UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
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, 07004
FAIRFIELD, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (973) 808-3020
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: NONE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
At November 1, 2002, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $19.8 million
based on the closing price of the registrant's common stock on November 1, 2002.
Trading of the registrant's common stock on the American Stock Exchange was
suspended from July 15, 2002 until November 1, 2002.
At May 13, 2003, 11,922,958 shares of the registrant's common stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM 10-K,
EXCEPT FOR ITEMS 14 AND 15 OF PART III WHICH ARE INCLUDED HEREIN, IS SET FORTH
IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
SEPTEMBER 23, 2003, TO BE FILED BY THE REGISTRANT WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER THE
FISCAL YEAR ENDED MARCH 31, 2003.
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MEASUREMENT SPECIALTIES, INC.
FORM 10-K
TABLE OF CONTENTS
MARCH 31, 2003
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND . . . 35
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . 35
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . 36
ITEM 14. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . . . . . . . . . . . . 37
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. . . 37
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
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PART I
ITEM 1. BUSINESS
INTRODUCTION
NOTE: AS MORE FULLY DESCRIBED BELOW UNDER "CHANGES TO OUR BUSINESS," WE
DISCONTINUED CERTAIN OF OUR BUSINESSES AND SOLD ASSETS DURING THE FISCAL YEAR
ENDED MARCH 31, 2003. EXCEPT AS OTHERWISE NOTED, THE DESCRIPTIONS OF OUR
BUSINESS, RESULTS AND OPERATIONS CONTAINED IN THIS REPORT REFLECT ONLY OUR
CONTINUING OPERATIONS.
Measurement Specialties is 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, angle, flow, and distance. We
have two businesses, a Sensor business and a Consumer Products business. We are
a New Jersey corporation organized in 1981.
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 manufacturers such as Alaris
Medical, Texas Instruments, the Allison Transmission Division of General Motors,
St. Jude Medical, and Graco.
Our Consumer Products business designs, manufactures and markets
sensor-based consumer products. These products include bathroom and kitchen
scales, tire pressure gauges, kitchen accessories and distance estimators. These
products are typically based on application-specific integrated circuits,
piezoresistive, and ultrasonic technologies. Our Consumer Products customers
include retailers such as Bed Bath & Beyond, Linens 'n Things, Sears, Costco and
Target, and European resellers such as Laica, Ole Bodtcher Hanson and Babyliss.
Each of our businesses benefit from the same core technology base. Our
advanced technologies include piezoresistive silicon sensors,
application-specific integrated circuits, micro-electromechanical systems
(MEMS), piezoelectric polymers, foil strain gauges, force balance systems, fluid
capacitive devices, linear and rotational variable differential transformers,
electromagnetic displacement sensors and ultrasonics. These technologies allow
our sensors to operate precisely and cost effectively. We have a global
operation with manufacturing, engineering, R&D facilities and sales offices
located in North America, Europe and Asia. By functioning globally we have been
able to enhance our applications engineering capabilities and increase our
geographic proximity to our customers.
Our strategy is to utilize our expertise in sensor technologies to target
expanding market segments and develop new products and applications, thereby
increasing demand for our sensors and sensor-based consumer products. Our
global design teams support our production facilities and engineering resources
in the United States and in China. By combining our manufacturing expertise with
our core technology, we strive to provide our global customers with an
advantageous price-value relationship.
OUR SENSORS
The majority of our sensors are devices, sense elements and transducers
that convert mechanical information into a proportionate electronic signal for
display, processing, interpretation, or control. Sensors are essential to the
accurate measurement, resolution, and display of pressure, motion, force,
displacement, angle, flow, and distance. Our other Sensor products are
transducers that convert an applied electrical signal into a mechanical motion
corresponding to the amplitude and frequency of the electrical input.
MARKETS
Sensor manufacturers are moving toward smart sensors that use digital
intelligence to enhance measurement and control signals. The shift toward
sensors utilizing digital signal processing technologies has enhanced
applications in the automotive, medical, military, and consumer products
markets. Examples of our sensor applications include:
- automotive applications in braking, transmission, fuel pressure,
diesel common rail pressure monitoring, security sensing, and onboard
tire pressure monitoring;
- industrial sensors for regulating flow in industrial paint sprayers
and agricultural equipment, monitoring pressures in refrigeration and
heating/ventilating/air conditioning compressors, controlling valves
in process control and electrical power generation equipment and
traffic monitoring, vehicle speed and red light enforcement:
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- medical sensors for invasive blood pressure measurement, drug infusion
flow monitoring, electronic stethoscopes, vascular health diagnostics,
sleep disorder sensing, and body activity feedback in heart
pacemakers;
- military applications, which continue to drive sensor development,
with new systems requiring small, high performance sensors for smart
systems such as navigation and weapons control systems, pressure
monitoring, and collision avoidance systems; and
- consumer products applications including the measurement of weight,
distance, and movement, digitizing information for electronic white
boards and pen input devices for laptops, acoustic devices for musical
instruments and speakers, and imbalance sensors for appliances.
In recent years, advances in microprocessor technology have fueled the
demand for sensors. As microprocessors have become smaller, more powerful and
less expensive, they have been incorporated into an increasing number of
products and applications. The growth of sensors parallels the growth in
microprocessors, which require sensors to deliver critical information. A
number of factors affecting the growth in the sensor market include:
- a strong increase in customer demand for low-cost, highly accurate
measurement solutions;
- the proliferation of silicon micromachining technology in
micro-electromechanical systems (MEMS) devices as a low-cost
alternatives to traditional technologies;
- manufacturers' increased use of advanced technology to customize
products with various features to meet customer demands; and
- investment in research and development spending in order to introduce
new products and expand applications for existing products.
TECHNOLOGY
In the rapidly evolving markets for sensors and sensor-based consumer
products, there is an increasing demand for technologies such as:
Piezoresistive Technology. Piezoresistive materials, most often silicon,
respond to changes in applied mechanical variables such as stress, strain, or
pressure by changing electrical conductivity. Changes in electrical
conductivity can be readily detected in circuits by changes in current with a
constant applied voltage, or conversely by changes in voltage with a constant
supplied current. Piezoresistive technology is widely used for the measurement
of pressure, load and acceleration, and its use in these applications is
expanding significantly.
Application Specific Integrated Circuits (ASICs). These circuits convert
analog electrical signals into digital signals for measurement, computation, or
transmission. Application specific integrated circuits are well suited for use
in consumer products because they can be designed to operate from a relatively
small power source and are inexpensive.
Micro-Electromechanical Systems (MEMS). Micro-electromechanical systems and
related silicon micromachining technology are used to manufacture components for
physical measurement and control. Silicon micromachining is an ideal technology
to use in the construction of miniature systems involving electronic, sensing,
and mechanical components because it is inexpensive and has excellent physical
properties. Micro-electromechanical systems have several advantages over their
conventionally manufactured counterparts. For example, by leveraging existing
silicon manufacturing technology, micro-electromechanical systems allow for the
cost-effective manufacture of small devices with high reliability and superior
performance.
Piezoelectric Polymer Technology. Piezoelectric materials convert
mechanical stress or strain into proportionate electrical energy, and
conversely, these materials mechanically expand or contract when voltages of
opposite polarities are applied. Piezoelectric polymer films are also
pyroelectric, converting heat into electrical charge. These polymer films offer
unique sensor design and performance because they are thin, flexible, inert,
broadband, and relatively inexpensive. This technology is ideal for applications
where the use of rigid sensors would not be possible or cost-effective.
Strain Gauge Technology. A strain gauge consists of metallic foil that is
impregnated into an insulating material and bonded to a sensing element. The
foil is etched to produce a grid pattern that is sensitive to changes in
geometry, usually length, along the sensitive axis producing a change in
resistance. The gauge operates through a direct conversion of strain to a
change in gauge resistance. This technology is useful for the construction of
inexpensive, reliable pressure sensors.
Force Balance Technology. A force-balanced accelerometer is a mass
referenced device that under the application of tilt or linear acceleration,
detects the resulting change in position of the internal mass by a position
sensor and an error signal is produced. This error signal is passed to a servo
amplifier and a current developed is fed back into a moving coil. This current
is proportional to the applied
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tilt angle or applied linear acceleration and will balance the mass back to its
original position. These devices are used in military and industrial
applications where high accuracy is required.
Fluid Capacitive Technology. This technology is also referred to as fluid
filled, variable capacitance. The output from the sensing element is two
variable capacitance signals per axis. Rotation of the sensor about its
sensitive axis produces a linear change in capacitance. This change in
capacitance is electronically converted into angular data, and provides the user
with a choice of ratiometric, analog, digital, or serial output signals. These
signals can be easily interfaced to a number of readout and/or data collection
systems.
Linear Variable Differential Transformers (LVDT). An LVDT is an
electromechanical sensor that produces an electrical signal proportional to the
displacement of a separate movable core. LVDT's are widely used as measurement
and control sensors wherever displacements of a few micro inches to several feet
can be measured directly, or where mechanical input, such as force or pressure,
can be converted into linear displacement. LVDT's are capable of extremely
accurate and repeatable measurements in severe environments.
Ultrasonic Technology. Ultrasonic sensors measure distance by calculating
the time of flight between transmitting and receiving an acoustic signal that is
inaudible to the human ear. This technology allows for the quick, easy, and
accurate measurement of distances between two points without physical contact.
BUSINESS SEGMENTS
Our financial results by business segment for the fiscal years ended March
31, 2003, 2002 and 2001 are presented in Note 17 to the consolidated financial
statements included in this Annual Report on Form 10-K.
PRODUCTS
Sensors. A summary of our Sensor business product offerings as of March
31, 2003 is presented in the following table:
PRODUCT TECHNOLOGY BRAND NAME APPLICATIONS
- ---------------- ------------------ ------------ --------------------------------------
Pressure Sensors Micro- IC Sensors Disposable catheter blood pressure,
Electromechanical altimeter, dive tank pressure, process
Systems (MEMS) instrumentation, fluid level, and
intravenous drug administration
monitoring
- ------------------------------------------------------------------------------------------
Piezoresistive microFused Fertilizer and paint spraying, diesel
engine control, hydraulics, and
automotive power train
- ------------------------------------------------------------------------------------------
Strain Gauge Schaevitz Instrumentation-grade aerospace and
weapon control systems, deep-sea
well head pressure, ship cargo level,
and steel mills
- ------------------------------------------------------------------------------------------
Accelerometers Piezoelectric PiezoSensors Transportation shipment monitoring,
Polymer audio speaker feedback, appliance
imbalance and consumer
exercise monitoring
- ------------------------------------------------------------------------------------------
Micro- IC Sensors Traffic alert and collision avoidance
Electromechanical systems, railroad, tilt, and
Systems (MEMS) instrumentation
- ------------------------------------------------------------------------------------------
Force Balance Schaevitz Aerospace, weapon fire control,
inertial navigation, angle, and tilt
- ------------------------------------------------------------------------------------------
Rotary Linear and Rotary Schaevitz Aerospace, machine control systems,
Displacement Variable knitting machines, industrial process
Sensors Displacement control, and hydraulic actuators
Transducer
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- ------------------------------------------------------------------------------------------
Tilt/Angle Fluid Capacitive Schaevitz Tire balancing, heavy equipment level
Sensors measurement, and consumer
electronic level measurement
- ------------------------------------------------------------------------------------------
Traffic Sensors Piezoelectric PiezoSensors Traffic survey, speed and red light
Polymer enforcement, toll, and in-motion
vehicle weight measurement
- ------------------------------------------------------------------------------------------
Custom Piezofilm Piezoelectric PiezoSensors Medical diagnostics, ultrasound,
Sensors Polymer consumer electronic, electronic
stethoscope, and sonar
- ------------------------------------------------------------------------------------------
Custom Micro- IC Sensors Atomic force microscopes, optical
Microstructures Electromechanical switching, hydrogen and humidity
Systems (MEMS) sensors
Consumer Products. A summary of our sensor-based consumer products as of
March 31, 2003 is presented in the following table:
PRODUCT TECHNOLOGY BRAND NAMES* TYPES OF PRODUCTS PRICE RANGE
- ------------- --------------- --------------- ------------------ ------------
Scales Piezoresistive, Thinner, Bathroom Scales $ 5.00-45.00
Application Health-o-meter,
Specific Laica,
Integrated Salter, and
Circuits Babyliss
Kitchen Scales $ 3.00-25.00
Royal Postal Scales $ 8.00-11.00
- ---------------------------------------------------------------------------------
Tire Pressure Piezoresistive Accutire Digital and $ 0.50-15.00
Gauges Mechanical Tire
Pressure Gauges
- ---------------------------------------------------------------------------------
Distance Ultrasonic Accutape Interior Distance $13.00-22.00
Measurement Estimator
Products
Park-Zone Distance Estimator $10.00-25.00
for Parking
- ---------------------------------------------------------------------------------
Kitchen Tools Dalla Piazza Kitchen Tools $ 1.75-45.00
* Health-o-Meter, Laica, Salter, Babyliss, Royal, and Dalla Piazza are
trademarks, trade names, or service marks of our customers and are not
owned by us.
CUSTOMERS
We sell our sensor products throughout the world. Our Sensor business
designs, manufactures, and markets sensors for original equipment manufacturer
applications. Our extensive customer base consists of manufacturers of
electronic, automotive, medical, military, and industrial products. None of our
Sensor business customers accounted for more than 10% of our net sales during
the last three fiscal years. Our key Sensor customers include:
- Alaris Medical - Allison Transmission - Ingersol Rand
- Argon Medical - Badger Meter - Component Distributor
- Graco - St. Jude Medical - Texas Instruments
Our Consumer Products business customers are primarily retailers,
resellers, or manufacturers of consumer products in the United States and
Europe. No Consumer Products customer accounted for more than 10% of net sales
in the fiscal year ended March 31, 2003. Previously, we had two Consumer
Products customers who accounted for more than 10% of net sales, Korona
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Haushaltswaren GmbH (Korona), a German distributor of diversified housewares,
and Sunbeam Corp. (Health and Safety Division), a United States manufacturer and
distributor of housewares.
Korona was acquired in August 2000 by an Asian manufacturer of scales and
other electronic products that is competitor of ours. Korona accounted for
0.4%, 7.2%, and 10.5% of net sales, or $0.4 million, $7.0 million, and $10.2
million, for the fiscal years ended March 31, 2003, 2002 and 2001, respectively.
Sales to Sunbeam accounted for 7.9%, 7.9%, and 10.5% of net sales, or $8.5
million, $7.6 million, and $10.2 million, for the fiscal years ended March 31,
2003, 2002 and 2001, respectively.
Other key Consumer Products customers include:
- Bed Bath & Beyond - Beurer - Brookstone
- Costco - Laica - Linens 'n Things
- Ole Bodtcher Hanson - Sam's Club - Sears
- Target
SALES AND DISTRIBUTION
We sell our sensor products through a combination of experienced direct
sales engineers and generally exclusive sales relationships with outside sales
representatives throughout the world. Our engineering teams work directly with
our global customers to tailor our sensors to meet their specific application
requirements.
Our sensor-based consumer products are sold and marketed under our own
brand names as well as brand names of our original equipment manufacturer
customers. We have the flexibility of selling our sensor-based consumer
products directly to retailers, to resellers, and to manufacturers of consumer
products.
We sell our products primarily in North America and Western Europe. The
growing Asian market is a significant target of opportunity for our business.
International sales accounted for 24.0% of net sales of our business for the
fiscal year ended March 31, 2003, 27.9% of net sales of our business for the
fiscal year ended March 31, 2002, and 31.9% of net sales of our business for the
fiscal year ended March 31, 2001.
SUPPLIERS
We rely on contract manufacturers for a significant portion of our
consumer-finished products. The majority of our sensor-based consumer products
are assembled by a single contract manufacturer located in China. We utilize
alternative manufacturers located in China to assemble additional sensor-based
consumer products. We procure components and finished products as needed,
through purchase orders, and do not have long-term contracts with any of our
suppliers. We believe that the components we utilize could be obtained from
alternative sources, or that our products could be redesigned to use alternative
suppliers' components, if necessary.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on expanding our core
technologies, improving our existing products, developing new products, and
designing custom sensors for specific customer applications. Our gross research
and development expenses, including customer funded projects, were $3.6
million, or 3.3% of net sales, for the fiscal year ended March 31, 2003,$6.9
million, or 7.1% of net sales, for the fiscal year ended March 31, 2002, $5.7
million, or 5.9% of net sales, for the fiscal year ended March 31, 2001.
Research and development expenses for our Sensor business were $3.0 million,
or 5.7% of net sales of our Sensor business, for the fiscal year ended March 31,
2003, $6.2 million, or 12.9% of net sales of our Sensor business, for the
fiscal year ended March 31, 2002, and $5.1 million, or 11.6% net sales of our
Sensor business, for the fiscal year ended March 31, 2001. Research and
development expenses in the Consumer Products business, which are historically
lower than Sensor business research and development expenses, were $0.6
million, or 1.1% of net sales of our Consumer Products business, for the fiscal
year ended March 31, 2003, $0.7 million, or 1.5% of net sales of our Consumer
Products business, for the fiscal year ended March 31, 2002, and $0.6 million,
or 1.3% net sales of our Consumer Products business, for the fiscal year ended
March 31, 2001.
