In February 2002, our Board formed a Special Committee consisting of all of our
outside directors. The Special Committee performed a limited review of the
appropriateness of our inventory valuation methodology, including whether a
misapplication of accounting principles would require a restatement of
previously reported financial statements. The Special Committee retained
independent counsel to assist in its investigation and, through its independent
counsel, retained RosenfarbWinters, LLC as special accounting advisors to the
Special Committee.
Initial Decision Not to Restate Financial Statements for Periods Prior to
December 31, 2001
In March 2002, management initially determined that the calculation of
capitalized overhead was in compliance with applicable accounting principles and
concluded that the increase in cost of sales and attendant reduction in
inventory value during the quarter ended December 31, 2001 was largely
attributable to changes in accounting estimates relating to the general
absorption of direct labor and overhead costs and therefore no restatement of
previously reported financial results was necessary. This determination was
based on management's belief that the calculation was appropriately capturing
direct labor and overhead costs. Robert DeWelt (who had been temporarily given
the title of "Acting CFO"
23
after the termination of our former Chief Financial Officer, Kirk Dischino) and
Edward McCausland, our Controller, resigned in disagreement with management's
conclusion not to restate prior period financial statements.
We subsequently retained Amper, Politziner and Mattia, PC (APM) in April 2002 to
assist and work under the direction of management in our analysis and
quantification of inventory calculations and to consult as to whether or not any
errors in the application of accounting principles or in the preparation of our
financial statements required restatement of previously reported financial
statements.
In May 2002, management again determined that the calculation of capitalized
overhead was in compliance with applicable accounting principles and concluded
that the increase in cost of sales and attendant reduction in inventory value
during the quarter ended December 31, 2001 was largely attributable to changes
in accounting estimates and therefore no restatement of previously reported
financial results was necessary. Our Board of Directors concurred in the
decision not to restate prior periods. In its limited review, the Special
Committee concluded that no information had been brought to its attention that
would render management's decision inappropriate. APM, RosenfarbWinters, and our
independent auditor, Arthur Andersen LLP, concurred in this conclusion. PwC's
engagement ended prior to the completion of our analysis and the Board's
determination.
Decision to Restate
On June 11, 2002, we retained Grant Thornton LLP to replace Arthur Andersen LLP
as our independent auditor. We appointed a new Chief Executive Officer in June
2002 and appointed a new Chief Financial Officer in July 2002. Based upon the
advice of our new auditor and after consultation with the United States
Securities and Exchange Commission, our new senior management team determined
that it was necessary to conduct a thorough re-examination of our historical
determination of inventory values and costs of goods sold. Beginning in July
2002, we concurred with our auditor's recommendation to expand the scope of
their audit work to include an extended analysis of our inventory valuation
calculations. As part of our auditor's procedures, they obtained detailed
operating and production data for our operating units, validated the underlying
data and applied the resulting data to assist new senior management in the
accurate determination of inventories valued at the lower of cost or estimated
market value. As a result of these procedures, our auditors discovered a number
of errors in our inventory valuation calculations.
There were various types of calculation and application errors at each of our
business units. These errors varied by quarter, type and cause. The errors and
causes thereof are included in the following general categories:
- Failure to analyze and account for standard cost variances properly
and on a timely basis;
- Failure to use readily available accounting and costing records to
determine manufacturing costs;
- Inclusion of inappropriate expenses in inventory cost pools;
- Apparent mathematical errors (including amounts used in calculations
that could not be reconciled to our underlying accounting records);
- Failure to adjust inventories to the lower of cost or market; and
- Use of inconsistent parameters to determine cost pools that relate
to inventory at each reporting period.
We determined that these errors in our valuation of inventory were of a
sufficient magnitude to require restatement. Accordingly, we restated our
previously issued financial statements for the fiscal year ended March 31, 2001
and our previously issued selected financial information for each of the
quarterly periods in the fiscal year ended March 31, 2001 and the first three
quarters in the fiscal year ended March 31,
24
2002. The effect of the restatement was an increase in cost of goods sold
aggregating approximately $8,200 for the fiscal year ended March 31, 2001, an
increase of our previously reported inventory values and operating income and a
corresponding reduction to cost of goods sold aggregating approximately $11,418
for the three months ended December 31, 2001, and $6,746 for the nine months
ended December 31, 2001. During the course of our review, we did not identify
errors of a significant magnitude to require restatement of periods ending prior
to April 1, 2000.
In connection with the restatement of our inventory and cost of sales values,
and due in part to the cessation of operations of Arthur Andersen LLP, the
previous auditor of our financial statements for the fiscal year ended March 31,
2001, we instructed our current auditor to conduct a reaudit of our financial
statements for the fiscal year ended March 31, 2001. The reaudit and the audit
for the fiscal year ended March 31, 2002 resulted in the following additional
adjustments to the previously reported results for the three and nine months
ended December 31, 2001, respectively:
- Reclassification of certain promotional costs from selling, general
and administrative to a reduction in revenue of $364 and $833;
- Amortization of patents in the amount of $59 and $177;
- Straight-lining of lease expense in accordance with SFAS 13 in the
amount of $14 and $113; and
- Certain other adjustments.
As a result of the restated items described above, including the inventory
valuation issue, we recomputed our tax provision for the three and nine months
ended December 31, 2001, resulting in a reduction of our previously reported tax
benefit by $1,992 and $2,775, respectively.