To maintain and improve our competitive position, our research, design, and
engineering teams work directly with customers to design custom sensors for
specific applications. For certain programs we receive funding from customers
for new product development, including $0.4 million for the fiscal year ended
March 31, 2003, $1.8 million for the fiscal year ended March 31, 2002, and $4.1
million for the fiscal year ended March 31, 2001. The primary cause of the
reduction in customer-funded development was the sale of the IC Sensors wafer
fab in July 2002. See Note 7 to the consolidated financial statements included
in this Annual Report on Form 10-K for a discussion of the sale of the IC
Sensors wafer fab.
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COMPETITION
The global market for sensors includes many diverse products and
technologies and is highly fragmented and subject to low to moderate pricing
pressures.
MSI piezoresistive, MEMS and microFused pressure sensing technologies
compete directly within the largest and fastest growing segments in the global
market for industrial pressure sensors. Most of our Sensor business competitors
are small companies or divisions of large corporations such as Emerson,
Motorola, Siemens, General Electric and Honeywell. The principal elements of
competition in the sensor market are production capabilities, price, quality,
service, and the ability to design unique applications to meet specific customer
needs.
The market for sensor-based consumer products is characterized by frequent
introductions of competitive products and moderate to high pricing pressures.
Recently, a number of brand name scale companies have been acquired by larger
brand name companies or by Asian original equipment manufacturers. Some of our
largest Consumer Products customers are also our competitors, such as Sunbeam
and Bonso Electronics International (which acquired Korona). The principal
elements of competition in the sensor-based consumer products market are price,
quality, and the ability to introduce new and innovative products.
Although we believe that we compete favorably in our Sensor and Consumer
Products businesses, new product introductions by our competitors could cause a
decline in sales or loss of market acceptance for our existing products. If
competitors introduce more technologically advanced products, the demand for our
products would likely be reduced.
INTELLECTUAL PROPERTY
We rely in part on patents to protect our intellectual property. We own 60
United States utility patents, 37 United States design patents, and 23 foreign
patents to protect our rights in certain applications of our core technology.
We have 18 United States patent applications pending, including provisionals.
These patent applications may never result in issued patents. Even if these
applications issue as patents, taken together with our existing patents, they
may not be sufficiently broad to protect our proprietary rights, or they may
prove unenforceable. We have not, however, obtained patents for all of our
innovations, nor do we plan to do so.
We also rely on a combination of copyrights, trademarks, service marks,
trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect our proprietary rights. In addition, we seek to protect
our proprietary information by using confidentiality agreements with certain
employees, consultants, advisors, customers, and others. We cannot be certain
that these agreements will adequately protect our proprietary rights in the
event of any unauthorized use or disclosure, that our employees, consultants,
advisors, customers, or others will maintain the confidentiality of such
proprietary information, or that our competitors will not otherwise learn about
or independently develop such proprietary information.
Despite our efforts to protect our intellectual property, unauthorized
third parties may copy aspects of our products, violate our patents, or use our
proprietary information. In addition, the laws of some foreign countries do not
protect our intellectual property to the same extent as the laws of the United
States. The loss of any material trademark, trade name, trade secret, patent
right, or copyright could hurt our business, results of operations, and
financial condition.
We believe that our products do not infringe on the rights of third
parties. However, we cannot be certain that third parties will not assert
infringement claims against us in the future or that any such assertion will not
result in costly litigation or require us to obtain a license to third party
intellectual property. In addition, we cannot be certain that such licenses will
be available on reasonable terms or at all, which could hurt our business,
results of operations, and financial condition.
FOREIGN OPERATIONS
We manufacture the majority of our sensor products, and most of our sensor
subassemblies used in our consumer products, in leased premises located in
Shenzhen, China. Sensors are also manufactured at our U.S. facilities in
Hampton, VA and San Jose, CA. Additionally, certain key management, sales and
support activities are conducted at leased premises in Hong Kong. Substantially
all our consumer products are assembled in China, primarily by a single
supplier, River Display, Ltd. ("RDL"), although we are utilizing alternative
Chinese assemblers. There are no agreements, which would require us to make
minimum payments to RDL, nor is RDL obligated to maintain capacity available for
our benefit, though we account for a significant portion of RDL's revenues.
Additionally, most of our products contain key components that are obtained from
a limited number of sources. These concentrations in external and foreign
sources of supply present risks of interruption for reasons beyond our control,
including political and other uncertainties regarding Hong Kong and China.
The Chinese government has continued to pursue economic reforms hospitable
to foreign investment and free enterprise, although the continuation and success
of these efforts is not assured. Our operations could be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation
and currency exchange controls, by the imposition of economic austerity measures
intended to reduce inflation, and by social and political unrest. China became a
member of World Trade Organization (WTO) on December 11, 2001. Such membership
requires China and each other member of the WTO to grant one another reciprocal
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"Normal Trade Relations" (NTR) status (formerly known as Most Favored Nation).
Accordingly, China's preferred trading status with the United States (and other
WTO members) is no longer subject to annual review and Chinese goods exported to
the United States are subject to a low tariff and receive other favorable
treatment.
The continued stability of political, legal, economic or other conditions
in Hong Kong cannot be assured. No treaty exists between Hong Kong and the
United States providing for the reciprocal enforcement of foreign judgments.
Accordingly, Hong Kong courts may not enforce judgments predicated on the laws
of the United States, whether arising from actions brought in the United States
or, if permitted, in Hong Kong.
Most of our revenues are priced in United States dollars. Most of our costs
and expenses are priced in United States dollars, Chinese renminbi and Hong Kong
dollars. Accordingly, the competitiveness of our products relative to products
produced locally (in foreign markets) may be affected by the performance of the
United States dollar compared with that of our foreign customers' currencies.
United States sales were $82.0 million, $69.8 million and $66.1 million, or
76.0%, 72.1%, and 68.1% of net sales, for the fiscal years ended March 31, 2003,
2002, and 2001, respectively. Foreign sales were $25.9 million, $27.0 million
and $30.9 million, or 24.0%, 27.9%, and 31.9% of net sales, for the fiscal years
ended March 31, 2003, 2002, and 2001, respectively. While limited, we are
exposed to foreign currency transaction and translation losses, which might
result from adverse fluctuations in the value of the Hong Kong dollar and
Chinese renminbi.
At March 31, 2003, we had net assets of $7.7 million in the United States.
At March 31, 2003, we had net liabilities of $2.0 million subject to
fluctuations in the value of the Hong Kong dollar and net assets of $13.7
million subject to fluctuations in the value of the Chinese renminbi.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to potential foreign currency,
transaction 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.
EMPLOYEES
As of March 31, 2003, we employed 1,463 persons, including 187 employees in
the United States, 3 employees in the United Kingdom, 1,267 employees in
Shenzhen, China, and 6 employees in Hong Kong, China.
As of March 31, 2003, 853 employees were engaged in manufacturing, 500 were
engaged in administration, 39 were engaged in sales and marketing and 71 were
engaged in research and development.
Our employees are not covered by collective bargaining agreements.
ENVIRONMENTAL MATTERS
We are subject to comprehensive and changing foreign, federal, state, and
local environmental requirements, including those governing discharges to the
air and water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
We believe that we are in compliance with current environmental requirements.
Nevertheless, we use hazardous substances in our operations and, as is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from our properties, we may be held liable and may be required to pay the cost
of remedying the condition. The amount of any resulting liability could be
material.
BACKLOG
At March 31, 2003, our backlog of unfilled orders was approximately $31.8
million. At March 31, 2002, our backlog of unfilled orders was approximately
$29.2 million. We include in backlog orders that have been accepted from
customers that have not been filled or shipped and have a scheduled release
date. All orders are subject to modification or cancellation by the customer
with limited charges. We believe that backlog may not be indicative of actual
sales for the current fiscal year or any succeeding period.
SEASONALITY
Our Consumer Products sales are seasonal, with highest sales during the
second and third fiscal quarters. There is no significant seasonality to our
Sensor sales.
10
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 at
such locations, 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 Pricewaterhouse Coopers (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" 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 auditors, 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. Each of our business units
experienced various types of calculation and application errors. 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;
11
- 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, 2002. See Note 3 to our
consolidated financial statements included in this Annual Report on Form 10-K
for further discussion regarding the restatement. The effect of the restatement
was an increase in cost of goods sold of $8.2 million for the fiscal year ended
March 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 auditors of our financial statements for the fiscal year ended
March 31, 2001, we instructed our current auditors to conduct a reaudit of our
financial statements for the fiscal year ended March 31, 2001. The reaudit
resulted in the following additional adjustments:
- Reclassification of certain promotional costs from selling, general
and administrative to a reduction in revenue of $1.0 million;
- Acceleration of amortization of deferred financing costs relating to
our bank loan in the amount of $0.7 million;
- Expensing of unallocated acquisition costs of $0.4 million;
- Straight-lining of lease expense in accordance with SFAS 13 in the
amount of $0.2 million; and
- Certain other adjustments.
As a result of the restated items described above, including the inventory
valuation issue, we recomputed our tax provision, resulting in a reduction of
our previously reported tax provision by $1.8 million.
We also identified certain errors within the quarterly results previously
reported for each of the quarters in the fiscal year ended March 31, 2001 and
for the first three quarters of the fiscal year ended March 31, 2002. These
errors were corrected in a form 8-k filing and quarterly information for the
year ended March 31, 2002 is included in the summary of quarterly financial
information contained in Note 19 to the consolidated financial statements
included in this Annual Report on Form 10-K.
12
Summary of Effects of Restatement. The following is a summary of the
significant effects of the restatement discussed above:
FISCAL YEAR ENDED MARCH 31, 2001
-----------------------------------------
AS RESTATED,
ADJUSTED FOR
Dollars in thousands, PREVIOUSLY AS DISCONTINUED
except per share amounts REPORTED RESTATED OPERATIONS (1)
------------- --------- ---------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales $ 103,095 $ 101,975 $ 97,033
Cost of goods sold 58,782 66,938 62,849
Gross profit 44,313 35,037 34,184
Selling, general and administrative 29,232 29,541 27,420
Income from continuing operations
before income taxes and cumulative
effect of accounting change 11,790 2,205 3,470
Provision for income taxes 2,829 1,008 1,008
Income from continuing operations
before cumulative effect of accounting change 8,961 1,197 2,462
Income from operations of discontinued units - - (1,265)
Income before cumulative effect of
accounting change 8,961 1,197 1,197
Cumulative effect of accounting change, net
of taxes - -
Net Income 8,961 1,197 1,197
Income per common share:
Basic 1.10 0.15 0.15
Diluted 0.99 0.13 0.13
(1)The consolidated financial statements for the fiscal years ended March
31, 2003, 2002 and 2001 include only the results of our ongoing operations.
Accordingly, Terraillon and Schaevitz UK are classified as discontinued
operations in the consolidated financial results for all periods presented. See
"Recent Changes in Our Business" below.
See "Item 14. Controls and Procedures" for a discussion of the actions that
we have taken to strengthen our internal controls.
FORWARD-LOOKING STATEMENTS
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 differ materially from the expected results described in or
underlying our forward-looking statements include:
- 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;
- A decline in the United States consumer products market;
- The class action lawsuit filed against us, the pending SEC
investigation and other legal proceedings described below under "Item
3 - Legal Proceedings"; and
- The risk factors listed from time to time in our SEC reports.
13
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 Annual Report on Form 10-K, whether as a result of new
information, future events, changes in assumptions or otherwise.
RISK FACTORS
RISKS RELATED TO OUR COMPANY
An investment in our common stock is speculative in nature and involves a
high degree of risk. No investment in our common stock should be made by any
person who is not in a position to lose the entire amount of such investment.
In addition to being subject to the risks described elsewhere in this Form
10-K, including those risks described below under "Liquidity and Capital
Resources," an investment in our common stock is subject to the following risks
and uncertainties:
OUR CASH AND AMOUNTS AVAILABLE UNDER OUR REVOLVING CREDIT FACILITY MAY NOT BE
SUFFICIENT TO SATISFY OUR FUTURE REQUIREMENTS. OUR AUDITORS HAVE EXPRESSED
UNCERTAINTY ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The company has incurred net losses of $ 9.1 million and $ 29.0 million for
the fiscal years ended March 31, 2003 and 2002, respectively. During this
period, we have incurred significant expenses for professional fees related to
our restructuring and pending litigation, certain of which are likely to
continue, in somewhat reduced amounts, for the foreseeable future.
We are currently the defendant in several pending lawsuits, including a
securities class action lawsuit. We are also the subject of a formal
investigation being conducted by the Division of Enforcement of the United
States Securities and Exchange Commission. We may incur significant liabilities
as a result of these pending legal proceedings which are described below in
"Item 3- Legal Proceedings" and in Note 16 to our consolidated financial
statements included in this Annual Report on Form 10-K.
Our revolving credit facility may not be available or adequate to fund
operations and losses, if any, capital expenditures or the amounts, if any, to
be paid in settlement of, or for judgments related to, our pending legal
proceedings. Under the terms of our 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 $1.5 million. 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 the lender under our revolving credit facility.
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.
As a result of the matters described in the preceding paragraphs, the
Report of Independent Certified Public Accountants on our consolidated financial
statements includes a paragraph indicating that these factors raise substantial
doubt about our ability to continue as a going concern. The financial
statements that accompany this report do not include any adjustments that might
be necessary if we are unable to continue as a going concern.
IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, WE MAY NOT
BE ABLE TO MEET THE NEEDS OF OUR CUSTOMERS AND OUR NET SALES MAY DECLINE.
Our success depends upon our ability to develop and introduce new sensor
products, sensor-based consumer products, and product line extensions. If we
are unable to develop or acquire new products in a timely manner, our net sales
will suffer. The development of new products involves highly complex processes,
and at times we have experienced delays in the introduction of new products.
Since many of our sensor products are designed for specific applications, we
must frequently develop new products jointly with our customers. We are
dependent on the ability of our customers to successfully develop, manufacture,
and market products that include our sensors. Successful product development
and introduction of new products depends on a number of factors, including the
following:
14
- accurate product specification;
- timely completion of design;
- achievement of manufacturing yields;
- timely and cost-effective production; and
- effective marketing.
WE HAVE SUBSTANTIAL NET SALES AND OPERATIONS OUTSIDE OF THE UNITED STATES,
INCLUDING SIGNIFICANT OPERATIONS IN CHINA, THAT EXPOSE US TO INTERNATIONAL
RISKS.
Our international operations accounted for approximately 34.2% of our net
sales in the fiscal year ended March 31, 2003 and 34.1% of our net sales in the
fiscal year ended March 31, 2002. At March 31, 2003, our foreign subsidiaries'
total assets aggregated $20.5 million, $4.9 million was in Hong Kong and $15.6
million was in China. We are subject to the risks of foreign currency
transaction and translation losses, which might result from fluctuations in the
values of the Chinese renminbi and the Hong Kong dollar. At March 31, 2003, we
had net liabilities of $2.0 million subject to possible fluctuations in the
value of the Hong Kong dollar and net assets of $13.7 million subject to
fluctuations in the value of the Chinese renminbi. Our foreign subsidiaries'
operations reflect intercompany transfers of costs and expenses, including
interest on intercompany trade receivables, at amounts established by us.
We manufacture or source nearly all of our sensor-based consumer products
and the majority of our sensors in China. Our China subsidiary is subject to
certain government regulations, including currency exchange controls, which
limit the subsidiary's ability to pay cash dividends or lend funds to us. The
inability to operate in China or the imposition of significant restrictions,
taxes, or tariffs on our operations in China would impair our ability to
manufacture products in a cost-effective manner and could significantly reduce
our profitability.
Risks specific to our international operations include:
- political conflict and instability in the relationships among Hong
Kong, Taiwan, China, and the United States, and in our target
international markets;
- political instability and economic turbulence in Asian markets;
- changes in United States and foreign regulatory requirements resulting
in burdensome controls, tariffs, and import and export restrictions;
- difficulties in staffing and managing international operations;
- changes in foreign currency exchange rates, which could make our
products more expensive as stated in local currency, as compared to
competitive products priced in the local currency;
- enforceability of contracts and other rights or collectability of
accounts receivable in foreign countries due to distance and different
legal systems;
- delays or cancellation of production and delivery of our products due
to the logistics of international shipping, which could damage our
relationships with our customers; and
- the current outbreak of SARS and the associated risks to our
operations in China and Hong Kong.
COMPETITION IN THE MARKETS WE SERVE IS INTENSE AND COULD REDUCE OUR NET SALES
AND HARM OUR BUSINESS.
Our Sensor business is characterized by highly fragmented markets and high
levels of competition. Despite recent consolidations, including the acquisition
of several smaller competitors of ours by larger competitors like General
Electric, Honeywell, and Danaher Corporation, the sensor industry remains highly
fragmented. The Consumer Products business is also highly competitive and is
becoming more competitive as a result of the emergence of new scale
manufacturers and enhanced product lines from existing competitors. Competitors
in our Consumer Products business include some customers for whom we manufacture
products. We cannot assure that our original equipment manufacturer customers,
who are also competitors, will not develop their own production capability or
locate alternative sources of supply, and discontinue purchasing products from
us. In addition, the barriers to entry are being reduced in the scale industry
due to the emergence of low cost, commercially available electronics and load
cells. Some of our competitors and potential competitors may have a number of
significant advantages over us, including:
15
- greater financial, technical, marketing, and manufacturing resources;
- preferred vendor status with our existing and potential customer base;
- more extensive distribution channels and a broader geographic scope;
- larger customer bases; and
- a faster response time to new or emerging technologies and changes in
customer requirements.
A SUBSTANTIAL PORTION OF OUR NET SALES IS GENERATED BY A SMALL NUMBER OF LARGE
CUSTOMERS. IF ANY OF THESE CUSTOMERS REDUCES OR POSTPONES ORDERS, OUR NET SALES
AND EARNINGS WILL SUFFER.
Historically, a relatively small number of customers have accounted for a
significant portion of our net sales. For the fiscal year ended March 31, 2003,
the five largest customers of our Consumer Products business represented 44.9%
of net sales for that business and 23.2% of our net sales, and the five largest
customers of our Sensor business represented 27.3% of net sales for that
business and 10.8% of our net sales. No customer accounted for more than 10%
of our net sales for the fiscal year ended March 31, 2003. Because we have no
long-term volume purchase commitments from any of our significant customers, we
cannot be certain that our current order volume can be sustained or increased.
The loss of or decrease in orders from any major customer could significantly
reduce our net sales and profitability.
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO DELIVER KEY COMPONENTS AND
FINISHED PRODUCTS, WHICH MAY AFFECT OUR ABILITY TO MEET THE NEEDS OF OUR
CUSTOMERS, RESULTING IN THE LOSS OF SALES AND CUSTOMERS.
We rely on contract manufacturers for a significant portion of our consumer
finished products. Our principal supplier is located in China and assembles the
majority of our consumer products, using proprietary subassemblies provided by
us and other components purchased from third parties. We procure components and
finished products, as needed, through purchase orders. We do not have a
guaranteed level of production capacity or any long-term contracts with any of
our suppliers other than Silicon Microstructures, Inc. (a wholly owned
subsidiary of Elmos Semiconductor, AG) with whom we have a long term silicon
wafer supply agreement as an outcome of their acquisition of the IC Sensors
wafer fab in August 2002. These suppliers could choose to allocate production
capacity toward their other customers. If delivery delays or supply shortages
of certain key components develop, we may experience an interruption in
production or we may be forced to adjust our product designs and production
schedules until we locate alternative sources of supply. If we lose one or more
of our sources of supply and/or assembly, and we are not able to replace that
source in a timely manner, we may be unable to meet the needs of our customers,
resulting in a loss of net sales and jeopardizing our customer relationships.
RECENT OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME (SARS) COULD ADVERSELY
EFFECT OUR OPERATIONS IN ASIA
SARS is a new respiratory illness that has recently been reported in Asia,
North America, and Europe. The disease produces flu-like symptoms, and has an
approximately 8% mortality rate. According to the World Health Organization
(WHO), as of May 13, 2003, there were approximately 7,548 reported SARS cases
worldwide resulting in approximately 573 deaths, with more than half of the
reported cases concentrated in China and Hong Kong. The current infection
control practice is to manage exposure to infected or potentially infected
individuals by isolation or quarantine. If our employees in Asia or the
employees of our principal supplier in China were to contract the SARS virus
(resulting in isolation or quarantine), we could experience delivery delays,
supply shortages, or production interruptions. The majority of our Shenzhen,
China employees live in dormitory-style housing arrangements which would make it
difficult to restrict the spread of airborne pathogens. In addition, one of our
employees lives in a building in Hong Kong, in which, according to media
reports, SARS is believed to have been spread through the plumbing system.
As of May 13, 2003, none of our employees have been diagnosed with SARS. To
mitigate this risk, we have established a special task force to implement and
monitor a comprehensive prevention strategy, including providing education and
training to our employees to enhance awareness of the disease, promoting careful
and frequent hand hygiene, monitoring of temperature/wellness, routine use of
personal protective equipment, limiting travel and direct contact to the region,
and establishing a special reporting and communication system.
OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN THEM.
Our success will depend to a significant extent on the continued service of
our executive officers and other key employees, including key sales, technical,
and marketing personnel. If we lose the services of one or more of our
executives or key employees, our business and ability to implement our business
objectives successfully could be harmed, particularly if one or more of our
executives or key employees decided to join a competitor or otherwise compete
16
directly or indirectly with us. We do not have key person life insurance on,
and generally do not have non-compete agreements with, any of our executives.
OUR TRANSFER PRICING PROCEDURES MAY BE CHALLENGED, WHICH MAY SUBJECT US TO
HIGHER TAXES AND ADVERSELY AFFECT OUR EARNINGS.
Transfer pricing refers to the prices that one member of a group of related
companies charges to another member of the group for goods, services, or the use
of intellectual property. If two or more affiliated companies are located in
different countries, the laws or regulations of each country generally will
require that transfer prices be the same as those charged by unrelated companies
dealing with each other at arm's length. If one or more of the countries in
which our affiliated companies are located believes that transfer prices were
manipulated by our affiliate companies in a way that distorts the true taxable
income of the companies, the laws of countries where our affiliated companies
are located could require us to redetermine transfer prices and thereby
reallocate the income of our affiliate companies in order to reflect these
transfer prices. Any reallocation of income from one of our companies in a lower
tax jurisdiction to an affiliated company in a higher tax jurisdiction would
result in a higher overall tax liability to us. Moreover, if the country from
which the income is being reallocated does not agree to the reallocation, the
same income could be subject to taxation by both countries.
We have adopted transfer pricing procedures with our subsidiaries located
in the United States, Hong Kong and China to regulate intercompany transfers.
Our procedures call for the transfer of goods, services, or intellectual
property from one company to a related company at prices that the related
parties believe are arm's length. We have established these procedures due to
the fact that some of our assets, such as intellectual property developed in the
United States, are transferred among our affiliated companies. We have
determined transfer prices that we believe are the same as the prices that would
be charged by unrelated parties dealing with each other at arm's length. If the
United States Internal Revenue Service or the taxing authorities of any other
jurisdiction were to successfully challenge these agreements or require changes
to our transfer pricing practices, we could become subject to higher taxes and
our earnings would be adversely affected. We believe that we operate in
compliance with all applicable transfer pricing laws in these jurisdictions.
However, there can be no assurance that we will continue to be found to be
operating in compliance with transfer pricing laws, or that such laws will not
be modified, which, as a result, may require changes to our transfer pricing
practices or operating procedures. Any determination of income reallocation or
modification of transfer pricing laws can result in an income tax assessment of
the portion of income deemed to be derived from the United States or other
taxing jurisdiction.
DEFECTS IN OUR PRODUCTS COULD IMPAIR OUR ABILITY TO SELL OUR PRODUCTS OR COULD
RESULT IN LITIGATION AND OTHER SIGNIFICANT COSTS.
Detection of any significant defects in our products may result in, among
other things, delay in time-to-market, loss of market acceptance and sales of
our products, diversion of development resources, injury to our reputation, or
increased warranty costs. Because our products are complex, they may contain
defects that cannot be detected prior to shipment. These defects could harm our
reputation, which could result in significant costs to us and could impair our
ability to sell our products. The costs we may incur in correcting any product
defects may be substantial and could decrease our profit margins. Since our
products are used in applications that are integral to our customers'
businesses, errors, defects, or other performance problems could result in
financial or other damages to our customers. Product liability litigation, even
if we are successful, would be time consuming and costly to defend. Our product
liability insurance may not be available or adequate to cover claims.
RISKS RELATED TO OUR INDUSTRIES
OUR CONSUMER PRODUCTS SALES MAY BE REDUCED BY DOWNTURNS IN THE RETAIL ECONOMY.
Historically, a significant portion of our net sales have been sales of
consumer products to retail merchants such as Sears, Sam's Club, and Bed Bath &
Beyond. In addition, many of our other customers, such as Sunbeam, sell to
retail merchants. Accordingly, a downturn in the retail economy could adversely
affect our sales and results of operations.
SUBSTANTIAL PRODUCT RETURNS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Certain consumer products may be sold with rights of return. Although we record
an estimate of the impact of the expected returns at the time of sale,
substantial returns in excess of estimated amounts from these customers could
harm our sales and results of operations.
WE RELY ON PROMOTIONAL PROGRAMS FOR A SIGNIFICANT PORTION OF OUR CONSUMER
PRODUCTS REVENUES. ANY REDUCTION IN CUSTOMER PROMOTIONS MAY RESULT IN A LOSS OF
NET SALES.
Promotional programs by our Consumer Products customers resulted in net
sales of $3.4 million for the fiscal year ended March 31, 2003, net sales of
$2.7 million for the fiscal year
17
ended March 31, 2002 and net sales of $6.8 million for the fiscal year ended
March 31, 2001. These promotional programs result in significant orders by
customers who do not carry our products on a regular basis. Promotional programs
often involve special pricing terms or require us to spend funds to have our
products promoted. We cannot assure you that promotional purchases by our retail
industry customers will be repeated regularly, or at all. These promotional
sales could cause our quarterly results to vary significantly. Any reduction in
customer promotions may result in a loss of net sales.
PRESSURE BY OUR CUSTOMERS TO REDUCE PRICES AND TO AGREE TO LONG-TERM SUPPLY
ARRANGEMENTS MAY CAUSE OUR NET SALES OR PROFIT MARGINS TO DECLINE.
Our customers are under pressure to reduce prices of their products.
Therefore, we expect to experience pressure from our customers to reduce the
prices of our products. Our customers frequently negotiate supply arrangements
with us well in advance of delivery dates, thereby requiring us to commit to
price reductions before we can determine if we can achieve the assumed cost
reductions. We believe that we must reduce our manufacturing costs and obtain
larger orders to offset declining average sales prices. If we are unable to
offset declining average sales prices, our gross profit margins will decline.
RAPID TECHNOLOGICAL CHANGE MAY MAKE OUR PRODUCTS OBSOLETE, RESULTING IN LOSS OF
SALES.
Technology changes rapidly in the markets we serve. Our success depends on
our ability to anticipate these changes, enhance our existing products, and
develop new products to meet customer requirements and achieve market
acceptance. We may not be able to respond correctly or soon enough. If we fail
in these efforts, our products will become obsolete, which will reduce our net
sales. We may also be required to write off inventory, tooling, or other assets
associated with obsolete products.
OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE TO PROTECT OUR BUSINESS.
We rely on our patent and trade secret rights to protect our proprietary
technology. Our patents may not provide us with meaningful protection from
competitors, including those who may pursue patents that may block our use of
our proprietary technology. In addition, we rely upon unpatented trade secrets
and seek to protect them, in part, through confidentiality agreements with
employees, customers, and potential customers. If these agreements are
breached, or if our trade secrets become known to or are independently developed
by competitors, we may not have adequate remedies. If a competitor's products
infringe upon our patents, we may sue to enforce our rights in an infringement
action. These suits may be costly and could divert funds, management, and
technical resources from our operations.
Currently, a significant portion of our net sales is derived from sales in
foreign countries. The laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Many United States companies have encountered substantial problems in protecting
their proprietary rights against infringement in foreign countries, including
some countries in which we sell products. Our means of protecting our
proprietary rights may not be adequate in these countries. For example, our
competitors in these countries may independently develop similar technology or
duplicate our systems. If we fail to protect our intellectual property
adequately in these countries, it would be easier for our competitors to sell
competing products in these countries.
SUCCESSFUL INFRINGEMENT CLAIMS BY THIRD PARTIES COULD RESULT IN SUBSTANTIAL
DAMAGES, LOST PRODUCT SALES, AND THE LOSS OF IMPORTANT PROPRIETARY RIGHTS.
There has been substantial litigation regarding patent and other
intellectual property in various high technology industries. In the future, we
may be notified of allegations that we may be infringing on intellectual
property rights possessed by others. Even if we are ultimately successful in our
defense, any litigation of this type could result in substantial costs and
diversion of time and effort by our management team. Other risks of infringement
claims include:
- - the loss of certain proprietary rights;
- - significant liabilities, including treble damages in some instances;
- - the need to seek licenses from third parties, which may not be available
on reasonable terms, if at all; and
- - barriers to product manufacturing.
Any of these outcomes could materially harm our business.
18
ITEM 2. PROPERTIES
As of March 31, 2003, we leased all of our properties under operating
leases as follows:
LOCATION PRIMARY USE BUSINESS SQ. FT. LEASE EXPIRATION
- ---------------------- -------------------------- ------------ ------- --------------------
Fairfield, NJ USA Corporate headquarters Consumer and 6,500 November 2007
Corporate
Headquarters
Wayne, PA USA Research and development, Sensor 2,900 December 2004
sales and marketing
San Jose, CA USA Manufacturing, research Sensor 4,700 August 2005
and development, sales and
marketing
Shenzhen, China Sensors principal Asian Sensor 125,860 Between August 2003
manufacturing and February 2005
facility
Shenzhen, China Research and development Consumer 12,214 February 2005
product support facility
Hampton, Virginia USA Sensors principal domestic Sensor 80,725 July 2011
manufacturing and
distribution facility
Hampton, Virginia USA Distribution and warehouse Consumer 39,275 July 2011
Hong Kong, China Trading office Consumer 2,000 February 2004
Kings Langley, England Sales and marketing Consumer 1,070 Month to Month
Our sensor manufacturing facilities located in China and Virginia are ISO
9001 certified. We believe that these premises are suitable and adequate for
our present operations.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION:
In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No.
1071 (D.N.J.).
On March 20, 2002, a class action lawsuit was filed on behalf of purchasers
of our common stock in the United States District Court for the District of New
Jersey against the company and certain of our present and former officers and
directors. The complaint was subsequently amended to include the underwriters
in our August 2001 public offering and our former auditors. The lawsuit alleges
violations of the federal securities laws. 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 have fully
briefed motions to dismiss the case, which remain under consideration by the
court.
We have Directors and Officers liability insurance that provides an
aggregate of $10.0 million in coverage for the period during which this claim
was filed ($5.0 million in primary coverage and $5.0 million in excess
coverage). Our primary D&O insurance carrier initially denied coverage of this
claim, which position we contested. After discussion, the insurer reversed its
previous coverage position and agreed to participate in the potential settlement
of the class action lawsuit (subject to the $5.0 million policy limit). As part
of the arrangement, we renewed our D&O coverage for the coming fiscal year. The
new policy provides for an aggregate of $6.0 million in coverage. The $3.2
million renewal premium represents a combination of the market premium for D&O
coverage for the period from April 7, 2003 through April 7, 2004 plus our
contribution toward a potential settlement in the class action lawsuit. No
assurance can be given that this insurance will be adequate, or
19
that our excess insurance coverage will be available or adequate, to cover
losses, if any, arising from this litigation.
In addition, our credit agreement precludes us from making cash payment in
settlement of this litigation without the prior consent of Fleet Capital
Corporation.
This litigation is ongoing and we cannot predict its outcome at this time
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.
SEC/U.S. Attorney Investigation
In February 2002, we contacted the staff of the SEC after discovering that
our former chief financial officer had made the misrepresentation to senior
management, our Board of Directors and our auditors that a waiver of a covenant
default under our credit agreement had been obtained when, in fact, our lenders
had refused to grant such a waiver. Since February 2002, we 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 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 these investigations will continue or their
outcome.
Hibernia Litigation
On or about July 23, 2002, Hibernia Capital Partners I, ilp and Hibernia
Capital Partners II, ilp filed a lawsuit against us 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 us 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 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 have now filed our defense, which is similar to an answer, and await
commencement of the discovery process. This litigation is ongoing and we cannot
predict its outcome at this time.
Robert L. DeWelt v. Measurement Specialties, Inc. et al., 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 us and
certain of the 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. 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. This litigation is
ongoing and we cannot predict its outcome at this time.
Semex, Inc. v. Measurement Specialties, Inc. and AMP Incorporated, Court of
Common Pleas of Montgomery County Pennsylvania, Docket Number NO. 02-23609.
On October 24, 2002, Semex, Inc. ("Semex") filed a lawsuit against us and
Amp Incorporated alleging breaches of the lease for our former facility in
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. An answer has been filed disputing certain of the amount s claimed to
be due.
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration).
Exeter Technologies, Inc. and Michael Yaron have alleged underpayments by
us at approximately $322,000 relating to a Product Line Acquisition Agreement,
dated January 5, 2000. The parties are working together to resolve their
dispute through a non-binding arbitration and both sides have exchanged
documents in order to facilitate the resolution process. If these efforts are
not successful, an arbitration is scheduled for June 17 and June 18, 2003.
Czarnek & Orkin Laboratories, Inc. v. TRW, Inc. and Measurement
Specialties, Inc. (Arbitration)
Czarnek & Orkin Laboratories, Inc. ("Orkin") submitted a demand for
arbitration with the American Arbitration Association on July 8, 2002. The
demand indicated that Orkin was seeking approximately $2.0 million in royalty
revenue from us. At issue was a
20
license agreement relating to the expected development and marketing of certain
sensor technology. The arbitration was concluded in the quarter ended March 31,
2003 and resulted in our making a settlement payment in the amount of $165,000.
In re: Service Merchandise Company, Inc. (Service Merchandise Company, Inc.
v. Measurement Specialties, Inc.), 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 $645,000 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 $645,000 from the company. This litigation
is ongoing and we cannot predict its outcome at this time.
In re: Clark Material Handling Company, et al. (Clark Material Handling
Company, et al. v. Lucas Control Systems, Case No. 02-997). We are currently
the defendant (as successor to Lucas Control Systems) in a lawsuit filed in
April 2002 by Clark Material Handling Company and its related debtors (the
"Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
Plaintiffs assert that Lucas Control Systems ("Lucas") received $34,413 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 Lucas' 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 Lucas 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 $34,413 from Lucas. This litigation is ongoing and we
cannot predict its outcome at this time.
Measurement Specialties, Inc. vs. Stayhealthy.com, Docket Number 03-3017
(E.D. Pa.)
On or about May 8, 2003, we filed a complaint against Stayhealthy, Inc.