The following is a summary of the significant effects of the restatement
discussed above on our results for the three and nine months ended December 31,
2001:
THREE MONTHS ENDED DECEMBER 31, 2001
(UNAUDITED)
---------------------------------------------
AS RESTATED,
ADJUSTED FOR
PREVIOUSLY AS DISCONTINUED
REPORTED RESTATED OPERATIONS(1)
-------- -------- --------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales $ 43,022 $ 42,658 $ 26,549
Cost of goods sold 42,602 31,184 18,552
Selling, general and administrative 11,318 10,189 7,486
Loss from continuing operations
before income taxes and cumulative
effect of accounting change (13,348) (1,990) (1,334)
Benefit for income taxes (2,002) (10) (14)
Loss from continuing operations
before cumulative effect of accounting
change (11,346) (1,980) (1,320)
Loss from operations of discontinued units -- -- (660)
Net loss (11,346) (1,980) (1,980)
Loss per common share: --
Basic and Diluted (0.98) (0.17) (0.17)
25
NINE MONTHS ENDED DECEMBER 31, 2001
(UNAUDITED)
--------------------------------------------
AS RESTATED,
ADJUSTED FOR
PREVIOUSLY AS DISCONTINUED
REPORTED RESTATED OPERATIONS(1)
-------- -------- --------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales $ 103,761 $ 102,928 $ 76,085
Cost of goods sold 83,960 77,214 55,333
Selling, general and administrative 29,578 28,197 23,630
Loss from continuing operations
before income taxes and cumulative
effect of accounting change (16,630) (10,161) (8,900)
Benefit for income taxes (2,824) (49) (56)
Loss from continuing operations
before cumulative effect of accounting change (13,806) (10,112) (8,844)
Loss from operations of discontinued units -- -- (1,268)
Loss from continuing operation before
cumulative effect of accounting change (13,806) (10,112) (10,112)
Cumulative effect of accounting change, net
of taxes -- (248) (248)
Net loss (13,806) (10,360) (10,360)
Loss per common share:
Basic and Diluted (1.37) (1.03) (1.03)
AS OF DECEMBER 31, 2001
(UNAUDITED)
-----------------------------------------
AS RESTATED,
ADJUSTED FOR
PREVIOUSLY AS DISCONTINUED
REPORTED RESTATED OPERATIONS(1)
-------- -------- --------------
CONSOLIDATED BALANCE SHEET DATA:
Inventories $ 28,486 $ 27,726 $ 18,312
Goodwill 21,902 14,707 7,572
Trademarks 0 9,930 453
Accrued expenses and other current
liabilities 9,449 11,181 8,130
Other liabilities 748 861 847
Accumulated retained earnings 2,419 (1,899) (1,899)
Stockholders' equity 51,470 47,446 47,446
26
(1) The consolidated statement of operations data and consolidated balance sheet
data have been adjusted to reclassify the results of discontinued operating
units.
See "Item 4. Controls and Procedures" for a discussion of the actions that we
have taken to strengthen our internal controls.
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING OUR RESTRUCTURING PROGRAM
IN CONNECTION WITH OUR RESTRUCTURING PROGRAM, WE HAVE DISCONTINUED CERTAIN
OPERATIONS AND SOLD ASSETS SINCE MARCH 31, 2002 AND MAY, IN THE FUTURE, ENGAGE
IN ADDITIONAL SALES OF ASSETS OR STOCK OR OBTAIN OTHER TYPES OF FINANCING.
ACCORDINGLY, THE HISTORICAL RESULTS OF OPERATIONS PRESENTED HEREIN ARE UNLIKELY
TO BE INDICATIVE OF FUTURE PERFORMANCE.
SPECIAL NOTE REGARDING RESTATEMENT OF OUR PREVIOUSLY ISSUED FINANCIAL STATEMENTS
WE HAVE RESTATED OUR PREVIOUSLY ISSUED FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDED MARCH 31, 2001, AND OUR PREVIOUSLY ISSUED FINANCIAL RESULTS FOR EACH OF
THE QUARTERLY PERIODS IN THE FISCAL YEAR ENDED MARCH 31, 2001 AND THE FIRST
THREE QUARTERS IN THE FISCAL YEAR ENDED MARCH 31, 2002 (COLLECTIVELY, THE
"RESTATEMENT PERIOD").
YOU SHOULD NOT RELY ON DISCUSSIONS OF RESULTS OF OPERATIONS AND TRENDS AFFECTING
OUR BUSINESS FOR THE RESTATEMENT PERIOD THAT APPEAR IN OUR SEC FILINGS MADE
PRIOR TO THE FILING OF OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
MARCH 31, 2002 AS AMENDED BY AMENDMENT NO.1 THERETO.
AS A RESULT OF THE RESTATEMENT, OUR HISTORICAL RESULTS OF OPERATIONS DIFFER
SIGNIFICANTLY FROM THOSE CONTAINED IN OUR REPORTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION PRIOR TO THE FILING OF OUR ANNUAL REPORT ON FORM 10-K FOR
THE FISCAL YEAR ENDED MARCH 31, 2002 AS AMENDED BY AMENDMENT NO.1 THERETO.
ACCORDINGLY, YOU SHOULD NOT RELY ON THOSE PREVIOUS DISCUSSIONS OF OUR RESULTS OF
OPERATIONS AND TRENDS AFFECTING OUR BUSINESS, SINCE SUCH DISCUSSIONS WERE BASED
ON FINANCIAL RESULTS THAT HAVE NOW BEEN RESTATED. WE DO NOT INTEND TO MAKE
ADDITIONAL FILINGS TO CORRECT THE HISTORICAL DISCUSSIONS OF RESULTS OF
OPERATIONS AND TRENDS AFFECTING OUR BUSINESS.
27
The following table sets forth, for the periods indicated, certain items in our
consolidated statements of income as a percentage of net sales:
Three months ended December 31,
-------------------------------
2002(1) 2001(1)
-------- --------
Net Sales
Sensors 47.9% 46.5%
Consumer products 52.1 53.5
-------- --------
Total net sales 100.0 100.0
Cost of Sales 61.9 69.9
-------- --------
Gross profit 38.1 30.1
Operating expenses (income)
Selling, general, and administrative 31.0 28.2
Research and development 1.5 5.9
Customer funded development -- (1.7)
Goodwill and Other Impairments -- 2.9
Restructuring costs 0.3 --
Interest expense, net 1.5 2.6
Other expenses (income) (0.2) (2.8)
-------- --------
34.1 35.1
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting change 4.0 (5.0)
Income tax provision (0.3) 0.0
Income (loss) from discontinued units 2.0 (2.5)
-------- --------
Net income (loss) 5.7% (7.5)%
======== ========
(1) The consolidated financial statements for the three months ended December
31, 2002 include the results of the ongoing operations of Measurement
Specialties, Inc. As a result of our restructuring plan, we sold all of the
outstanding stock of Terraillon in September 2002 and placed Schaevitz UK into
receivership in June 2002. Accordingly, Terraillon and Schaevitz UK are
classified as discontinued operations in the consolidated financial results for
all periods presented. The comparisons above exclude the results of these
discontinued operations, except for "Income (loss) from discontinued units,"
"Cumulative effect of accounting change, net of tax" and "Net income (loss)."