("Stayhealthy") in United States District Court in the Eastern District of
Pennsylvania. The Complaint alleges that Stayhealthy owes us at least
$1,185,842 for failing to make certain payments in accordance with the terms of
a sales contract. The Complaint asserts claims against Stayhealthy for breach
of contract, sale of goods, action for price, collection of account, and unjust
enrichment. To date, we have not been served with Stayhealthy's answer to the
complaint. This action is ongoing and we cannot predict its outcome at this
time.
Litigation Accruals
As of March 31, 2003, we have provided an accrual of $3.6 million
associated with certain of the legal matters discussed above. However, there
can be no assurances that additional amounts may not be required to dispose of
such matters.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an Annual Meeting of Shareholders on March 3, 2003. At that
meeting, our shareholders elected one director for a term that will expire at
our Annual Meeting in 2005. In addition, our shareholders ratified the
appointment of Grant Thornton LLP as our independent auditors for the fiscal
year ended March 31, 2003. The results of the shareholder voting are as
follows:
VOTES FOR VOTES AGAINST
--------- -------------
Election of Director 9,510,696 41,347
Morton L. Topfer
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
Ratification of Auditors 9,527,381 14,025 10,637
There were no broker non votes on any of the above matters. The following
individuals whose terms expire in either 2003 or 2004 continue to serve as our
directors: Joseph R. Mallon, Jr., The Honorable Dan J. Samuel, John D. Arnold
and Frank D. Guidone.
21
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers as of March 31, 2003 were as follows:
NAME AGE POSITION
Frank Guidone 38 Chief Executive Officer and Director
Morton L. Topfer 66 Chairman of the Board
John P. Hopkins 42 Chief Financial Officer
Mark W. Cappiello 49 Vice President and General Manager of the
Consumer Products Division
J. Victor Chatigny 52 Vice President and General Manager of the
Sensors Products Division
Morton L. Topfer has been a director since January 2002 and was appointed
Chairman of the Board in January 2003. Mr. Topfer is Managing Director of
Castletop Capital and a member of the Board of Directors of Dell Computer
Corporation. He previously served at Dell as Counselor to the Chief Executive
Officer, from December 1999 to February 2002, and Vice Chairman, from June 1994
to December 1999. Prior to joining Dell, Mr. Topfer served for 23 years at
Motorola, Inc. where he held several executive positions, last serving as
Corporate Executive Vice President and President of the Land Mobile Products
Sector. Mr. Topfer was conferred the Darjah Johan Negeri Penang State Award in
July 1996 by the Governor of Penang for contributions to the development of the
electronics industry in Malaysia. He serves as a director for Alliance Gaming
and Bio Reference Laboratories. Mr. Topfer also serves on the advisory board of
Singapore Technologies.
Frank Guidone has served as Chief Executive Officer since June 2002 and a
Director since December 2002. Mr. Guidone remains a principal of Corporate
Revitalization Partners (CRP), a Dallas-based turnaround/crisis management
consulting firm. Mr. Guidone has been a Managing Director/Principal of CRP since
2000. Mr. Guidone is also a partner/co-founder of Four Corners Capital
Partners, a boutique private investment and consulting firm founded in 1999.
Prior to Four Corners, Mr. Guidone spent 13 years in management consulting with
Andersen Consulting and George Group, Inc. Mr. Guidone has worked with numerous
solvent and insolvent companies, focusing on operational and financial
restructurings. Mr. Guidone received a B.S. in mechanical engineering from The
University of Texas at Austin.
John P. Hopkins was appointed Chief Financial Officer in July 2002. Prior
to joining Measurement Specialties, he was Vice President, Finance from April
2001, and was Vice President and Controller from January 1999 to March 2001,
with Cambrex Corporation, a provider of scientific products and services to the
life sciences industry. From 1988 to 1998, he held various senior financial
positions with ARCO Chemical Company, a manufacturer and marketer of specialty
chemicals and chemical intermediates. Mr. Hopkins is a Certified Public
Accountant and was an Audit Manager for Coopers & Lybrand prior to joining ARCO
Chemical. Mr. Hopkins holds a B.S. in Accounting from West Chester University,
and an M.B.A. from Villanova University.
Mark W. Cappiello was appointed Vice President and General Manager of our
Consumer Products Division in June 2002. Mr. Cappiello was our Vice President
of Sales and Marketing from January 1988 until June 2002. Mr. Cappiello has
over twenty-five years of experience in international consumer products
marketing, over twenty of which have been in the scale industry. From January
1985 to October 1987, Mr. Cappiello was employed by Terraillon S.A., a French
manufacturer and distributor of scales and balance products. Mr. Cappiello
received a B.A. in business from the University of Connecticut.
J. Victor Chatigny has been Vice President and General Manager of our
Sensors Division since June 2002. Mr. Chatigny joined Measurement Specialties
through our 1998 acquisition of PiezoSensors from AMP Incorporated, where he
served as Director of Sales, Marketing and Research and Development since 1993.
He held management positions in PiezoSensors since 1982, and, previously, in the
Electronics Division of Corning International from 1978. Mr. Chatigny served in
US Army Corps of Engineers where he was Captain, 11th Engineering Battalion. He
holds B.S. and M.S. degrees in industrial engineering and management from
Clarkson University, and a M.B.A. (finance) from The American University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) Market Price
Our common stock, no par value, is traded on the American Stock Exchange
(AMEX) under the symbol MSS. The following table presents the reported high and
low sales prices of our common stock as reported on the AMEX for the periods
indicated:
22
HIGH LOW
------ ------
YEAR ENDING MARCH 31, 2003
Quarter ended June 30, 2002 $ 3.25 $ 1.00
Quarter ended September 30, 2002 2.91 2.06
Quarter ended December 31, 2002 3.20 1.35
Quarter ended March 31, 2003 3.26 1.95
YEAR ENDED MARCH 31, 2002
Quarter ended June 30, 2001. $25.58 $14.96
Quarter ended September 30, 2001 16.25 9.10
Quarter ended December 31, 2001 12.00 5.61
Quarter ended March 31, 2002 10.40 6.56
The trading of our common stock was suspended by the AMEX on February 15,
2002 because of delays in the filing of our quarterly report on Form 10-Q for
the three months ended December 31, 2001. Trading of the stock resumed on June
5, 2002. Trading of the stock was subsequently suspended from July 15, 2002
until November 1, 2002 as a result of our failure to timely file our Annual
Report on Form 10-K for the fiscal year ended March 31, 2002. On August 21,
2002, we received a letter from the AMEX indicating that we were not in
compliance with AMEX listing guidelines due to our failure to furnish certain
reports and information to shareholders and that our securities were, therefore,
subject to being delisted from the AMEX. We appealed this 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 we evidenced compliance with applicable AMEX continued listing
requirements. Accordingly, our hearing file with the AMEX was closed.
(B) Approximate Number of Holders of Common Stock
At May 8, 2003, there were approximately 111 shareholders of record of our
common stock.
(C) 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.
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.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and the related notes to the consolidated
financial statements included in this Annual Report on Form 10-K.
YEARS ENDED MARCH 31,
2003 2002 2001(1) 2000 1999
Results of operations:
Net sales $107,888 $ 96,790 $ 97,033 $ 59,997 $37,596
Income (loss) from continuing operations $ (6,323) $(24,234) $ 2,462 $ 5,531 $ 1,729
Net income (loss) $ (9,097) $(29,047) $ 1,197 $ 5,531 $ 1,729
Net cash provided by (used in):
Operating activities $ 3,047 $ (6,077) $ (4,123) $ 8,129 $ 3,471
Investing activities $ 21,113 $(12,070) $(19,287) $(15,999) $(4,993)
Financing activities $(24,178) $ 27,344 $ 27,539 $ 7,041 $ 3,927
Income (loss) from continuing operations
per common share:
Basic $ (0.53) $ (2.30) $ 0.30 $ 0.73 $ 0.24
Diluted $ (0.53) $ (2.30) $ 0.27 $ 0.64 $ 0.23
Loss per common share from discontinued operations
Basic $ (0.23) $ (0.43) $ (0.15) $ - $ -
Diluted $ (0.23) $ (0.43) $ (0.14) $ - $ -
Net income (loss) per common share:
Basic $ (0.76) $ (2.76) $ 0.15 $ 0.73 $ 0.24
Diluted $ (0.76) $ (2.76) $ 0.13 $ 0.64 $ 0.23
Cash dividends declared per common share None None None None None
As of March 31,
Total assets $ 46,168 $ 89,612 $ 67,685 $ 39,647 $18,535
Long-term debt, net of current maturities (2) $ 2,000 $ - $ - $ 9,000 $ 3,250
(1) Reflects the restatement of our financial statements for fiscal year
ended March 31, 2001. See "Restatement" above and Note 3 to our consolidated
financial statements included in this Annual Report on Form 10-K.
(2) In 2002 and 2001, long-term debt was reclassified to current as a
result of our defaults under the credit agreement, as discussed in Note 8 to our
consolidated financial statements included in this Annual Report on form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Annual
Report on Form 10-K. 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.
OVERVIEW
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, 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 Consumer Products business designs, manufactures and markets
sensor-based consumer products. These products include bathroom and kitchen
scales, tire pressure gauges, kitchen accessories and distance estimators.
24
NEW ACCOUNTING STANDARDS
On May 15, 2003, the Financial Accounting Standards Board issued Statement
("FASB") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"), which requires
that certain financial instruments be presented as liabilities that were
previously presented as equity or as temporary equity. Such instruments include
mandatory redeemable preferred and common stock, and certain options and
warrants. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and is generally effective at the beginning of the
first interim period beginning after June 15, 2003. We are currently evaluating
the impact that Statement 150 will have on our consolidated financial position
and results of operations when adopted.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock
- -Based Compensation- Transition and Disclosure", an amendment of FASB Statement
No. 123. The standard amends FASB statement No 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for voluntary change
to fair value based method of accounting for stock-based employee 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. We have elected to continue
accounting for stock-based compensation using the intrinsic method. However, we
have adopted the new disclosure requirements specified under SFAS No. 148 (See
Note 2 to our consolidated financial statements included in this Annual Report
on Form 10-K.)
On July 29, 2002, the FASB issued 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 termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. We
will apply SFAS 146 prospectively to exit or disposal activities initiated after
December 31, 2002. We have no current exit or disposal activities that fall
under the provision of SFAS 146.
Prior to December 31, 2002, our policy was to accrue restructuring and
other costs at commitment date of a plan in accordance with the provisions of
Emerging Issues Task Force 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, we have
provided for certain restructuring costs during the years ended March 31, 2003
and 2002. (See Notes 7 and 12 to our consolidated financial statements
included in this Annual Report on Form 10-K).
In 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS 145 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
FASB 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. This standard is effective for fiscal
years beginning after May 15, 2002. We do not expect that this standard will
have a material effect on our financial position or results of operations. We
will implement SFAS No. 145 in the fiscal quarter ending June 30, 2003.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated assets' retirement costs. We are required to
implement SFAS No. 143 on April 1, 2003. We do not expect this standard to have
a material impact on our consolidated financial position or results of
operations.
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. We previously did not record a liability
when guaranteeing obligations unless it became probable that we would have to
perform under the guarantee. FIN 45 applies prospectively to guarantees we
issue or modify subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December 15,
2002. Our guarantees have historically consisted of warranty provisions and we
do not anticipate FIN 45 will have a material effect on our financial statements
for the year ended March 31, 2004. Disclosures required by FIN 45 are included
in the accompanying financial statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
25
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable
interest entities within the scope of FIN 46 will be required to be consolidated
by their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected returns, or both. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
We are in the process of determining what impact, if any, the adoption of the
provisions of FIN 46 will have upon our financial condition or results of
operations, but do not believe that this statement will have a material effect
on our financial condition or results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. We have not determined the effect of adoption of EITF 00-21
on our financial statements or the method of adoption we will use.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the periods reported. The following accounting policies involve a
"critical accounting estimates" because they are particularly dependent on
estimates and assumptions made by management about matters that are highly
uncertain at the time the accounting estimates are made. In addition, while we
have used our best estimates based on facts and circumstances available to us at
the time, different estimates reasonably could have been used in the current
period, or changes in the accounting estimates we used are reasonably likely to
occur from period to period which may have a material impact on the presentation
of our financial condition and results of operations. We review these estimates
and assumptions periodically and reflect the effects of revisions in the period
that they are determined to be necessary.
REVENUE RECOGNITION:
Revenue is recorded when products are shipped, at which time title
generally passes to the customer. Certain consumer products may be sold with a
provision allowing the customer to return a portion of products. Upon shipment,
we provide for allowances for returns based upon historical and estimated return
rates. The amount of actual returns could differ from our estimate. Changes in
estimated returns would be accounted for in the period of change.
We utilize manufacturing representatives as sales agents for certain of our
products. Such representatives do not receive orders directly from customers,
take title to or physical possession of products, or invoice customers.
Accordingly, revenue is recognized upon shipment to the customer.
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. We are not responsible for the ultimate sale to third party
customers and therefore record revenue upon shipment to the distributor.
ACCOUNTS RECEIVABLE:
The majority of the our accounts receivable are due from retailers and
manufacturers of electronic, automotive, military, and industrial products.
Credit is extended based on evaluation of a customer's financial condition and,
generally, collateral is not required. Accounts receivable are generally due
within 30 to 90 days and are stated as amounts due from customers net of
allowances for doubtful accounts, and other sales allowances. Accounts
outstanding longer than the contractual payment terms are considered past due.
We determine our allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, our previous loss
history, the customer's current ability to pay its obligation to us, and the
condition of the general economy and the industry as a whole. We write-off
accounts receivable when we determine they are uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Actual uncollectible accounts could exceed our estimates and
26
changes to our estimates will be accounted for in the period of change.
INVENTORIES:
We make purchasing decisions principally based upon firm sales orders from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown in customer
demand, customer delay in the issuance of sales orders, miscalculation of
customer requirements, technology changes that render raw materials and finished
goods obsolete, loss of customers and/or cancellation of sales orders. We
establish reserves for our inventories to recognize estimated obsolescence and
unusable items on a continual basis. Market conditions surrounding products are
also considered periodically to determine if there are any net realizable
valuation matters, which would require a write-down of any related inventories.
If market or technological conditions change, it may result in additional
inventory reserves and write-downs, which would be accounted for in the period
of change.
GOODWILL IMPAIRMENT:
Management assesses goodwill for impairment at the reporting unit level on
an annual basis or more frequently under certain circumstances. Such
circumstances include (i) significant adverse change in legal factors or in the
business climate, (ii) an adverse action or assessment by a regulator, (iii)
unanticipated competition, (iv) a loss of key personnel, (v) a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of, and (vi) recognition
of an impairment loss in a subsidiary that is a component of a reporting unit.
Management must make assumptions regarding estimating the fair value of our
reporting units. If these estimates or related assumptions change in the future,
we may be required to record an impairment charge. Impairment charges would be
included in general and administrative expenses in our statements of operations,
and would result in reduced carrying amounts of the goodwill.
LONG LIVED ASSETS:
Management assesses the recoverability of long-lived assets, which consist
primarily of fixed assets and intangible assets whenever events or changes in
circumstance indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (i) significant
underperformance relative to expected historical or projected future operating
results; (ii) significant negative industry or economic trends; (iii)
significant decline in our stock price for a sustained period; and (iv) a change
in our market capitalization relative to net book value. If the recoverability
of these assets is unlikely because of the existence of one or more of the
above-mentioned factors, an impairment analysis is performed using a projected
discounted cash flow method. Management must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of
these assets. If these estimates or related assumptions change in the future,
we may be required to record an impairment charge. Impairment charges would be
included in general and administrative expenses in our statements of operations,
and would result in reduced carrying amounts of the related assets on our
balance sheets.
INCOME TAXES:
We file income tax returns in every jurisdiction in which we have reason to
believe that we are subject to tax. Historically, we have been subject to
examination by various taxing jurisdictions. To date, none of these
examinations has resulted in any material additional tax. Nonetheless, any tax
jurisdiction may contend that our filing position regarding one or more of our
transactions is contrary to that jurisdiction's laws or regulations.
We have provided a valuation allowance against deferred tax assets since we
believe uncertainty exists regarding the realizability of our deferred tax
assets. Realization of a deferred tax asset is dependent on generating future
taxable income.
The income tax provision is based upon the proportion of pretax profit in
each jurisdiction in which we operate. The income tax rates in Hong Kong and
China are less than those in the United States. Deferred income taxes are not
provided on our subsidiaries' earnings which are expected to be reinvested.
Distribution, in the form of dividends or otherwise, would subject our
subsidiaries' earnings to United States income taxes, subject to an adjustment
for foreign tax credits. Determination of the amount of unrecognized deferred
United States income tax liability is not practicable because of the
complexities associated with its hypothetical calculation.
WARRANTY RESERVE:
Our sensor and consumer products generally are marketed under warranties to
end users of up to ten years. Factors affecting our warranty liability include
the number of products sold and historical and anticipated rates of warranty
claims and cost per claim. We provide for estimated product warranty
obligations at the time of sale, based on our historical warranty claims
experience and assumptions about future warranty claims. This estimate is
susceptible to changes in the near term based on introductions of new products,
product quality improvements/declines and changes in end user application and/or
behavior.
CONTINGENCIES AND LITIGATION:
27
We periodically assess the potential liabilities related to any lawsuits or
claims brought against us. While it is typically very difficult to determine the
timing and ultimate outcome of these actions, we use our best judgment to
determine if it is probable that we will incur an expense related to a
settlement for such matters and whether a reasonable estimation of such probable
loss, if any, can be made. Given the inherent uncertainty related to the
eventual outcome of litigation, it is possible that all or some of these matters
may be resolved for amounts materially different from any estimates that we may
have made with respect to their resolution.
RESULTS OF OPERATIONS
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"). See "Restatement" above. The Consolidated Financial
Statements for the fiscal year ended March 31, 2001 included in this report and
the discussions of the results of operations for the year ended March 31, 2001
give effect to the restatement. You should not rely on discussions of our
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.
RECENT CHANGES IN OUR BUSINESS
DISCONTINUED OPERATIONS:
We placed our United Kingdom subsidiary, Measurement Specialties UK Limited
(referred to herein as Schaevitz UK), into receivership on June 5, 2002 pursuant
to the terms of a Mortgage Debenture dated February 28, 2001.
In September 2002, we sold all of the outstanding stock of Terraillon
Holdings Limited (referred to herein as Terraillon), a European manufacturer of
branded consumer bathroom and kitchen scales, to Fukuda (Luxembourg) S.a.r.l.,
an investment holding company incorporated in Luxembourg.
Our consolidated financial statements for the fiscal years ended March 31,
2003, 2002, and 2001 include the results of our ongoing operations. As
indicated above, Schaevitz UK and Terraillon have been classified as
discontinued operations in the consolidated financial results for all periods
presented. Accordingly, all comparisons in Management's Discussion and Analysis
for each of the fiscal years ended March 31, 2003, 2002 and 2001 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)."
SALE OF ASSETS:
In July 2002, we sold the assets, principally property and equipment,
related to our 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 our IC Sensors
division.
IC Sensors continues to design and sell all, and manufacture most, of the
product lines it produced prior to the sale, including custom wafers and die,
pressure sensors, accelerometers and custom MEMS components, and to outsource to
SMI the manufacturing of silicon chips used in these products. This sale is
reflected in the results of operations of the Sensors segment.
28
SUMMARY OF CERTAIN INCOME STATEMENT ITEMS AS A PERCENTAGE OF SALES:
The following table sets forth, for the periods indicated, certain items in
our consolidated statements of income as a percentage of net sales:
FISCAL YEAR ENDED MARCH 31,
-----------------------------
2003 2002 2001(1)
-------- -------- ---------
Net Sales
Sensors 48.4% 50.5% 45.5%
Consumer products 51.6 49.5 54.5
-------- -------- ---------
Total net sales 100.0 100.0 100.0
Cost of Sales 64.9 74.2 64.8
-------- -------- ---------
Gross profit 35.1 25.8 35.2
Operating expenses (income)
Selling, general, and administrative 31.7 34.7 28.3
Litigation expense 3.3
Research and development 3.4 7.2 5.9
Customer funded development (0.3) (1.8) (4.3)
Goodwill and Other Impairments - 4.6 -
Restructuring costs 1.1 1.0 -
Interest expense, net 1.9 2.3 2.8
Other expenses (income) (0.6) 0.2 (1.0)
-------- -------- ---------
40.5 48.2 31.7
Loss from continuing operations before income
taxes and cumulative effect of accounting change (5.4) (22.4) 3.5
Income tax benefit (expense) (0.4) (2.6) (1.0)
Loss from operations of discontinued units (3.6) (4.7) (1.3)
Gain on disposition of discontinued units 1.0
Cumulative effect of accounting change - (0.3) -
-------- -------- ---------
NET INCOME (LOSS) (8.4)% (30.0)% 1.2%
======== ======== =========
(1) Reflects the restatement of our financial statements for the fiscal year ended March
31, 2001. See "Restatement" above and Note 3 to our consolidated financial statements included
in this Annual Report on Form 10-K.
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2002
The consolidated financial statements for the fiscal years ended March 31,
2003, 2002 and 2001 include only the results of our ongoing operations.
Accordingly, Terraillon and Schaevitz UK are classified as discontinued
operations in the consolidated financial results for all periods presented. See
"Recent Changes in Our Business" above.
NET SALES. Net sales increased $11.1 million, or 11.5%, to $107.9 million
for the fiscal year ended March 31, 2003 from $ 96.8 million for fiscal year
ended March 31, 2002.
Net sales of our Sensor business increased $3.3 million, or 6.8%, to $52.2
million for the fiscal year ended March 31, 2003 from $48.9 million for the
fiscal year ended March 31, 2002. This increase was primarily the result of
strong sales in our microFused pressure product line with increased demand
across our expanding OEM customer base and increased sales in the automotive
sector due to the introduction of new customer platforms.
Net sales of our Consumer Products business increased $7.8 million, or
16.3%, to $55.7 million for the fiscal year ended March 31, 2003 from $47.9
million for the fiscal year ended March 31, 2002. Approximately 16.7% of the
sales improvement resulted from the liquidation of $1.3 million of slow moving
and obsolete inventory during the fiscal year ended March 31, 2003. Excluding
this liquidation event, Consumer Products sales increased $6.5 million, or
13.6%, to $54.4 million for the fiscal year ended March 31, 2003 as compared to
the fiscal year ended March 31, 2002. The balance of the improved sales was
mainly attributable to increased sales of bath scales and tire pressure gauges.
In addition, sales increased due to the introduction of our kitchen accessories
line. OEM sales were consistent year over year.
29
GROSS PROFIT. Gross profit increased $12.8 million, or 51.5%, to $37.8
million for the fiscal year ended March 31, 2003 from $ 25.0 million for the
fiscal year ended March 31, 2002. Gross margin increased to 35.1% for the fiscal
year ended March 31, 2003 from 25.8% for the fiscal year ended March 31, 2002.
Gross margin for our Sensor business increased to 38.3% for the fiscal year
ended March 31, 2003 from 27.4% for the fiscal year ended March 31, 2002. The
continued improvement of our Sensors margin is due to the transfer of additional
production and materials sourcing to our lower cost China facility, along with
the sale and closure of the Milpitas, CA wafer fab and Valley Forge, PA
facilities. During the fiscal year ended March 31, 2003, we produced certain
custom products for one of our Sensor customers, Stayhealthy Inc. In the fiscal
quarter ended March 31, 2003, we concluded that collectability for certain of
the products manufactured for Stayhealthy could not be reasonably assured.
Accordingly, in that quarter, gross margin was negatively affected by $0.6
million due to the write-down of inventory still on hand related to the products
manufactured for Stayhealthy. Gross margin for our Consumer Products business
increased to 32.1% for the fiscal year ended March 31, 2003 from 26.0% for the
fiscal year ended March 31, 2002. Consumer Products gross margins for the fiscal
year ended March 31, 2002 reflect $1.3 million in write-downs of slow moving and
obsolete inventory to net realizable value. These write downs were largely
comprised of Park Zone inventory.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $0.6 million, or 2.0%, to $34.2 million for the fiscal year
ended March 31, 2003 from $33.6 million for the fiscal year ended March 31,
2002. The increase was attributable to $9.1 million in consulting and
professional fees incurred in the fiscal year ended March 31, 2003, most of
which was due to costs associated with the defaults under our former credit
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, the increases were offset by a $0.5 million reduction
in our employee bonus accruals and a $0.3 million refund of property taxes.
ACCRUED LITIGATION EXPENSES. During the quarter ended March 31, 2003, we
recorded an aggregate of $3.6 million in reserves relating to certain of our
pending litigation.
RESEARCH AND DEVELOPMENT. Research and development costs decreased $3.3
million, or 47.8%, to $3.6 million for the fiscal year ended March 31, 2003
from $6.9 million for the fiscal year ended March 31, 2002. Customer-funded
development decreased $1.4 million to $0.4 million for the fiscal year ended
March 31, 2003 from $1.8 million for the fiscal year ended March 31, 2002. On
a net basis, research and development costs decreased $1.9 million, or 37.2%,
to $3.2 million for the fiscal year ended March 31, 2003 from $5.1 million for
the fiscal year ended March 31, 2002. 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.
RESTRUCTURING AND OTHER COSTS. Restructuring and other costs are costs
associated with our restructuring program. Restructuring costs increased $0.2
million to $1.2 million over the $1.0 million in the fiscal year ended March 31,
2002. This increase relates to additional severance and lease cost relating to
continued reductions in our workforce and consolidation of operations.
INTEREST EXPENSE, NET. Net interest expense decreased $0.3 million, or
12.5%, to $2.1 million for the fiscal year ended March 31, 2003 from $2.4
million for the fiscal year ended March 31, 2002. Interest expense includes
$0.5 million associated with the issuance of warrants in connection with the
$9.3 million bridge loan from Castletop Capital L.P. Interest expense, exclusive
of the $0.5 million associated with the issuance of the above mentioned
warrants, decreased $0.8 million, which is attributable to a $17.3 million
reduction in average debt outstanding from $33.6 million in the fiscal year
ended March 31, 2002 to $16.3 million in the fiscal year ended March 31, 2003.
INCOME TAXES. We had a pretax loss for financial reporting purposes and
have not provided a tax benefit for the fiscal year ended March 31, 2003.
Recognition of a deferred tax benefit will require generation of future taxable
income. A provision of $0.3 million was recorded for our estimated foreign tax
liability in excess of available foreign net operating loss carry-forwards for
the fiscal year ended March 31, 2003, since certain foreign entities generated
income during the period. We recorded a tax benefit of $0.3 million for the
fiscal year ended March 31, 2002 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 operations of discontinued units was
$3.9 million for the fiscal year ended March 31, 2003, as compared to $4.6
million for the fiscal year ended March 31, 2002. Gain on disposition of
discontinued units was $1.1 million for the fiscal year ended March 31, 2003.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2001
NET SALES. Net sales decreased $0.2 million, or 0.2%, to $96.8 million for
the fiscal year ended March 31, 2002 from $ 97.0 million for the fiscal year
ended March 31, 2001. Net sales for the fiscal year ended March 31, 2002
include the results of Schaevitz for the entire twelve month period while net
sales for the fiscal year ended March 31, 2001 include Schaevitz results only
from the date of acquisition in August 2000.
30
Net sales of our Sensor business increased $4.8 million, or 10.9%, to
$48.9 million for the fiscal year ended March 31, 2002 from $44.1 million for
the fiscal year ended March 31, 2001. The increase is primarily due to the
Schaevitz acquisition. Sales of microFused pressure sensors and IC Sensors
products grew in the fiscal year ended March 31, 2002, but were largely offset
by weaker PiezoSensor sales. Excluding the impact of the Schaevitz acquisition,
net sales of our Sensor business for the fiscal year ended March 31, 2002 were
unchanged from net sales of our Sensor business for the fiscal year ended March
31, 2001.
Net sales of our Consumer Products business decreased $5.0 million, or
9.5%, to $47.9 million for the fiscal year ended March 31, 2002 from $52.9
million for the fiscal year ended March 31, 2001. Sales of tire pressure gauges
were particularly strong during the fiscal year ended March 31, 2001 due
primarily to consumer demand caused by the tire quality issues experienced by a
major tire manufacturer and a large number of Christmas promotions. Sales of
tire pressure gauges declined during the fiscal year ended March 31, 2002 due to
a significant reduction in promotions, a decrease in the number of new customers
and less media attention to tire quality issues from the previous year. Sales
of Park Zone products were significantly lower in the fiscal year ended March
31, 2002 compared to the fiscal year ended March 31, 2001, as many retailers
opted out of this product category following poor sell-through in 2001.
Offsetting the decline in Park Zone sales were stronger bath scale sales,
primarily driven by stronger consumer demand in the United States.
GROSS PROFIT. Gross profit decreased $9.2 million, or 26.9%, to $25.0
million for the fiscal year ended March 31, 2002 from $34.2 million for the
fiscal year ended March 31, 2001. Gross margin decreased to 25.8% for the
fiscal year ended March 31, 2002 from 35.2% for the fiscal year ended March 31,
2001. In our Sensor business, the primary reason for the decrease in gross
margin is the operating inefficiencies associated with our attempt to build
inventory and increase manufacturing capacity in connection with the transfer of
a significant amount of production to our China facility. These lower
production levels resulted in greater allocation of fixed costs to individual
products. In response to these declining Sensor business margins, management
implemented significant cost reduction measures, such as the sale of the IC
Sensors wafer fab in July 2002, the shutdown of Valley Forge operations in
September 2002, and a reduction in workforce. Gross profit and gross margin for
our Consumer Products business declined in the fiscal year ended March 31, 2002
compared to the prior fiscal year due to a decline in sales, increase in
material costs, and certain write-downs of slow moving inventory that was
subsequently liquidated.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses increased $6.2 million, or 22.6%, to $33.6 million for the fiscal year
ended March 31, 2002 from $27.4 million for the fiscal year ended March 31,
2001. The overall increase is primarily due to the substantially increased
consulting and professional fees that were incurred as a result of the defaults
under our former credit agreement, the restatement of our financial statements,
the class action lawsuit and the SEC investigation.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $1.2
million, or 21.1%, to $6.9 million for the fiscal year ended March 31, 2002
from $5.7 million for the fiscal year ended March 31, 2001. During the fiscal
year ended March 31, 2002, we received $1.8 million in customer funded
development, as compared to $4.1 million during the fiscal year ended March 31,
2001. Customer funded research and development was unusually high in the fiscal
year ended March 31, 2001 as a result of several large contracts. These
contracts were not renewed due to the inability of the customer to continue
funding the projects.
GOODWILL IMPAIRMENT. In connection with our restructuring program, we
performed additional impairment tests during the fiscal year ended March 31,
2002 that resulted in an impairment charge of $4.4 million.
RESTRUCTURING AND OTHER COSTS. Restructuring and exiting costs are costs
associated with our restructuring program. Our restructuring program was
intended to reduce costs, streamline operations and generate cash to repay our
lenders. The restructuring costs of $1.0 million during the fiscal year ended
March 31, 2002 consisted of severance costs and the write down of fixed assets.
INTEREST EXPENSE, NET. Net interest expense decreased $0.2 million to $2.4
million for the fiscal year ended March 31, 2002 from $2.6 million for the
fiscal year ended March 31, 2001. This increase is attributable to lower average
outstanding debt.
INCOME TAXES. Our effective tax rates for the fiscal years ended March 31,
2002 and 2001 were 9.6% and 22.3%, respectively. The difference relates to an
increase in the valuation allowance provided for our deferred tax assets. The
rate may change in future periods if operating results or acquisition related
costs differ significantly from current projections. Deferred income taxes are
not provided on our subsidiaries' undistributed earnings, which approximated
$7.1 million at March 31, 2002, because those earnings are expected to be
permanently reinvested.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) was $15.0 million as of each of March 31, 2003 and March 31, 2002. The
decrease in accounts payable of $3.4 million from $13.2 million at March 31,
2002 to $9.8 million at March 31, 2003 was offset by a decrease in accounts
receivable of $1.7 million from $12.2 million at March 31, 2002 to $10.5 million
at March 31, 2003, and a decrease in inventory of $1.7 million from $16.0
million at March 31, 2002 to $14.3 million at March 31, 2003. The decrease in
our accounts payable is primarily due to the cure of extended payables with our
vendors. The decrease in our accounts receivable is a result of improved
management of our receivable collections. The inventory decline is attributable
31
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. Cash provided by operating
activities was $3.0 million for the fiscal year ended March 31, 2003, as
compared to a deficit of $6.1 million for the fiscal year ended March 31, 2002.
Capital spending decreased to $1.5 million for the fiscal year ended March 31,
2003 from $2.4 million for the year ended March 31, 2002. This decrease
contributed to cash flow after capital expenditures of $1.5 for the year ended
March 31, 2003 as compared to a negative cash flow of $8.4 million for the last
fiscal year. Capital spending in the fiscal year ended March 31, 2002
represented a large investment in our Shenzhen, China facility to prepare for
the transfer of manufacturing from our domestic facilities to this facility, as
well as capital expenditures for our domestic sensor operations in Hampton,
Virginia and Milpitas, California. Capital spending in the fiscal year ended
March 31, 2003 was primarily used for maintenance and critical tooling. Other
investing activities for the fiscal year ended March 31, 2003 provided $22.6
million, consisting of $3.4 million in net proceeds from the sale of the IC
Sensor wafer fab, $18.2 million from the sale of Terraillon and $1.0 million
from the liquidation of Schaevitz UK. Financing activities for the fiscal year
ended March 31, 2003 consumed $24.1 million, consisting primarily of the
repayment of debt. Exchange rate effect for the fiscal year ended March 31 is
$0.3 million as a result of the sale of Terraillon. For the fiscal year ended
March 31, 2003, we had a cash flow of $0.3 million from continuing operations,
and a deficit of $1.4 million in connection with discontinued operations,
resulting in a net decrease in cash of $1.1 million as compared to March 31,
2002.
Revolving Credit Facility
On January 31, 2003, we entered into a $15.0 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 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 May 13, 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. At March 31, 2003, the amount outstanding
under the revolving credit facility was $3.3 million. In addition, at May 13,
2003, the amount outstanding under this credit facility was $0.8 million,
leaving us with $6.6 million of additional borrowing capacity. Commitment fees
on the unused balance are equal to .375% per annum of the average monthly amount
by which $15.0 million exceeds the sum of the outstanding principal balance.
The 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 $2.0 million 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 principal and interest payments during that period.
As of March 31, 2003, the weighted average short-term interest rate on the
revolving credit facility was 5.25%. The average amount outstanding under the
revolving credit facility for the period from January 31, 2003 through March 31,
2003 was $4.7 million.