28
Nine months ended December 31,
------------------------------
2002(1) 2001(1)
-------- --------
Net Sales
Sensors 47.4% 49.6%
Consumer products 52.6 50.4
-------- --------
Total net sales 100.0 100.0
Cost of Sales 65.7 72.7
-------- --------
Gross profit 34.3 27.3
Operating expenses (income)
Selling, general, and administrative 31.6 31.1
Research and development 2.4 6.0
Customer funded development (0.4) (1.8)
Goodwill and Other Impairments -- 1.0
Restructuring costs 1.4 --
Interest expense, net 2.1 3.5
Other expenses (income) (0.4) (0.8)
-------- --------
36.7 39.0
Loss from continuing operations before income
taxes and cumulative effect of accounting change (2.4) (11.7)
Income tax (provision) benefit (0.1) 0.1
Loss from discontinued units (3.6) (1.7)
Cumulative effect of accounting change -- (0.3)
-------- --------
Net loss (6.1)% (13.6)%
======== ========
(1)The consolidated financial statements for the nine months ended December 31,
2002 include the results of the ongoing operations of Measurement Specialties,
Inc. As a result of our restructuring plan, we sold all of the outstanding stock
of Terraillon in September 2002 and placed Schaevitz UK into receivership in
June 2002. Accordingly, Terraillon and Schaevitz UK are classified as
discontinued operations in the consolidated financial results for all periods
presented. The comparisons above exclude the results of these discontinued
operations, except for "Loss from discontinued units," "Cumulative effect of
accounting change, net of tax" and "Net income (loss)."
(2) Reflects the restatement of our financial statements for the three and nine
months ended December 31, 2001. See "Restatement" and Note 3 to our consolidated
financial results included in this Quarterly Report on Form 10-Q.
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001
The consolidated financial statements for the three months ended December 31,
2002 include the results of the ongoing operations of Measurement Specialties,
Inc. As a result of our restructuring plan, we sold all of the outstanding stock
of Terraillon in September 2002 and placed Schaevitz UK into receivership in
29
June 2002. Accordingly, Terraillon and Schaevitz UK are classified as
discontinued operations in the consolidated financial results for all periods
presented.
Net Sales. Net sales increased to $28,413 for the three months ended December
31, 2002 from $26,549 for the three months ended December 31, 2001.
Net sales of our Sensor business increased $1,259, or 10.2%, to $13,601 for the
three months ended December 31, 2002 from $12,342 for the three months ended
December 31, 2001.
Strong sales continued from our Microfused pressure product line resulting from
increased demand across our OEM customer base. Sales of our MicroFused products
in the automotive sector increased significantly due to the introduction of new
customer platforms.
PiezoSensors sales more than doubled as compared to the third quarter of fiscal
2002. The increase was, in part, the result of higher sales across several of
our core markets, including traffic sensors (used for vehicle classification,
weight-in-motion, speed and red light enforcement) and sensors used in
electronic utility meters. PiezoSensors' also fulfilled significant orders for a
new health monitoring product in support of our customer's expanding product
launch.
Sales for our IC Sensors product line declined as compared to the third quarter
of fiscal 2002. One of our larger medical products customers substantially
lowered its purchases in the third quarter of fiscal 2003, and also lowered its
purchase forecast for the fourth quarter of fiscal 2003 and for fiscal 2004.
Schaevitz Sensors sales also declined. This decline is primarily the result of
continued weakness in the capital equipment and power generation markets.
Net sales of our Consumer Products business increased $605, or 4.3%, to $14,812
for the three months ended December 31, 2002 from $14,207 for the three months
ended December 31, 2001. Sales of bath scales and kitchen tools increased
slightly, and sales of tire pressure gauges were flat as compared to the third
quarter of fiscal 2002. Increased sales in the United States were partially
offset by reduced European sales. Sales in Asia were flat as compared to the
third quarter in fiscal 2002.
Gross Profit. Gross profit increased $2,820, or 35.3%, to $10,817 for the three
months ended December 31, 2002 from $7,997 for the three months ended December
31, 2001. Gross margin increased to 38.1% for the three months ended December
31, 2002 from 30.1% for the three months ended December 31, 2001. Gross margin
for our Sensor business increased to 44.7% for the three months ended December
31, 2002 from 38.1% for the three months ended December 31, 2001. The continued
improvement of our Sensors margin is due to the transfer of additional
production and materials sourcing to our lower cost China facility, the impact
of prior period headcount reductions and the realization of benefits from our
restructuring activities, including the sale of the IC Sensors wafer fab in July
2002 and the consolidation of facilities and business support activities into
our Hampton, Virginia infrastructure. Gross margin for our Consumer Products
business increased to 31.9% for the three months ended December 31, 2002 from
29.0% for the three months ended December 31, 2001. The margin related to our
OEM sales increased to 26% for the third quarter of fiscal 2003 from 23% for the
third quarter of fiscal 2002. The OEM margin for fiscal 2002 was negatively
affected by higher costs associated with the introduction of new products in
Europe. The margin on retail sales increased to 38.7% for the three months ended
December 31, 2002 from 37% for the three months ended December 31, 2001.
Selling, General and Administrative. Selling, general and administrative
expenses increased $1,316, or 17.6%, to $8,802 for the three months ended
December 31, 2002 from $7,486 for the three months ended December 31, 2001. The
increase was largely attributable to $2,837 in consulting and professional fees
incurred during the third quarter of fiscal 2003, most of which was a result of
defaults under our credit
30
agreement, the restatement of our financial statements, the class action
lawsuits and SEC investigation. These increases were partially offset by savings
in payroll, facility and other expenses resulting from our cost reduction
activities. In addition, selling, general and administrative costs for the
fiscal quarter ended December 31, 2002 reflect a $450 reduction in our employee
bonus accruals, and a $275 refund of property taxes.
Research and Development. Research and development costs decreased $1,140, or
72.5%, to $433 for the three months ended December 31, 2002 from $1,573 for the
three months ended December 31, 2001. Customer-funded development decreased $425
to $14 for the three months ended December 31, 2002 from $439 for the three
months ended December 31, 2001. On a net basis, research and development costs
decreased $715, or 63.1%, to $419 for the three months ended December 31, 2002
from $1,134 for the three months ended December 31, 2001. The primary cause of
the reduction in research and development spending and customer-funded
development was the sale of the IC Sensors wafer fab in July 2002. We do not
expect significant customer funded research and development for the remainder of
fiscal 2003.
Interest Expense, Net. Net interest expense decreased $261, or 38.0%, to $425
for the three months ended December 31, 2002 from $686 for the three months
ended December 31, 2001. Interest expense includes $304 associated with the
issuance of warrants in connection with the $9,300 bridge loan from Castletop
Capital L.P. (See Note 6 of the Notes to Condensed Consolidated Financial
Statements included in this report). This decrease in interest expense is
attributable to a $22,359 reduction in average debt outstanding from $31,691 in
the three months ended December 31, 2001 to $9,332 in the three months ended
December 31, 2002.
Income Taxes. We had pretax income for financial reporting purposes for the
three months ended December 31, 2002, and have not provided an income tax
provision relating to our domestic operations because we have available net
operating loss carryforwards that may be applied to this income. A provision of
$97 was recorded for our estimated foreign tax liability in excess of available
foreign net operating loss carryforwards for the three months ended December 31,
2002. We recorded a tax benefit of $14 for the three months ended December 31,
2001 which relates to refundable income taxes.