Bridge Loan
On October 31, 2002, we received a $9.3 million 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 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 such as stock
splits, recapitalization, reorganization, merger, sale of the company or stock
dividend.
Amendment to Bridge Loan
We used a portion of the proceeds from the FCC revolving credit facility to
reduce the principal amount outstanding under the bridge loan to $2.0 million.
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 security interest and rights of Castletop under the bridge loan
agreement were subordinated to those of FCC; and
- The non-default interest rate under the bridge loan was increased to
11%.
There were no amendments to the warrant issued as part of the bridge loan
transaction.
32
Second Amendment to Bridge Loan
On April 11, 2003, we entered into a second amendment to our bridge loan to
increase the aggregate outstanding principal amount of the Subordinated Note in
favor of Castletop Capital, L.P. from $2.0 million to $5.0 million. No other
changes were made to the note. The additional borrowing was used to fund the
$3.2 million renewal premium payable in connection with the renewal of our
Directors and Officers liability insurance coverage (which renewal premium
represents a combination of the market premium for D&O coverage for the period
from April 7, 2003 through April 7, 2004 plus our contribution toward a
potential settlement in the class action lawsuit).
Liquidity
As of May 13, 2003, we had $3.2 million of available cash. In addition, as
of May 13, 2003, we had the right to borrow an additional $6.6 million under the
revolving credit facility. Our ongoing capital needs and other obligations, in
addition to funding our operations include the payment of:
- substantial professional fees that are being incurred as the result of the
class action lawsuits, SEC investigation and other pending legal
proceedings; and
- any judgments, settlement payments or penalties arising from the class
action lawsuit, SEC investigation or other pending legal proceedings.
Commitments:
As of March 31, 2003 we had the following commitments:
OPERATING Long term
Fiscal year ended March 31 LEASES DEBT OTHER (1) TOTAL
2004 $ 2,006 $ 3,260 $ 242 $5,508
2005 1,559 2,000 - 3,559
2006 985 - - 985
2007 885 - - 885
2008 905 - - 905
Thereafter 3,176 - - 3,176
(1) Severance agreement with our former Chief Executive Officer.
Our revolving credit facility may not be available or adequate to fund
operations and losses, if any, capital expenditures or the amounts, if any, to
be paid in any settlement of, or judgments related to, our pending legal
proceedings. Under the terms of our 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 $1.5 million. 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" above for a more complete
description 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 equity 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.
33
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 the third fiscal quarters.
Inflation
We believe that inflation has not had a material effect on our business.
We compete on the basis of product design, features, and value. Accordingly,
our revenues generally have kept pace with inflation, notwithstanding that
inflation in the countries where our subsidiaries are located has been
consistently higher than inflation in the United States. We have ongoing cost
reduction programs, intended to result in improved competitiveness and gross
margins. Increases in labor costs have not had a significant impact on our
business because most of our employees are in China, where prevailing labor
costs are low. Additionally, we believe that while we have not experienced any
significant increases in materials costs, such increases are likely to affect
the entire electronics industry and, accordingly, may not have a significant
adverse effect on our competitive position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 may be 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
March 31, 2003, we had net liabilities of $2.0 million Subject to fluctuations
in the value of the Hong Kong dollar and net assets of $13.7 million subject
to fluctuations in the value of the Chinese renminbi. At March 31, 2002, we had
net liabilities of $3.7 million subject to fluctuations in the value of the Hong
Kong dollar and net assets of $10.4 million subject to fluctuations in the value
of the 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 transaction
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.
We are exposed to a certain level of interest rate risk.
Interest on the principal amount of our borrowings under our revolving
credit facility accrues 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 March 31, 2003, an annual interest rate increase of 100
basis points would have increased interest expense and thus decrease our after
tax profitability by $53. We do not hedge this interest rate exposure.
34
The following is a summary of our interest rate exposure at March 31, 2003:
RATE
------
Borrowing under bank line of credit (variable rate) $3,260 5.25% (1)
Term loan (fixed rate, due January 2005) 2,000 11.00% (2)
(1) Represents weighted average rate at March 31, 2003
(2) Represents non-default fixed rate pursuant to agreement
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data, together with the report
thereon by our Independent Certified Public Accountants, are listed below in
Item 16: Exhibits, Financial Statement Schedules and Reports on Form 8-K and are
filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As more fully set forth in our Current Report on Form 8-K filed with the
SEC on June 14, 2002, we terminated the engagement of Arthur Andersen LLP as our
independent auditor, effective June 7, 2002 and engaged Grant Thornton LLP as
our new independent auditor, effective June 11, 2002. Grant Thornton LLP
previously served as our independent auditor from 1992 until September 18, 2000.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Apart from certain information concerning our executive officers which is
set forth in Part I of this report, other information required by this Item is
incorporated herein by reference to the applicable information in the proxy
statement for our annual meeting of shareholders to be held on September 23,
2003, including the information set forth under the caption "Election of
Directors."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the applicable information in the proxy statement for our annual meeting of
shareholders to be held on September 23, 2003, including the information set
forth under the captions "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation."
35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides information with respect to the equity
securities that are authorized for issuance under our compensation plans as of
March 31, 2003:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF
SECURITIES
REMAINING
AVAILABLE
FOR FUTURE
ISSUANCE
UNDER
NUMBER OF EQUITY
SECURITIES TO BE WEIGHTED-AVERAGE COMPENSATION
ISSUED UPON EXERCISE PRICE PLANS
EXERCISE OF OF OUTSTANDING (EXCLUDING
OUTSTANDING OPTIONS, SECURITIES
OPTIONS, WARRANTS WARRANTS AND REFLECTED
AND RIGHTS RIGHTS IN COLUMN(A))
------------------ ------------------ -------------
(A) (B) (C)
------------------ ------------------
Equity compensation plans
approved by security holders
1,710,970 $ 4.59 76,630
Equity compensation plans not
approved by security holders
- - -
------------------ ------------------ -------------
Total 1,710,970 $ 4.59 76,630
The other information required by this Item is incorporated by reference to
the applicable information in the proxy statement for our annual meeting of
shareholders to be held on September 23, 2003, including the information set
forth under the caption "Beneficial Ownership of Measurement Specialties Common
Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
applicable information in the proxy statement for our annual meeting of
shareholders to be held on September 23, 2003, including the information set
forth under the caption "Executive Agreements and Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90-day period prior to the filing of this report, our
management, including our Chief Executive Officer and Chief Financial Officer,
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as of March 31, 2003. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are adequate, and have been consistently improving, but that certain
improvements to our internal controls continue to be necessary to enable the
company to record, process, summarize and report financial data in a more
efficient manner.
We have continued to make substantial improvements to our disclosure
controls and procedures since the filing of our quarterly report on Form 10-Q
for the three months ended December 31, 2002, including:
- completion of a financial reporting system that consolidates our financial
results in such a manner that serves both our external and internal
reporting requirements which we intend to use as our primary financial
reporting system for the fiscal year ending March 31, 2004;
- consolidation of the financial information for our China manufacturing
facility onto one information technology platform and general ledger; and
- hiring and retention of additional qualified financial reporting personnel.
(b) Changes in internal controls.
36
No significant changes were made in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation discussed above.
We intend to continue to evaluate our internal disclosure controls and
procedures and implement improvements as required. More specifically, we are
evaluating process and system changes to improve our budgeting, forecasting,
performance reporting and prospecting/customer contact management.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not Applicable
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements and schedules are
filed at the end of this report, beginning on page F-l. Other
schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
DOCUMENT PAGES
Report of Independent Certified Public Accountants . . . . . . F-1
Consolidated Statements of Operations for the Years Ended
March 31, 2003, 2002 and 2001. . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of March 31, 2003 and 2002. . . F-3 to F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 2003, 2002 and 2001. . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended. . . F-6 to F-7
March 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements . . . . . . . . . . F-8 to F-34
Schedule II - Valuation and Qualifying Accounts, for the Years
Ended March 31, 2003, 2002 and 2001. . . . . . . . . . . . . . S-1
(b) Reports on Form 8-K
We did not file any current reports on Form 8-K during the three months
ended March 31, 2003.
(c) 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
Perkin-Elmer, Inc. and Measurement Specialties, Inc.
10.4* Purchase Agreement dated August 4, 2000 between TRW Sensors &
Components, Inc. and Measurement Specialties, Inc.
37
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 of Lease, dated August 4, 2000, 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+ First Amendment dated February 1, 2001 to Lease between
Kelsey-Hayes Company and Measurement Specialties, Inc. for
property in Hampton, Virginia.
10.14++ Lease Agreement dated May 20, 1986 between Semex, Inc. and
Pennwalt Corporation and all amendments for property in Valley
Forge, Pennsylvania.
10.15++ Lease Agreements for property in Shenzhen, China
10.16++ Lease dated August 4, 2000 between Kelsey-Hayes Company and
Measurement Specialties, Inc. for property in Hampton, Virginia.
10.17++ 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.
10.18++ Agreement for the Purchase of the Share Capital of Terraillon
Holdings Limited, dated 7 June 2001, among Hibernia Development
Capital Partners LLP, Hibernia Development Capital Partners II LLP,
Fergal Mulchrone and Chris Duggan and Andrew Gleeson and
Measurement Specialties, Inc.
38
10.19+ 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.
10.20+++ Asset Purchase Agreement dated July 12, 2002 by and among Elmos
Semiconductor AG, Silicon Microstructures, Inc., Measurement
Specialties, Inc., and IC Sensors Inc.
10.21++++ Stock Purchase Agreement, dated as of September 18, 2002, by and
between FUKUDA (Luxembourg) S.a.r.l. and Measurement Specialties,
Inc.
10.22#### 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.
10.23#### Agreement of Lease, commencing October 1, 2002, between Liberty
Property Limited Partnership and Measurement Specialties, Inc.
10.24#### Sublease Agreement, dated August 1, 2002, between Quicksil, Inc.
and Measurement Specialties, Inc.
10.25**** Senior Secured Note and Warrant Purchase Agreement, dated as of
October 31, 2002, by and among Castletop Capital, LP and Measurement
Specialties, Inc.
10.26**** Loan and Security Agreement, dated January 31, 2003, by and among
Fleet Capital Corporation, Measurement Specialties, Inc. and IC
Sensors, Inc.
10.27 Second Amendment to Loan and Security Agreement, effective as of
the 11th day of April 2003, by and among Measurement Specialties,
Inc., IC Sensor, Inc. and Fleet Capital Corporation
10.28 Second Amendment to Senior Secured Note and Warrant Purchase
Agreement, dated April 11, 2003, among Castletop Capital, L. P.,
Measurement Specialties, Inc. and I C Sensor, Inc.
21.1+ Subsidiaries.
23.1 Consent of Grant Thornton LLP.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
# 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 29, 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 August 22, 2000 and
incorporated herein by reference.
39
** 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 Quarterly Report on Form 10-Q filed on February 12,
2003.
+ 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.
+++ 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 (including amendment thereto).
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEASUREMENT SPECIALTIES, INC.
By: /s/ FRANK GUIDONE
- ---------------------------
Frank Guidone
Chief Executive Officer
Date: May 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- -------------------------- --------------------------------------------- ------------
/s/ Frank Guidone Chief Executive Officer and Director May 27, 2003
- -------------------------- (Principal Executive Officer)
Frank Guidone
/s/ John P. Hopkins Chief Financial Officer (Principal Financial May 27, 2003
- -------------------------- Officer and Principal Accounting Officer)
John P. Hopkins
/s/ Morton L. Topfer Chairman of the Board May 27, 2003
- --------------------------
Morton L. Topfer
/s/ John D. Arnold Director May 27, 2003
- --------------------------
John D. Arnold
/s/ Joseph R. Mallon, Jr. Director May 27, 2003
- --------------------------
Joseph R. Mallon, Jr.
/s/ The Hon. Dan J. Samuel Director May 27, 2003
- --------------------------
The Hon. Dan J. Samuel
41
I, Frank Guidone, certify that:
1. I have reviewed this annual report on Form 10-K of Measurement Specialties,
Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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: May 27, 2003 /s/ Frank Guidone
------------------------------
Name: Frank Guidone
Title: Chief Executive Officer
42
I, John P. Hopkins, certify that:
1. I have reviewed this annual report on Form 10-K of Measurement Specialties,
Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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
functions):
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
annual report whether 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: May 27, 2003 /s/ John P. Hopkins
------------------------------
Name: John P. Hopkins
Title: Chief Financial Officer
43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Measurement Specialties, Inc.
We have audited the accompanying consolidated balance sheets of Measurement
Specialties, Inc. and Subsidiaries (a New Jersey corporation) as of March 31,
2003 and 2002, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended March 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Measurement
Specialties, Inc. and Subsidiaries as of March 31, 2003 and 2002, and the
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 3, the accompanying consolidated financial statements for
the year ended March 31, 2001 have been restated. The effect of the restatement
is disclosed in Note 3.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company incurred net losses of $9,097,000 and $29,047,000 for the fiscal years
ended March 31, 2003 and 2002, respectively. Additionally, the Company is a
defendant in a class action lawsuit and is also the subject of investigations
being conducted by the Division of Enforcement of the United States Securities
and Exchange Commission and the United States Attorney for the District of New
Jersey. These factors, among others, as discussed in Note 1 to the financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") on April 1, 2001.
In addition, as disclosed in notes 2, and 6, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") on April 1, 2001.
We have also audited Schedule II for each of the three years in the period ended
March 31, 2003. In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.
GRANT THORNTON LLP
New York, New York
May 20, 2003
F-1
MEASUREMENT SPECIALTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31,
------------------------------
($IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2003 2002 2001
--------- --------- --------
AS RESTATED
NOTE 3
--------
Net sales $107,888 $ 96,790 $97,033
Cost of goods sold 70,047 71,817 62,849
--------- --------- --------
Gross profit 37,841 24,973 34,184
--------- --------- --------
Operating expenses (income):
Selling, general and administrative 34,225 33,555 27,420
Litigation expense 3,550 - -
Research and development 3,622 6,946 5,720
Customer funded development (367) (1,784) (4,132)
Goodwill and other impairments - 4,417 -
Restructuring costs 1,219 955 -
--------- --------- --------
Total operating expenses 42,249 44,089 29,008
--------- --------- --------
Operating income (loss) (4,408) (19,116) 5,176
Interest expense, net 2,075 2,371 2,634
Gain on sale of Wafer Fab (159) - -
Other expense (income) (468) 235 (928)
--------- --------- --------
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting change (5,856) (21,722) 3,470
Income tax 467 2,512 1,008
--------- --------- --------
Income (loss) from continuing operations before cumulative
effect of accounting change (6,323) (24,234) 2,462
--------- --------- --------
Discontinued operations:
Loss from operations of discontinued units (net of income tax benefit) (3,910) (4,565) (1,265)
Gain on disposition of discontinued units (net of income tax benefit) 1,136 - -
--------- --------- --------
Loss from discontinued units (2,774) (4,565) (1,265)
--------- --------- --------
Income (loss) before cumulative effect of accounting change (9,097) (28,799) 1,197
Cumulative effect of accounting change, net of taxes - 248 -
--------- --------- --------
Net income (loss) $ (9,097) $(29,047) $ 1,197
========= ========= ========
Income (loss) per common share - Basic
Income (loss) from continuing operations $ (0.53) $ (2.30) $ 0.30
Income (loss) from discontinued units (0.23) (0.43) (0.15)
Cumulative effect of accounting change - (0.02) -
--------- --------- --------
Net income (loss) $ (0.76) $ (2.76) $ 0.15
========= ========= ========
Income (loss) per common share - Diluted
Income (loss) from continuing operations $ (0.53) $ (2.30) $ 0.27
Income (loss) from discontinued units (0.23) (0.43) (0.14)
Cumulative effect of accounting change - ( 0.02) -
--------- --------- --------
Net income (loss) $ (0.76) $ (2.76) $ 0.13
========= ========= ========
Weighted average shares outstanding - Basic 11,911 10,531 8,144
========= ========= ========
Weighted average shares outstanding - Diluted 11,911 10,531 9,045
========= ========= ========
The accompanying notes are an integral part of these
Consolidated financial statements.
F-2
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
($IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002
- ------------------------------------------------------------ ---------- ----------
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 2,694 $ 3,760
ACCOUNTS RECEIVABLE, TRADE, NET OF ALLOWANCE FOR DOUBTFUL
ACCOUNTS OF $1,038 AND $658, RESPECTIVELY 10,549 12,220
INVENTORIES 14,275 16,026
ASSETS HELD FOR SALE - 36,632
PREPAID EXPENSES AND OTHER CURRENT ASSETS 1,885 2,088
---------- ----------
Total current assets 29,403 70,726
---------- ----------
PROPERTY AND EQUIPMENT, NET 11,818 14,287
---------- ----------
OTHER ASSETS:
Goodwill 4,191 4,191
Deferred income taxes - -
Other assets 756 408
---------- ----------
Total other assets 4,947 4,599
---------- ----------
Total Assets $ 46,168 $ 89,612
========== ==========
The accompanying notes are an integral part of these
Consolidated financial statements.
F-3
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
($IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002
- ---------------------------------------------------------------------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG TERM DEBT $ 3,260 $ 29,281
ACCOUNTS PAYABLE 9,846 13,232
ACCRUED COMPENSATION 1,207 1,435
LIABILITIES HELD FOR SALE - 12,800
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 5,744 4,875
ACCRUED LITIGATION EXPENSES 3,550 -
----------- -----------
TOTAL CURRENT LIABILITIES 23,607 61,623
OTHER LIABILITIES:
LONG TERM DEBT 2,000
OTHER LIABILITIES 1,615 1,162
----------- -----------
TOTAL LIABILITIES 27,222 62,785
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
SERIAL PREFERRED STOCK; 221,756 SHARES AUTHORIZED; NONE OUTSTANDING - -
COMMON STOCK, NO PAR; 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 43,197 42,346
ACCUMULATED DEFICIT (29,683) (20,586)
ACCUMULATED OTHER COMPREHENSIVE LOSS (70) (435)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 18,946 26,827
----------- -----------
$ 46,168 $ 89,612
=========== ===========
The accompanying notes are an integral part of these
Consolidated financial statements.
F-4
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2003, 2002, AND 2001
Accumulated
Additional Retained Other
Common paid-in Earnings Comprehensive Comprehensive
($IN THOUSANDS EXCEPT PER SHARE AMOUNTS) stock capital (Deficit) Loss Total Income (Loss)
- -------------------------------------------------------- --------- --------- ---------- ----------- --------- --------------
BALANCE, APRIL 1, 2000 $ 5,502 $ 2,042 $ 7,264 $ (1) $ 14,807
--------- --------- ---------- ----------- ---------
Comprehensive income, March 31, 2001:
Net income, as restated - - 1,197 - 1,197 $ 1,197
Currency translation adjustment - - - (14) (14) (14)
--------------
Comprehensive income, as restated - - - - - $ 1,183
==============
Tax benefit on exercise of options - 924 - - 924
353,500 common shares issued upon exercise of options - 803 - - 803
--------- --------- ---------- ----------- ---------
BALANCE, MARCH 31, 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):
Net (loss) - - (9,097) - (9,097) $ (9,097)
Currency translation adjustment - effect of
disposal of Terraillon - - - 365 365 $ 365
--------------
Comprehensive loss - - - - - $ (8,732)
==============
Proceeds from exercise of stock options - 134 - - 134
Warrants issued for professional service - 265 - - 265
Warrants issued for debt - 452 - - 452
--------- --------- ---------- ----------- ---------
BALANCE, MARCH 31, 2003 $ 5,502 $ 43,197 $ (29,683) $ (70) $ 18,946
========= ========= ========== =========== =========
The accompanying notes are an integral part of these
Consolidated financial statements.
F-5
MEASUREMENT SPECIALTIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31,
---------------------------------
2003 2002 2001
---------- ---------- ---------
As Restated
CASH FLOWS FROM OPERATING ACTIVITIES: Note 3
---------
Net income (loss) $ (9,097) $ (29,047) $ 1,197
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Loss from discontinued operations 3,910 4,565 1,265
Depreciation and amortization 3,331 4,549 2,570
Deferred rent 17 126 178
Warrants issued for professional services 265 - -
Amortization of debt discount 452 - -
Goodwill and other impairments - 4,062 -
Gain on sale of Wafer Fab (159) - -
Gain on sale of Discontinued Units (1,136) - -
Provision for writedown of assets 656 188 -
Provision for doubtful accounts 842 809 698
Provision for warranty 641 614 572
Reversal of tax benefit on exercise of options - (1,534) -
Deferred income taxes - 2,650 (947)
Tax benefit on exercise of stock options - - 924
Net changes in operating assets and liabilities: - - -
Accounts receivable, trade 829 (251) (1,284)
Inventories 1,751 6,230 (9,638)
Prepaid expenses and other current assets 203 (1,106) (301)
Other assets (57) 1,587 (513)
Accounts payable, trade (3,386) 1,822 1,318
Accrued expenses and other liabilities 435 (1,341) (162)
Accrued litigation expenses 3,550 - -
---------- ---------- ---------
Net cash provided by (used in) operating activities 3,047 (6,077) (4,123)
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,518) (2,366) (5,653)
Proceeds from sale of Wafer Fab 3,370 - -
Proceeds from sale of Terraillon 18,197 - -
Cash received from receiver 1,064 - -
Purchases of intangible assets - - (40)
Acquisition of business, net of cash acquired - (9,704) (13,594)
---------- ---------- ---------
Net cash provided by (used in) investing activities 21,113 (12,070) (19,287)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under secured note 9,300 - -
Repayment under secured note (7,300) - -
Borrowing under bank line of credit agreements 20,568 23,632 14,736
Repayments under bank line of credit agreements (46,371) (14,935) -
Repayments under capital lease obligations (218) (597) -
Proceeds from long term debt - - 25,000
Repayment of long term debt - (13,836) (13,000)
Payment of deferred financing costs (net) (291) (231) -
Warrants issued for debt - - -
Proceeds from exercise of options and warrants 134 429 803
Proceeds from issuance of common stock - 32,882 -
---------- ---------- ---------
Net cash provided by (used in) financing activities (24,178) 27,344 27,539
---------- ---------- ---------
Effect of exchange rates 365 (420) -
F-6
Net change in cash and cash equivalents 347 8,777 4,129
Cash used in discontinued operations (1,413) (5,483) (5,545)
Cash and cash equivalents, beginning of year 3,760 466 1882
---------- ---------- ---------
Cash and cash equivalents, end of year $ 2,694 $ 3,760 $ 466
========== ========== =========
Supplemental Cash Flow Information:
Cash paid (refunded) during the year for:
Interest $ 2,582 $ 2,818 $ 2,409
Taxes (588) 621 817
Non cash financing and investing transactions:
Issuance of common stock for acquisition - 6,800 -
The accompanying notes are an integral part of these
Consolidated financial statements.
F-7
MEASUREMENT SPECIALTIES INC.
Notes to Consolidated Financial Statements
MARCH 31, 2003
($ IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND LIQUIDITY:
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 original equipment manufacturers for use in
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, kitchen tools and distance estimators ("See Note 17").
We sell our products primarily in North America and Western Europe.
LIQUIDITY AND GOING CONCERN:
The Company incurred net losses of $9,097 and $ 29,047 for the fiscal years
ended March 31, 2003 and 2002, respectively. During this period, the Company
has incurred significant expenses for professional fees related to the Company's
restructuring and pending litigation, certain of which are likely to continue,
in somewhat reduced amounts, for the foreseeable future.
The Company is currently the defendant in several pending lawsuits,
including a securities class action lawsuit. The Company is also the subject of
a formal investigation being conducted by the Division of Enforcement of the
United States Securities and Exchange Commission. The Company may incur
significant additional liabilities as a result of these pending legal
proceedings.
The Company's revolving credit facility may not be available or adequate to
fund operations and losses, if any, capital expenditures or the amounts, if any,
to be paid in settlement of, or for judgments related to, the Company's pending
legal proceedings. Under the terms of our credit agreement, the Company is
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, the Company is 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 the lender under our revolving credit
facility.
The Company's cash and amounts available under the Company's revolving
credit facility may not be sufficient to satisfy the obligations discussed
above. If the Company is unable to satisfy these obligations, the Company may
need to explore other fund raising alternatives, including the sale of assets or
equity securities. No assurance, however, can be given that the Company will be
able to successfully sell assets or stock, or, even if such transactions are
possible, that they will be on terms reasonable to the Company, that they will
enable the Company to satisfy its obligations or that such actions will be
permitted under the Company's credit agreement. Additionally, any sale of equity
securities will dilute existing shareholders and may be at prices that are
substantially lower than current market prices. If the Company is unable to
satisfy its loss contingencies and, if necessary does not obtain additional
funds, the Company will likely be unable to continue operations, or the Company
will be compelled to restructure its obligations in a bankruptcy proceeding
under Title 11 of the United States Code.
The Company is actively defending this litigation and will continue to
implement its plans to improve operating results.
As a result of the matters described in the preceding paragraphs, the
Report of Independent Certified Public Accountants on the Company's consolidated
financial statements includes a paragraph indicating that these factors raise
substantial doubt about its ability to continue as a going concern. The
Company's consolidated financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
F-8
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 until June 2002
and September 2002, respectively, are reflected as discontinued operations from
their respective dates of acquisition for all periods presented. All
significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions which affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers highly liquid investments with maturities of up to
three months, when purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash equivalents and short-term debt are carried at cost, which
approximates fair value due to the short-term nature of such instruments.
Long-term debt is carried at cost, which management believes approximates fair
value because the interest rate on such instruments approximates market yields
at March 31, 2003.
INVENTORIES:
Inventories are stated at the lower of cost or estimated market value. The
FIFO (first-in, first-out) method is utilized to determine cost for the
Company's inventories.
The Company makes purchasing decisions principally based upon firm sales
orders from customers, the availability and pricing of raw materials and
projected customer requirements. Future events that could adversely affect these
decisions and result in significant charges to its operations include slowdown
in customer demand, customer delay in the issuance of sales orders,
miscalculation of customer requirements, technology changes that render raw
materials and finished goods obsolete, loss of customers and/or cancellation of
sales orders. The Company establishes reserves for inventories to recognize
estimated obsolescence and unusable items on a continual basis. Market
conditions surrounding products are also considered periodically to determine if
there are any net realizable valuation matters, which would require a write down
of any related inventories. If market or technological conditions change, it may
result in additional inventory reserves and write-downs, which would be
accounted for in the period of change.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets, generally three to ten years. Leasehold improvements are
amortized over the shorter of the lease terms or the estimated useful lives of
the assets. Normal maintenance and repairs of property and equipment are
expensed as incurred. Renewals, betterments and major repairs that materially
extend the useful life of property and equipment are capitalized.
INCOME TAXES:
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of existing assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. A valuation
allowance is provided in order to reduce deferred tax assets to the amounts that
can reasonably be expected to be realized.
F-9
Tax benefits from early disposition of the stock acquired by employees from
the exercise of incentive stock options or non-qualified stock options are
credited to additional paid-in capital.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
The functional currency of the Company's foreign operations is the
applicable local currency. The foreign subsidiaries' assets and liabilities are
translated into United States dollars using exchange rates in effect at the
balance sheet date and their operations are translated using the average
exchange rates prevailing during the year. The resulting translation adjustments
are recorded as a component of other comprehensive income (loss).
Realized foreign currency transaction gains and losses are included in
operations.
GOODWILL:
Prior to adoption of SFAS 142 on April 1, 2001, the Company amortized
goodwill over its estimated useful life and evaluated goodwill for impairment in
conjunction with its other long-lived assets. See "Long-lived assets" below for
further information.
The Company adopted SFAS No. 142 as of April 1, 2001 and ceased amortizing
goodwill. In connection with its restructuring program (See Note 12), the
Company performed additional impairment tests during the year ended March 31,
2002 that resulted in an impairment charge of $7,479 in the fourth quarter of
such fiscal year of which $4,417 related to continuing operations and $3,062
related to discontinued operations. As of March 31, 2003, the Company has
reevaluated the impact of SFAS No. 142 on its goodwill, and no additional
impairment charges were deemed necessary. See Note 6 for further discussion of
the impact of SFAS No. 142 on the Company's financial position and results of
operations.
Management assesses goodwill for impairment at the reporting unit level on
an annual basis or more frequently under certain circumstances. Such
circumstances include (i) significant adverse change in legal factors or in the
business climate, (ii) an adverse action or assessment by a regulator, (iii)
unanticipated competition, (iv) a loss of key personnel, (v) a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of, and (vi) recognition
of an impairment loss in a subsidiary that is a component of a reporting unit.
Management must make assumptions regarding estimating the fair value of the
Company's reporting units. If these estimates or related assumptions change in
the future, the Company may be required to record an impairment charge.
Impairment charges would be included in general and administrative expenses in
the Company's statements of operations, and would result in reduced carrying
amounts of the goodwill.
LONG-LIVED ASSETS:
The Company adopted SFAS 144 as of April 1, 2002. Adoption of this
statement did not have a material affect on the financial position or results of
operations. Management assesses the recoverability of its long-lived assets,
which consist primarily of fixed assets and intangible assets with finite useful
lives, whenever events or changes in circumstance indicate that the carrying
value may not be recoverable. The following factors, if present, may trigger an
impairment review: (i) significant underperformance relative to expected
historical or projected future operating results; (ii) significant negative
industry or economic trends; (iii) significant decline in the Company's stock
price for a sustained period; and (iv) a change in the Company's market
capitalization relative to net book value. If the recoverability of these assets
is unlikely because of the existence of one or more of the above-mentioned
factors, an impairment analysis is performed using a projected discounted cash
flow method. Management must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of these respective assets.
If these estimates or related assumptions change in the future, the Company may
be required to record an impairment charge. Impairment charges would be included
in general and administrative expenses in the Company's statements of
operations, and would result in reduced carrying amounts of the related assets
on the Company's balance sheets.
REVENUE RECOGNITION:
Revenue is recorded when products are shipped, at which time title
generally passes to the customer. Certain consumer products may be sold with a
provision allowing the customer to return a portion of products. Upon shipment,
the Company provides for allowances for returns and warranties based upon
historical and estimated return rates. The amount of actual returns could
differ from Company estimates. Changes in estimated returns would be accounted
for in the period of change.
The Company utilizes manufacturing representatives as sales agents for
certain of its products. Such representatives do not receive orders directly
from customers, take title to or physical possession of products, or invoice
customers. Accordingly, revenue is recognized upon shipment to the customer.
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. The Company is not responsible for the ultimate sale to third
F-10
party customers and therefore records revenue upon shipment to the distributor.
Promotional rebates and other consideration provided to customers are reflected
as a reduction in revenue.
ACCOUNTS RECEIVABLE:
The majority of the Company's accounts receivable are due from retailers
and manufacturers of electronic, automotive, military and industrial products.
Credit is extended based on an evaluation of a customers' financial condition
and, generally, collateral is not required. Accounts receivable are generally
due within 30 to 90 days and are stated at amounts due from customers net of
allowances for doubtful accounts and other sales allowances. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers deteriorates, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Actual uncollectible accounts could exceed the Company's estimates
and changes to its estimates will be accounted for in the period of change.
SHIPPING AND HANDLING:
The Company generally does not bill shipping and handling fees to its
customers. Shipping and handling costs are recorded in cost of sales.
ADVERTISING COSTS:
Advertising costs are included in selling, general and administrative
expenses and are expensed when the advertising or promotion is published.
Advertising expenses for the years ended March 31, 2003, 2002 and 2001 were
approximately $539, $831 and $875, respectively.
ACQUISITIONS:
The Company acquired Terraillon in August 2001, Schaevitz Sensors in August
2000 and IC Sensors in February 2000. These business combinations were accounted
for using the purchase method of accounting. Effective July 1, 2001, the Company
adopted the provisions of SFAS No. 141 (which is effective for all business
combinations completed after June 30, 2001). In June 2002, the Company placed
"Schaevitz UK", previously a component of the Company's Sensor segment, into
receivership; in July 2002, the Company sold the assets related to its silicon
wafer fab manufacturing operation in Milpitas, CA; and in September 2002, the
Company sold all of the outstanding stock of Terraillon. See Note 7 .
In all acquisitions, the purchase price of the acquired business was
allocated to the assets acquired and liabilities assumed at their fair values on
the date of the acquisition. The fair values of these items were based upon
management's estimates and, in certain cases, with the assistance of an
independent professional valuation firm. Certain of the acquired assets were
intangible in nature, including trademarks. Management employed an independent
valuation firm to assist in determining the fair value of these intangible
assets. The excess purchase price over the amounts allocated to the assets was
recorded as goodwill.
All such valuation methodologies, including the determination of subsequent
amortization periods, involve significant judgments and estimates. Different
assumptions and subsequent actual events could yield materially different
results.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. Customer
funding is recognized as a reduction in research and development expense when
earned.
WARRANTY RESERVE:
The Company's sensor and consumer products generally are marketed under
warranties to end users of up to ten years. Factors affecting the Company's
warranty liability include the number of products sold and historical and
anticipated rates of claims and cost per claim. The Company provides for
estimated product warranty obligations at the time of sale, based on its
historical warranty claims experience and assumptions about future warranty
claims. This estimate is susceptible to changes in the near term based on
introductions of new products, product quality improvements and changes in end
user application and/or behavior.
F-11
The following table summarizes the warranty reserve:
YEAR ENDED MARCH 31,
----------------------
2003 2002 2001
------ ------ ------
Total Warranty Reserve (Beginning) $(685) $(619) $(410)
Expense for Warranties issued during the period (641) (614) (572)
Costs to repair products 154 111 -
Costs to replace products 410 437 363
------ ------ ------
Total Warranty Reserve (Ending) $(762) $(685) $(619)
====== ====== ======
COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) consists of net earnings or loss for the period
and the impact of unrealized foreign currency translation adjustments.
STOCK BASED COMPENSATION:
The Company has two stock-based employee compensation plans, which are
described more fully in Note 15. The Company applies APB Opinion 25, "Accounting
for Stock Issued to Employees", and related Interpretations in accounting for
its plans. There was no compensation expense recognized in 2003, 2002 and 2001
as a result of options issued with an exercise price below the underlying
stock's market price. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement 123, "Accounting for Stock-Based Compensation",
using the assumptions described in Note 15, to its stock-based employee plans.
YEAR ENDED MARCH 31,
---------------------------
2003 2002 2001
-------- --------- ------
Net income (loss), as reported $(9,097) $(29,047) $1,197
Add: Stock-based employee compensation
expense included in reported net - - -
income, net of related tax effects
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for awards granted, modified, or
settled, net of related tax effects 640 139 1,010
-------- --------- ------
Pro forma net income (loss) $(9,737) $(29,186) $ 187
======== ========= ======
Net income (loss) per share:
Basic - as reported $ (0.76) $ (2.76) $ 0.15
Basic - pro forma (0.82) (2.77) 0.02
Diluted - as reported (0.76) (2.76) 0.13
Diluted - pro forma (0.82) (2.77) 0.02
LEASES:
The Company follows SFAS No. 13, "Accounting for leases" to account for its
operating and capital leases. In accordance with SFAS No. 13, lease costs,
including escalations, are provided for using the straight-line basis over the
lease period.