Discontinued Operations. As a result of our restructuring plan, we sold all of
the outstanding stock of Terraillon in September 2002 and placed Schaevitz UK
into receivership in June 2002. Income from operation of discontinued units was
$0 for the three months ended December 31, 2002, as compared to a loss of $660
for the three months ended December 31, 2001. Gain on disposition of
discontinued units was $570 for the three months ended December 31, 2002, as
compared to $0 for the three months ended December 31, 2001.
NINE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2001
The consolidated financial statements for the nine months ended December 31,
2002 include the results of the ongoing operations of Measurement Specialties,
Inc. Terraillon and Schaevitz UK are classified as a discontinued operations in
the consolidated financial results for all periods presented.
Net Sales. Net sales increased to $84,496 for the nine months ended December 31,
2002 from $76,085 for the nine months ended December 31, 2001.
Net sales of our Sensor business increased $2,277, or 6.0%, to $40,045 for the
nine months ended December 31, 2002 from $37,768 for the nine months ended
December 31, 2001. This increase was the result of the factors outlined above in
the discussion of Sensor sales for the three months ended December 31, 2002.
31
Net sales of our Consumer Products business increased $6,134, or 16.0%, to
$44,451 for the nine months ended December 31, 2002 from $38,317 for the nine
months ended December 31, 2001. More than 20% of this sales improvement resulted
from the liquidation of $1,315 of slow moving and obsolete inventory during the
nine months ended December 31, 2002. Excluding this liquidation event, Consumer
Products sales increased $4,819, or 12.6%, to $43,136 for the nine months ended
December 31, 2002 as compared to the nine months ended December 31, 2001. The
balance of the improved sales was mainly attributable to increased sales of bath
scales, tire pressure gauges (due to heavy seasonal promotional activity),
kitchen tools and distance measurement products.
Gross Profit. Gross profit increased $8,272, or 39.9%, to $29,024 for the nine
months ended December 31, 2002 from $20,752 for the nine months ended December
31, 2001. Gross margin increased to 34.3% for the nine months ended December 31,
2002 from 27.3% for the nine months ended December 31, 2001. Gross margin for
our Sensor business increased to 38.2% for the nine months ended December 31,
2002 from 29.5% for the nine months ended December 31, 2001. This margin
improvement is the result of the factors outlined above in the discussion of
gross margin for the three months ended December 31, 2002. Gross margin for our
Consumer Products business increased to 30.9% for the nine months ended December
31, 2002 from 27.2% for the nine months ended December 31, 2001. Gross margins
for the nine months ended December 31, 2001 reflect $1,322 in write-downs of
slow moving and obsolete inventory to net realizable value. The write-down was
primarily comprised of Park Zone inventory.
Selling, General and Administrative. Selling, general and administrative
expenses increased $3,126, or 13.2%, to $26,756 for the nine months ended
December 31, 2002 from $23,630 for the nine months ended December 31, 2001. The
increase was primarily attributable to $7,257 in consulting and professional
fees incurred in the nine months ended December 31, 2002, most of which was a
result of defaults under our credit agreement, the restatement of financial
statements, the class action lawsuits and SEC investigation. These increases
were partially offset by savings in payroll, facility and other expenses
resulting from our cost reduction activities. In addition, selling, general and
administrative expenses for the fiscal quarter ended December 31, 2002 were
offset by a $450 reduction in our employee bonus accruals and a $275 refund of
property taxes.
Research and Development. Research and development costs decreased $2,571, or
56.3%, to $1,997 for the nine months ended December 31, 2002 from $4,568 for the
nine months ended December 31, 2001. Customer-funded development decreased $978
to $360 for the nine months ended December 31, 2002 from $1,338 for the nine
months ended December 31, 2001. On a net basis, research and development costs
decreased $1,593, or 49.3%, to $1,637 for the nine months ended December 31,
2002 from $3,230 for the nine months ended December 31, 2001. The primary cause
of the reduction in research and development spending and customer-funded
development was the sale of the IC Sensors wafer fab in July 2002. We do not
expect significant customer funded research and development for the remainder of
fiscal 2003.
Interest Expense, Net. Net interest expense decreased $888, or 33.4%, to $1,770
for the nine months ended December 31, 2002 from $2,658 for the nine months
ended December 31, 2001. Interest expense includes $304 associated with the
issuance of warrants in connection with the $9,300 bridge loan from Castletop
Capital L.P. (See Note 6 of the Notes to Condensed Consolidated Financial
Statements included in this report). This decrease in interest expense is
attributable to a $15,967 reduction in average debt outstanding from $34,686 in
the nine months ended December 31, 2001 to $18,719 in the nine months ended
December 31, 2002.
Income Taxes. We had a pretax loss for financial reporting purposes and have not
provided a tax benefit for the nine months ended December 31, 2002. Recognition
of a deferred tax benefit will require generation of future taxable income. A
provision of $97 was recorded for our estimated foreign tax
32
liability in excess of available foreign net operating loss carryforwards for
the nine months ended December 31, 2002, since certain foreign entities
generated income during the period. We recorded a tax benefit of $56 for the
nine months ended December 31, 2001 which relates to refundable income taxes.
Discontinued Operations. As a result of our restructuring plan, we sold all of
the outstanding stock of Terraillon in September 2002 and placed Schaevitz UK
into receivership in June 2002. Loss from operation of discontinued units was
$3,910 for the nine months ended December 31, 2002, as compared to $1,268 for
the nine months ended December 31, 2001. Gain on disposition of discontinued
units was $910 for the nine months ended December 31, 2002, as compared to $0
for the nine months ended December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) increased by $3,084 from $15,014 as of March 31, 2002 to $18,098 as of
December 31, 2002. The increase was attributable to an increase in accounts
receivable of $2,341 from $12,220 at March 31, 2002 to $14,561 at December 31,
2002, a decrease in accounts payable of $1,460 from $13,232 at March 31, 2002 to
$11,772 at December 31, 2002, and partially offset by a decrease in inventory of
$717 from $16,026 at March 31, 2002 to $15,309 at December 31, 2002. Accounts
receivable increased as a result of seasonal increase in sales of our Consumer
segment. The decrease in our accounts payable was primarily due to the cure of
extended payables with our vendors and lower seasonal spending in the consumer
business. The inventory decline is attributable to improved management of
overall inventory levels, including the liquidation of certain slow moving
finished goods inventory, and additional reserves for excess and slow-moving
inventory in the Sensor segment. Included in accrued expenses and other current
liabilities at December 31, 2002 is a $1,100 advance payment from a customer.
Cash used by operating activities was $339 for the nine months ended December
31, 2002, as compared to a deficit of $6,058 for the same period last fiscal
year. Capital spending decreased to $1,149 for the nine months ended December
31, 2002 from $4,690 for the nine months ended December 31, 2001. This decrease
contributed to negative cash flow after capital expenditures of $1,488 for the
nine months ended December 31, 2002 as compared to a negative cash flow of
$10,748 for the nine months ended December 31, 2001. Capital spending in the
nine months ended December 31, 2001 represented a large investment in our
Shenzhen, China facility to prepare for the transfer of manufacturing from our
domestic facilities to our China facility, as well as capital expenditures for
our domestic sensor operations in Hampton, Virginia and Milpitas, California.
Capital spending in the nine months ended December 31, 2002 was primarily used
for maintenance and critical tooling. Other investing activities for the nine
months ended December 31, 2002 provided $20,860, consisting of $3,300 in net
proceeds from the sale of the IC Sensor wafer fab, $16,668 from the sale of
Terraillon and $892 received from the receiver for Schaevitz UK. Financing
activities for the nine months ended December 31, 2002 consumed $19,807,
consisting primarily of the repayment of debt. For the nine months ended
December 31, 2002, we had a deficit of $435 from continuing operations, used
$1,246 in connection with discontinued operations and recognized $374 as a
result of the effect of favorable exchange rates, resulting in a net decrease in
cash of $1,307 as compared to March 31, 2002.
Revolving Credit Facility
On January 31, 2003, we entered into a $15 million revolving credit facility
with Fleet Capital Corporation ("FCC"). The revolving credit facility is secured
by a lien on substantially all of our assets. Interest accrues on the principal
amount of our borrowings under this facility at a fluctuating rate per year
33
equal to the lesser of FCC's prime rate for commercial loans plus one percent
(subject to a two percent increase upon the occurrence of an event of default
under the loan agreement) or the maximum rate permitted by applicable law. As of
February 5, 2003, the interest rate applicable to borrowings under the revolving
credit facility was 5.25 percent. The amount of borrowing available under the
revolving credit facility is determined in accordance with a formula based on
certain of our accounts receivable and inventory. The revolving credit facility
expires on February 1, 2006. As of February 5, 2003, the Company had $4,618 of
available cash. In addition, as of February 5, 2003, there was $6,899 in
outstanding borrowings and the Company had the right to borrow an additional
$2,123 under the revolving credit facility.
Our revolving credit agreement requires us to meet certain financial covenants
during the term of the revolving credit facility. In addition to certain
affirmative and negative covenants, which include a restriction on the payment
of dividends, we are required to maintain a borrowing availability of at least
$2,000 through the filing of our quarterly report on Form 10-Q for the three
months ending June 30, 2003. In addition, beginning in the same fiscal quarter,
we are required to keep a minimum fixed charge ratio of 1.0 to 1 at the end of
each fiscal quarter. Fixed charge ratio is defined as operating cash flow, which
is EBITDA (earnings before interest, taxes, depreciation and amortization) minus
cash taxes paid and minus capital expenditures, divided by the sum of scheduled
principle payments and interest expense during that period.
Bridge Loan
On October 31, 2002, we received a $9,300 bridge loan from Castletop Capital,
L.P., a limited partnership controlled by Morton Topfer, Chairman of our Board
of Directors. The proceeds from this loan were used to repay all our obligations
under our previous term loan and revolving credit facility. The loan is
evidenced by a Senior Secured Note originally due January 31, 2003 and does not
include a revolving credit facility. Interest on the note initially accrued at a
rate of 7% per annum (subject to a 2% increase upon the occurrence of an event
of default under the note). Castletop Capital also received a warrant to
purchase up to 297,228 shares of our common stock for an exercise price equal to
the average closing price of our common stock on the American Stock Exchange for
the first five trading days after October 31, 2002 ($1.64 per share). The
warrant has a term of five years. The exercise price and number of shares
subject to the warrant may be adjusted under certain circumstances.
The relative estimated fair value of the warrant of $452 was recorded as a debt
discount, which is being charged to interest expense over the life of the debt.
Interest expense associated with the warrant of $304 was recorded for the three
months ended December 31, 2002.
Amendment to Bridge Loan
We used a portion of the proceeds from the revolving credit facility to reduce
the principal amount outstanding under the bridge loan to $2,000. Also, in
connection with the revolving credit facility transaction, the terms of the
bridge loan were amended as follows:
- The maturity date of the Castletop note was extended to January 31,
2005;
- The non-default interest rate under the bridge loan was increased to
11%; and
- The security interest and rights of Castletop under the bridge loan
agreement were subordinated to those of FCC.
There were no amendments to the warrant issued as part of the bridge loan
transaction.
34
Liquidity
At February 5, 2003, we had approximately $4,618 of available cash and $2,123 of
borrowing capacity under our revolving credit facility. Our ongoing capital
needs and other obligations, include the payment of:
- substantial consulting and professional fees that are being incurred
as the result of the class action lawsuits, SEC investigation and
ongoing restructuring; and
- any judgments, settlement payments or penalties arising from the
class action lawsuit, SEC investigation or other matters described
under "Legal Proceedings."
Our revolving credit facility may not be available or adequate to fund amounts,
if any, to be paid in settlement of our pending legal proceedings. Under the
terms of the credit agreement, we are prohibited from making any cash payment in
settlement of any litigation unless, after giving effect to such payment and for
a period of 30 consecutive days prior thereto, availability under the credit
facility is not less than $1,500. Moreover, we are prohibited from making any
cash payment in settlement of the class action lawsuit, the DeWelt litigation or
the Hibernia litigation without the prior written consent of FCC. See "Legal
Proceedings" below for a more complete discussion of our pending legal
proceedings.
Our cash and amounts available under our revolving credit facility may not be
sufficient to satisfy the obligations discussed above. If we are unable to
satisfy these obligations, we may need to explore other fund raising
alternatives, including the sale of assets or equity securities. No assurance,
however, can be given that we will be able to successfully sell assets or stock,
or, even if such transactions are possible, that they will be on terms
reasonable to us, that they will enable us to satisfy our obligations or that
such actions will be permitted under our credit agreement. Additionally, any
sale of securities will dilute existing shareholders and may be at prices that
are substantially lower than current market prices. If we are unable to satisfy
our loss contingencies and do not obtain additional funds, we will likely be
unable to continue operations, or we will be compelled to restructure our
obligations in a bankruptcy proceeding under Title 11 of the United States Code.
Dividends
We have not declared cash dividends on our common equity. Additionally, the
payment of dividends is prohibited under our credit agreement and bridge loan
agreement. If permitted under applicable law and consented to by our lenders, we
may, in the future, declare dividends under certain circumstances.
At present, there are no material restrictions on the ability of our Hong Kong
subsidiary to transfer funds to us in the form of cash dividends, loans,
advances, or purchases of materials, products, or services. Chinese laws and
regulations, including currency exchange controls, restrict distribution and
repatriation of dividends by our China subsidiary.
Seasonality
Our sales of consumer products are seasonal, with highest sales during the
second and third fiscal quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(DOLLARS IN THOUSANDS)
35
We are exposed to a certain level of foreign currency exchange risk.
The majority of our net sales are priced in United States dollars. Our costs and
expenses are priced in United States dollars, Hong Kong dollars and Chinese
renminbi. Accordingly, the competitiveness of our products relative to products
produced domestically (in foreign markets) may be affected by the performance of
the United States dollar compared with that of our foreign customers'
currencies. Additionally, we are exposed to the risk of foreign currency
transaction and translation losses, which might result from adverse fluctuations
in the values of the Hong Kong dollar and the Chinese renminbi. At December 31,
2002, we had net liabilities of $2,360 subject to fluctuations in the value of
the Hong Kong dollar, and net assets of $13,327 subject to fluctuations in the
value of the Chinese renminbi. At December 31, 2001, we had net liabilities of
$4,147 subject to fluctuations in the value of the Hong Kong dollar, and net
assets of $19,798 subject to fluctuations in the value of Chinese renminbi.At
March 31, 2002, we had net liabilities of $3,700 subject to fluctuations in the
value of the Hong Kong dollar, and the net assets of $10,900 subject to
fluctuations in the value of Chinese renminbi.
Fluctuations in the value of the Hong Kong dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong dollar to that of the United States dollar. However, there can be no
assurance that the value of the Hong Kong dollar will continue to be tied to
that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to foreign currency and
translation risks, we may purchase currency exchange forward contracts, currency
options, or other derivative instruments, provided such instruments may be
obtained at suitable prices. However, to date we have not done so.
See Note 7 of the Notes to condensed consolidated financial statements included
in this report for a discussion of the elimination of certain of our foreign
operations.
Interest on the revolving credit facility accrues on the principal amount of our
borrowings under this facility at a fluctuating rate per year equal to the
lesser of FCC's prime rate for commercial loans plus one percent (subject to a
two percent increase upon the occurrence of an event of default under the loan
agreement) or the maximum rate permitted by applicable law. Our results will be
adversely affected by any increase in interest rates. For example, based on the
current debt outstanding at February 5, 2003, an annual interest rate increase
of 100 basis points would increase interest expense and thus decrease the
Company's after tax profitability by $69. We do not hedge this interest rate
exposure.
CAUTIONARY STATEMENT
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. Forward looking statements may be
identified by such words or phrases as "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will," "may" and similar expressions. All
statements that address operating performance, events or developments that we
expect or anticipate will occur in the future are forward-looking statements.
The forward-looking statements above are not guarantees of future performance
and involve a number of risks and uncertainties. Factors that might cause actual
results to
36
differ materially from the expected results described in or underlying our
forward-looking statements include:
- Our ability to complete our ongoing restructuring program;
- Conditions in the general economy and in the markets served by us;
- Competitive factors, such as price pressures and the potential
emergence of rival technologies;
- Interruptions of suppliers' operations or the refusal of our
suppliers to provide us with component materials;
- Timely development and market acceptance, and warranty performance
of new products;
- Changes in product mix, costs, yields and fluctuations in foreign
currency exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the European consumer products market;
- The class action lawsuits filed against us and the pending SEC
investigation; and
- The risk factors listed from time to time in our SEC reports.
This list is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the filing of this Quarterly Report on Form 10-Q, whether as a result of new
information, future events, changes in assumptions or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The company's management, including the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of December 31, 2002. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the company's disclosure controls and procedures are adequate, but that
certain improvements to our internal controls are necessary to enable the
company to record, process, summarize and report financial data in a more
efficient manner.
We have made substantial improvements to our disclosure controls and procedures
since the filing of our quarterly report on Form 10-Q for the three months ended
September 30, 2002, including:
- consolidation of the financial information for our domestic Sensor
business onto one information technology platform and general
ledger;
- reassignment of the financial reporting responsibility from the
corporate accounting level to the respective separate general
managers and controllers of each of our business units;
- implementation of consolidated financial and operational review
procedures; and
- retention of additional qualified financial reporting personnel.
(b) Changes in internal controls.
We are in the process of implementing the following additional changes to our
internal controls:
37
- consolidation of the financial information for our China
manufacturing facility onto one information technology platform and
general ledger; and
- development of a financial reporting system that consolidates the
financial results in such a manner that serves both the external and
internal reporting requirements of the Company.
We intend to continue to evaluate our internal disclosure controls and
procedures and implement improvements as required.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(DOLLARS IN THOUSANDS)
CLASS ACTION LAWSUIT
On March 20, 2002, a class action lawsuit was filed on behalf of purchasers of
Measurement Specialties, Inc.'s common stock in the United States District Court
for the District of New Jersey against Measurement Specialties and certain
present and former officers and directors. The complaint was subsequently
amended to include the underwriters in the August 2001 public offering and our
former auditors. The lawsuit alleges violations of the federal securities laws
including, among other things, that the registration statement related to the
our August 2001 public offering and the our periodic SEC filings misrepresented
or omitted material facts and that certain of the our officers made false or
misleading statements of material fact. The lawsuit seeks an unspecified award
of money damages. After March 20, 2002, nine additional similar class actions
were filed in the same court. The ten lawsuits have been consolidated into one
case under the caption In re: Measurement Specialties, Inc. Securities
Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs filed a Consolidated Amended
Complaint on September 12, 2002. The underwriters have made a claim for
indemnification under the underwriting agreement. The parties are currently
briefing motions to dismiss the case.
We intend to defend the foregoing lawsuit vigorously, but cannot predict the
outcome and are not currently able to evaluate the likelihood of success or the
range of potential loss, if any. However, if we were to lose this lawsuit,
judgment would likely have a material adverse effect on our consolidated
financial position, results of operations and cash flows. Although we have
Directors and Officers insurance policies that provide aggregate coverage of
$10,000 for the period during which the claims were filed, our carrier has
denied coverage for this matter. We intend to contest this position. No
assurance, however, can be given that this insurance coverage will be available
or adequate to cover losses, if any, arising out of this litigation. In
addition, our credit agreement precludes us from making cash payment in
settlement of this litigation without the prior consent of our lenders.
SEC INVESTIGATION
In February 2002, Measurement Specialties, Inc., contacted the staff of the SEC
after discovering that our former Chief Financial Officer had made the
misrepresentation to senior management, the Board and our auditors that a waiver
of the covenant default under our credit agreement had been obtained when, in
fact,
38
the lenders had refused to grant such a waiver. Since February 2002, Measurement
Specialties and a Special Committee formed by our Board of Directors have been
cooperating with the staff of the SEC. In June 2002, the staff of the Division
of Enforcement of the SEC informed us that it is conducting a formal
investigation relating to matters reported in our Quarterly Report on Form 10-Q
for the quarter ended December 31, 2001. We cannot predict how long the SEC
investigation will continue or its outcome.
UNITED STATES ATTORNEY INQUIRY
We have also learned that the Office of the United States Attorney for the
District of New Jersey is conducting an inquiry into the matters that are being
investigated by the SEC. We cannot predict how long the United States Attorney's
inquiry will continue or its outcome.
OTHER LITIGATION
In re Service Merchandise Company, Inc. (Service Merchandise Company, Inc. v.
Measurement Specialties, Inc.), United States Bankruptcy Court for the Middle
District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro. No.
301-0462A.
We are currently the defendant in a lawsuit filed in March 2001 by Service
Merchandise Company, Inc. ("SMC") and its related debtors (collectively, the
"Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings. The
Bankruptcy Court entered a stay of the action in May 2001, which was lifted in
February 2002. Citing 11 U.S.C. Section 547(b), the action alleges that we
received $645 from one or more of the Debtors during the ninety (90) day period
before the Debtors filed their bankruptcy petitions, that the transfers were to
our benefit, were for or on account of an antecedent debt owed by one or more of
the Debtors, made when one or more of the Debtors were insolvent, and that the
transfers allowed us to receive more than we would have received if the cases
were cases under Chapter 7 of the United States Bankruptcy Code. The action
seeks to disgorge the sum of $645 from us. It is not possible at this time to
predict the outcome of the litigation or estimate the extent of any damages that
could be awarded in the event that we are found liable to the estates of SMC or
the other Debtors.
Robert L. DeWelt v. Measurement Specialties, Inc. et al., United States District
Court, District of New Jersey, Civil Action No. 02-CV-3431.
On July 17, 2002, Robert DeWelt, our former acting Chief Financial Officer and
general manager of our Schaevitz Division, filed a lawsuit against Measurement
Specialties, Inc. and certain of our officers and directors. Mr. DeWelt resigned
on March 26, 2002 in disagreement with management's decision not to restate
certain of our financial statements. See "Restatement" above for a discussion of
Mr. DeWelt's resignation. The lawsuit alleges a claim for constructive wrongful
discharge and violations of the New Jersey Conscientious Employee Protection
Act. Mr. DeWelt seeks an unspecified amount of compensatory and punitive
damages. We have filed a Motion to Dismiss this case. We intend to defend the
foregoing lawsuit vigorously, but cannot predict the outcome and are not
currently able to evaluate the likelihood of success or the range of potential
loss, if any. In addition, our credit agreement precludes us from making cash
payment in settlement of this litigation without the prior consent of our
lenders.
Hibernia Litigation
On or about July 23, 2002, Hibernia Capital Partners I, ilp and Hibernia Capital
Partners II, ilp filed a lawsuit against Measurement Specialties in the High
Court of Dublin. The Plenary Summons states that plaintiffs seek a declaration
that the plaintiffs entered into the share purchase agreement on June 7, 2001
for the sale of their shares in Terraillon Holdings Limited to Measurement
Specialties as a result of an operative misrepresentation and misstatement.
Plaintiffs further seek damages for misrepresentation and/or breach of contract
and/or breach of warranty and costs of the proceedings. On August 9, 2002, we
39
entered an Appearance, which is the equivalent of the acceptance of service of
process. On August 22, 2002, plaintiffs filed a Statement of Claim, which is the
equivalent of a complaint. We are still engaged in the initial pleadings process
wherein plaintiffs' claims and our defenses will be set forth in detail. We
intend to defend the foregoing lawsuit vigorously, but cannot predict the
outcome and are not currently able to evaluate the likelihood of success or the
range of potential loss, if any. In addition, our credit agreement precludes us
from making cash payment in settlement of this litigation without the prior
consent of our lenders.
Semex, Inc. vs. Measurement Specialties, Inc. and AMP Incorporated, Court of
Common Pleas, Montgomery County, Pennsylvania.
On October 24, 2002, Semex, Inc. ("Semex") filed a lawsuit against Measurement
Specialties, Inc. and Amp Incorporated alleging breaches of the lease for our
former facility in the Valley Forge, Pennsylvania. We are the assignee of Amp
Incorporated under the lease. The plaintiff alleges that we owe at least
$770,166 for certain payment defaults under the lease. The plaintiff also seeks
an unspecified amount of damages related to plaintiff's allegations of, among
other things, damage to the property, failure to remove alterations and failure
to conduct environmental testing. At this point in the litigation, we cannot
predict its outcome.
Czarnek & Orkin Laboratories, Inc. v. TRW, Inc. and Measurement Specialties,
Inc.
Czarnek & Orkin Laboratories, Inc. ("Orkin") submitted a demand for arbitration
with the American Arbitration Association on July 8, 2002. The demand indicates
that Orkin is seeking approximately $2,000,000 in royalty revenue. At issue is a
license agreement relating to the expected development and marketing of certain
sensor technology. The arbitration is scheduled to be held during the week of
February 10, 2003. At this point in the arbitration, we cannot predict its
outcome.
From time to time, we are subject to other legal proceedings and claims in the
ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 2002 and January 2003, we issued warrants to purchase an aggregate of
76,755 shares of our common stock to Corporate Revitalization Partners ("CRP")
at an exercise price of $2.28 per share. These warrants were issued as part of a
"success fee" as a result of the achievement of certain goals in connection with
our restructuring program. Frank Guidone, a Managing Director of CRP, is our
chief executive officer. The warrants were sold in reliance upon the exemption
from registration under Section 4(2) of the Securities Act of 1933, as a
transaction not involving a public offering.
40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1# Second Restated Certificate of Incorporation of Measurement
Specialties, Inc.
3.2++ Bylaws of Measurement Specialties, Inc.
4.1+ Specimen Certificate for shares of common stock of Measurement
Specialties, Inc.
10.1# Supply and Distribution Agreement dated September 26, 1997 between
Korona GmbH & Co. KG and Measurement Specialties, Inc.
10.2## Product Line Acquisition Agreement dated January 5, 2000 between
Exeter Technologies, Inc., Dr. Michael Yaron and Measurement
Specialties, Inc.
10.3### Stock Purchase Agreement dated February 11, 2000 between
PerkinElmer, Inc. and Measurement Specialties, Inc.
10.4* Purchase Agreement dated August 4, 2000 between TRW Sensors &
Components, Inc. and Measurement Specialties, Inc.
10.5** Asset Purchase Agreement dated August 14, 1998 between AMP
Incorporated, The Whitaker Corporation and Measurement Specialties,
Inc.
10.6+ Measurement Specialties, Inc. 1995 Stock Option Plan.
10.7*** Measurement Specialties, Inc. 1998 Stock Option Plan.
10.8+ Lease dated December 30, 1999 between Hollywood Place Company
Limited and Measurement Limited for property in Kowloon, Hong Kong.
10.9+ Lease dated September 14, 1977 between Schaevitz E.M. Limited and
Slough Trading Estate Limited for property in Slough, England.
10.10+ Deed of Variation dated July 14, 1992 of Lease between Slough
Trading Estate Limited and Lucas Schaevitz Limited.
10.11+ Assignment dated August 4, 2000 of Lease from Lucas Schaevitz
Limited to Measurement Specialties (England) Limited.
10.12+ License to Assign dated August 4, 2000 between Slough Trading Estate
Limited, Lucas Schaevitz Limited, Measurement Specialties (England)
Limited and Measurement Specialties, Inc. for property in Slough,
England.
10.13+ Lease dated May 5, 1994 between Transcube Associates and Measurement
Specialties, Inc. for property in Fairfield, New Jersey.
10.14+ First Amendment dated February 24, 1997 to Lease between Transcube
Associates and Measurement Specialties, Inc.
10.15+ Second Amendment dated July 10, 2000 to Lease between Transcube
Associates and Measurement Specialties, Inc.
10.16+ First Amendment dated February 1, 2001 to Lease between Kelsey-Hayes
Company and Measurement Specialties, Inc. for property in Hampton,
Virginia.
10.17++ Lease Agreement dated May 20, 1986 between Semex, Inc. and Pennwalt
Corporation and all amendments for property in Valley Forge,
Pennsylvania.
10.18++ Lease Agreement dated January 10, 1986 between Creekside Industrial
Associates and I.C. Sensors and all amendments for property in
Milpitas, California.
10.19++ Lease Agreements for property in Shenzhen, China.
10.20++ Lease dated August 4, 2000 between Kelsey-Hayes Company and
Measurement Specialties, Inc. for property in Hampton, Virginia.
10.21++ Amended and Restated Revolving Credit, Term Loan and Security
Agreement dated as of February 28, 2001 among Measurement
Specialties, Inc., Measurement Specialties UK Limited, Summit Bank,
The Chase Manhattan Bank and First Union National Bank as agent and
all amendments.
10.22++ Agreement for the Purchase of the Share Capital of Terraillon
Holdings Limited, dated 7
41
June 2001, among Hibernia Development Capital Partners I ilp,
Hibernia Development Capital Partners II ilp, Fergal Mulchrone and
Chris Duggan and Andrew Gleeson and Measurement Specialties, Inc.
10.23+ Supplemental Agreement, dated 11 July 2001, concerning the amendment
of the Agreement for the Purchase of the Share Capital of Terraillon
Holdings Limited, dated 7 June 2001.
10.24+++ Asset Purchase Agreement dated July 12, 2002 by and among Elmos
Semiconductor AG, Silicon Microstructures, Inc., Measurement
Specialties, Inc., and IC Sensors Inc.
10.25++++ Stock Purchase Agreement, dated as of September 18, 2002, by and
between FUKUDA (Luxembourg) S.a.r.l. and Measurement Specialties,
Inc.
10.26#### Forbearance Agreement, dated as of June , 2002, by and among
Wachovia Bank, National Association, for itself and as agent for
Fleet National Bank and JP Morgan Chase Bank, Measurement
Specialties, Inc., Measurement Specialties UK Limited., IC Sensors,
Inc., Measurement Limited, Jingliang Electronics (Shenzhen) Co.,
Ltd. and Terraillon Holdings Limited.
10.27#### Agreement of Lease, commencing October 1, 2002, between Liberty
Property Limited Partnership and Measurement Specialties, Inc.
10.28#### Sublease Agreement, dated August 1, 2002, between Quicksil, Inc. and
Measurement Specialties, Inc.
10.29 Senior Secured Note and Warrant Purchase Agreement, dated as of
October 31, 2002, by and among Castletop Capital, L.P.
and Measurement Specialties, Inc. (including amendment thereto)
10.30 Loan and Security Agreement, dated January 31, 2003, by and among
Fleet Capital Corporation, Measurement Specialties, Inc. and IC
Sensors, Inc.
# Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-Q filed on February 3, 1998 and
incorporated herein by reference.
## Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-Q filed on February 14, 2000 and
incorporated herein by reference.
### Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on March 1, 2000 and incorporated
herein by reference.
#### Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on October 28, 2002.
* Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on August 22, 2000 and
incorporated herein by reference.
** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K/A filed on August 27, 1998 and
incorporated herein by reference.
*** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Proxy Statement for the Annual Meeting of Shareholders filed on
August 18, 1998 and incorporated herein by reference.
+ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form S-1 (File No. 333-57928) and
incorporated herein by reference.
++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on July 5, 2001 and incorporated
herein by reference.
42
+++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on August 14, 2002 and
incorporated herein by reference.
++++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on October 7, 2002 and
incorporated herein by reference.
(B) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed during the three months ended
December 31, 2002:
On October 7, 2002, we filed a Current Report on Form 8-K pursuant to Item 2
(Acquisition or Disposition of Assets) to announce our sale of all of the
outstanding stock of Terraillon Holdings Limited to Fukuda (Luxembourg) S.a.r.l.
On December 13, 2002, we filed Amendment No. 1 to the 8-K referred to in the
previous sentence to include unaudited condensed pro forma financial statements
in accordance with Item 7 of Form 8-K.
On December 13, 2002, we filed a Current Report on Form 8-K pursuant to Item 5
(Other Events) to provide restated key financial information for each of the
quarterly periods in the fiscal year ended March 31, 2001 and the first three
quarters in the fiscal year ended March 31, 2002.
43
SIGNATURES
Pursuant to the requirements 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.
MEASUREMENT SPECIALTIES, INC.
(Registrant)
/s/ John P. Hopkins
-------------------------------------------
Date: February 12, 2003 John P. Hopkins
Chief Financial Officer (authorized officer
and principal financial officer)
44
CERTIFICATION OF QUARTERLY REPORT
I, Frank Guidone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Measurement
Specialties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 12, 2003 /s/ Frank Guidone
------------------------------------
Name: Frank Guidone
Title: Chief Executive Officer
45
CERTIFICATION OF QUARTERLY REPORT
I, John P. Hopkins, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Measurement
Specialties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 12, 2003 /s/ John P. Hopkins
------------------------------------
Name: John P. Hopkins
Title: Chief Financial Officer
46