DERIVATIVE INSTRUMENTS:
From time to time, the Company utilizes derivative financial instruments to
reduce interest rate and foreign currency risks. The Company does not hold or
issue derivative financial instruments for trading purposes. The Company adopted
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," on
April 1, 2001. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments and hedging activities and requires that an
entity recognize all derivatives as either assets or liabilities in the
F-12
statement of financial condition and measure those instruments at fair value.
Changes in the fair value of those instruments will be reported in earnings or
other comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses associated
with changes in the fair value of the derivative and the effect on the
consolidated financial statements will depend on its hedge designation and
whether the hedge is highly effective in achieving offsetting changes in the
fair value of cash flows of the asset or liability hedged. The Company did not
qualify for hedge accounting for its interest rate swap. During the year ended
March 31, 2002, an aggregate of $871 was reflected in the income statement
related to an interest rate swap. Of such amount, $623 was reflected as
interest expense and $248 was recorded as the cumulative effect of the adoption
of the accounting principle. The fair value of the swap at March 31, 2002 was
included in accrued expenses.
As part of the Company's refinancing plan, in October 2002 all derivative
financial instruments were satisfied. The cost of these financial instruments
for the fiscal year ended March 31, 2003 was $154 and has been included in
interest expense.
Terraillon had certain foreign currency derivatives which effects are
included in discontinued operations for all periods presented.
RECLASSIFICATIONS:
Certain reclassifications have been made to conform prior years' financial
statements to the current year's presentation.
RECENT ACCOUNTING PRONOUNCEMENTS:
On May 15, 2003, the Financial Accounting Standards Board issued
Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" (SFAS 150), which requires that
certain financial instruments be presented as liabilities that were previously
presented as equity or as temporary equity. Such instruments include mandatory
redeemable preferred and common stocks and certain options and warrants. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003 and is generally effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is currently evaluating the impact
that SFAS 150 will have on its consolidated financial position and results of
operations when adopted.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure, an amendment of FASB Statement No.
123". The standard amends FASB statement No 123 "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for voluntary change
to fair value based method of accounting for stock-based employee 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 elected to
continue accounting for stock-based compensation using the intrinsic value
method. However, the Company has adopted the new disclosure requirements
specified under SFAS No. 148.
On July 29, 2002, the FASB issued 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 termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
Company will apply SFAS 146 prospectively to exit or disposal activities
initiated after December 31, 2002. The Company has no current exit or disposal
activities that fall under the provision of SFAS 146.
Prior to December 31, 2002, the Company's policy was to accrue
restructuring and other costs at 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 years ended March 31, 2003 and 2002. (See Notes 7 and 12 ).
In 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." 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. This statement is effective for fiscal years
beginning after May 15, 2002. The Company does not expect this Statement will
have a material effect on its financial position or results of operations. The
Company will implement SFAS No. 145 in the fiscal quarter ending June 30, 2003.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated assets' retirement costs. The Company was required to
implement SFAS No. 143 on April 1, 2003. The Company does not expect this
standard to have a material impact on its consolidated financial position or
results of operations.
F-13
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. The Company previously did not record a
liability when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002,
but has certain disclosure requirements effective for interim and annual periods
ending after December 15, 2002. The Company's guarantees have historically
consisted of warranty provisions and the Company does not anticipate FIN 45 will
have a material effect on its financial statements for the year ended March 31,
2004. Disclosures required by FIN 45 are included in the accompanying financial
statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable
interest entities within the scope of FIN 46 will be required to be consolidated
by their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected returns, or both. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company is in the process of determining what impact, if any, the adoption
of the provisions of FIN 46 will have upon its financial condition or results of
operations. The Company does not believe that the adoption of FIN46 will have a
material effect on its financial position or results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. The Company has not determined the effect of adoption of
EITF 00-21 on its financial statements or the method of adoption it will use.
3. RESTATEMENT:
Based on the advice of its auditors and after 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. Each of the Company's
business units experienced various types of calculation and application errors.
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
- 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 and the Company's 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 the Company's 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.
F-14
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: reclassification of certain costs included in selling,
general, and administrative expenses to revenue of $1,009; acceleration of
amortization of deferred financing costs relating to the Company's bank loan in
the amount of $667; expensing of unallocated acquisition costs of $439;
straight-lining of lease expense in accordance with SFAS No. 13 in the amount of
$178; and certain other adjustments. As a result of all the above adjustments,
the Company recalculated its tax provision resulting in a benefit of $1,821.
FISCAL YEAR ENDED MARCH 31, 2001
-----------------------------------------
AS RESTATED,
ADJUSTED FOR
PREVIOUSLY AS DISCONTINUED
REPORTED RESTATED OPERATIONS (1)
------------- --------- ---------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales $ 103,095 $ 101,975 $ 97,033
Cost of goods sold 58,782 66,938 62,849
Gross profit 44,313 35,037 34,184
Selling, general and administrative 29,232 29,541 27,420
Income from continuing operations
before income taxes and cumulative
effect of accounting change 11,790 2,205 3,470
Provision for income taxes 2,829 1,008 1,008
Income from continuing operations
before cumulative effect of accounting change 8,961 1,197 2,462
Income (Loss) from operations of discontinued units - - (1,265)
Income before cumulative effect of
accounting change 8,961 1,197 1,197
Cumulative effect of accounting change, net
of taxes - -
Net Income 8,961 1,197 1,197
Income per common share:
Basic 1.10 0.15 0.15
Diluted 0.99 0.13 0.13
See Note 7, for discussion of discontinued operations.
The consolidated financial statements for the fiscal years ended March 31,
2003, 2002 and 2001 include only the results of our ongoing operations
Accordingly, Terraillon and Schaevitz UK are classified as discontinued
operations in the consolidated financial results for all periods presented.
4. INVENTORIES
INVENTORIES ARE SUMMARIZED AS FOLLOWS:
MARCH 31,
----------------
2003 2002
------- -------
RAW MATERIALS $ 6,930 $ 7,111
WORK-IN-PROCESS 2,630 1,986
FINISHED GOODS 4,715 6,929
------- -------
$14,275 $16,026
======= =======
Inventory reserves were $4,996 and $5,106 as of March 31, 2003 and 2002,
respectively.
F-15
5. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
March 31,
-------------------------------------------------
2003 2002 Useful Life
--------- --------- ---------------------------
Production machinery and equipment $ 13,800 $ 18,006 5-7 years
Tooling costs 3,579 2,946 5-7 years
Furniture and equipment 4,922 4,649 3-10 years
Leasehold improvements 1,721 2,209 Remaining term of the lease
Construction in progress 283 1,203 -
--------- ---------
Total 24,305 29,013
Less: accumulated depreciation and amortization (12,487) (14,726)
--------- ---------
$ 11,818 $ 14,287
========= =========
Depreciation expense was $3,002, $3,608 and $2,539 for the years ended
March 31, 2003, 2002, and 2001, respectively.
6. GOODWILL AND INTANGIBLES
The Company adopted SFAS 142 effective April 1, 2001 and discontinued
amortizing goodwill. The changes in the carrying value of goodwill for the years
ended March 31, 2003, 2002, 2001 and 2000 are as follows:
SENSORS CONSUMER TOTAL
--------- ---------- --------
BALANCE AS OF MARCH 31, 2000 $ 4,687 $ 914 $ 5,601
Purchase business combination 3,315 3,315
Goodwill Amortization (431) (135) (566)
--------- ---------- --------
BALANCE AS OF MARCH 31, 2001 7,571 779 8,350
Purchase business combination -
Impairment loss (3,353) (779) (4,132)
Other (27) (27)
--------- ---------- --------
BALANCE AS OF MARCH 31, 2002 4,191 - 4,191
Impairment loss -
--------- ---------- --------
BALANCE AS OF MARCH 31, 2003 $ 4,191 $ - $ 4,191
========= ========== ========
During the fiscal quarter ended March 31, 2002, management and the
Company's Board of Directors, after considering ongoing operating losses,
approved a restructuring program. As a result of the Company's evaluation of its
businesses and its restructuring plan, management, with the assistance of
valuation experts, performed impairment tests for the Company's reporting units
and concluded that impairment charges were required for certain reporting units.
The impairments related primarily to the Company's Schaevitz and Schaevitz UK
reporting units. Fair value of the Company's reporting units was determined
using the implied fair value approach. Impairment losses of $4,417, which
includes $285 relating to sensor division patents, are included on a separate
line item in continuing operations and impairment losses related to discontinued
operations of $3,062 are reflected in discontinued operations (See Note 7). This
process was completed in the fiscal quarter ended June 30, 2002 and was repeated
in the fiscal quarter ended March 31, 2003. According to the guidelines
established under SFAS 142, there was no impairment issue for its reporting
units. At March 31, 2003, fair value of the Company's reporting units was
determined using the implied fair value approach.
Other identifiable intangible assets with finite lives, which are included
in other assets, consisting of patents with gross value of $171 and accumulated
amortization of $90, with a net book value of $81, are amortized over a period
of 6 years. Amortization expense for the years ended March 31, 2003, 2002 and
2001 was $29, $61 and $0, respectively. Amortization expense is expected to be
$29 per year through 2006.
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of taxes, for the periods
presented:
F-16
FOR THE YEARS ENDED MARCH 31,
----------------------------------------
2003 2002 2001
------------- ---------- -------------
AS RESTATED
(SEE NOTE 3)
-------------
Income (loss) from continuing operations before cumulative effect of accounting changes,
as reported $ (6,323) $ (24,234) $ 2,462
Goodwill amortization - - 566
------------- ---------- -------------
Income (loss) from continuing operations before cumulative effect of accounting changes,
as adjusted $ (6,323) $ (24,234) $ 3,028
============= ========== =============
Net income (loss), as reported $ (9,097) $ (29,047) $ 1,197
Goodwill amortization - - 566
------------- ---------- -------------
NET INCOME (LOSS), AS ADJUSTED $ (9,097) $ (29,047) $ 1,763
============= ========== =============
Income (loss) from continuing operations before cumulative effect of accounting change,
per share:
Basic, as reported $ (0.53) $ (2.30) $ 0.30
Goodwill amortization - - 0.07
------------- ---------- -------------
Basic, as adjusted $ (0.53) $ (2.30) $ 0.37
============= ========== =============
Diluted, as reported $ (0.53) $ (2.30) $ 0.27
Goodwill amortization - - 0.07
------------- ---------- -------------
Diluted, as adjusted $ (0.53) $ (2.30) $ 0.34
============= ========== =============
Net income (loss) per share
Basic net income (loss) per share, as reported $ (0.76) $ (2.76) $ 0.15
Goodwill amortization - - 0.07
------------- ---------- -------------
Net income (loss) per share, as adjusted $ (0.76) $ (2.76) $ 0.22
============= ========== =============
Diluted net income (loss) per share, as reported $ (0.76) $ (2.76) $ 0.13
Goodwill amortization - - 0.07
------------- ---------- -------------
DILUTED NET INCOME (LOSS) PER SHARE, AS ADJUSTED $ (0.76) $ (2.76) $ 0.20
============= ========== =============
7. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE, AND GAIN ON
SALE OF ASSETS AND DISCOUNTINED UNITS:
BACKGROUND: The Company adopted FAS 144 on April 1, 2002 (See Note 2). As more
fully discussed below, the Company sold all of the outstanding stock of
Terraillon, previously a component of the Company's Consumer Products segment,
in September 2002, and placed Schaevitz UK previously a component of the
Company's Sensor segment, into receivership in June 2002. The Company 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,
and liabilities held for sale in the amount of $12,800 at March 31, 2002,
respectively, represent the assets and liabilities from these operations. Since
these businesses were disposed of by March 31, 2003, all of the assets and
liabilities have been removed from the balance sheet. The amounts for Terraillon
and Schaevitz UK on the consolidated statements of operations for the fiscal
years ended March 31, 2003, 2002 and 2001 have been reclassified as discontinued
operations to reflect the disposal of these operating units.
SCHAEVITZ UK: In August 2000, the Company acquired Schaevitz Sensors
("Schaevitz") from TRW Components, Inc. Schaevitz designs and manufacturers a
variety of tilt, displacement, and pressure transducers and transmitters in the
United States and Europe that are sold worldwide. The acquisition was accounted
for as a purchase. The aggregate cash paid was $17,860 (including payment to TRW
Components Inc. of $16,775 and closing costs of $1,085).
The Company placed Schaevitz UK 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. Schaevitz UK's landlord has a
potential dilapidations claim of up to 350 Pounds Sterling (approximately $563
based on market exchange rates as of May 13, 2003) against Schaevitz UK that
F-17
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 amounts for Schaevitz
UK on the consolidated statements of operations for the fiscal years ended March
31, 2003, 2002 and 2001 have been reclassified as discontinued operations to
reflect the disposal of this operatiing unit. During the fiscal year ended March
31, 2003, the Company incurred $3,511 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 $1,202. The amount recovered
from the liquidation was approximately $1,064, of which $439 is reflected as
gain on disposal of discontinued units.
IC SENSORS: On February 14, 2000, the Company acquired IC Sensors, Inc. from
Perkin-Elmer, Inc. IC Sensor's designs, manufactures and markets micromachined
silicon pressure sensors, accelerometers and microstructures. The acquisition
was accounted for as a purchase. The aggregate cash paid was $12,368 (including
payment to Perkin-Elmer of $12,000 and closing costs of $368).
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 as "Gain on Sale of
Wafer Fab" for the fiscal year ended March 31, 2003.
TERRAILLON: In August 2001, the Company acquired all of the outstanding shares
of Terraillon, a European manufacturer of branded consumer bathroom and kitchen
scales. The acquisition was accounted for as a purchase. The aggregate purchase
price was $17,468 and included $10,320 in cash, the issuance of 503,692 shares
of restricted Company common stock valued at $6,800 based on the closing market
price on the date of acquisition of $13.50 per share, and closing costs of $348.
In September 2002, the Company sold all of the outstanding stock of Terraillon
to Fukuda S.a.r.l, an investment holding company incorporated in Luxembourg, for
$22,819. On January 24, 2003 and February 19, 2003, the Company received $1,384
and $152, respectively, 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 $357, as certain amounts
previously provided for are no longer required, which is included in gain on
sale of discontinued units.
F-18
The following is a summary of the components of assets and liabilities 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
----------- -------------- ---------- -------
Total Current Assets 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
----------- -------------- ---------- -------
Property and Equipment, Net 840 - 3,218 4,058
----------- -------------- ---------- -------
OTHER ASSETS:
Goodwill, net 4,074 - - 4,074
Trademarks 9,477 - - 9,477
Other assets - 2,070 - 2,070
----------- -------------- ---------- -------
Total Other Assets 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
=========== ============== ========== =======
F-19
A summary of the results of operations of the discontinued operating units
follows:
FOR THE YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------------------------
2003 2002 (1) 2001
--------------------------------------- --------------------------------------- ---------------
TERRAILLON SCHAEVITZ, UK TOTAL TERRAILLON SCHAEVITZ, UK TOTAL SCHAEVITZ, UK
------------ --------------- -------- ------------ --------------- -------- ---------------
Net sales $ 18,678 $ 905 $19,583 $ 28,516 $ 7,313 $35,829 $ 4,942
Cost of goods sold 13,244 617 13,861 19,562 6,232 25,794 4,090
------------ --------------- -------- ------------ --------------- -------- ---------------
Gross profit 5,434 288 5,722 8,954 1,081 10,035 852
Operating expenses (income):
Selling, general and
administrative 5,835 149 5,984 9,784 316 10,100 1,416
Research and development - 68 68 - 452 452 67
Goodwill and other impairments - - 3,062 3,062
Restructuring costs - 3,577 3,577 - 458 458 -
------------ --------------- -------- ------------ --------------- -------- ---------------
Total operating expenses 5,835 3,794 9,629 9,784 4,288 14,072 1,483
Operating income (loss) (401) (3,506) (3,907) (830) (3,207) (4,037) (631)
Interest (income) expense 25 (2) 23 343 (32) 311 -
Other (income) expense (27) 7 (20) (1) 208 207 634
------------ --------------- -------- ------------ --------------- -------- ---------------
(Loss) before income taxes (399) (3,511) (3,910) (1,172) (3,383) (4,555) (1,265)
Provision for income taxes - - - 10 - 10 -
------------ --------------- -------- ------------ --------------- -------- ---------------
Net (loss) from discontinued
operations $ (399) $ (3,511) $(3,910) $ (1,182) $ (3,383) $(4,565) $ (1,265)
============ =============== ======== ============ =============== ======== ===============
(1) Terraillon was acquired in August 2001.
8. LONG-TERM DEBT:
Long-term debt is summarized as follows:
March 31,
---------------
2003 2002
------ -------
Borrowing under bank line of credit $3,260 $20,899
Term loan 2,000 8,164
Other, principally capital lease obligations - 218
------ -------
Total long-term debt 5,260 29,281
Less: current portion 3,260 29,281
------ -------
Long-term portion $2,000 $ -
====== =======
Long Term Debt is payable as follows:
Year ended March 31,
2004 $3,260
2005 $2,000
CURRENT REVOLVING CREDIT FACILITY
On January 31, 2003, the Company entered into a $15,000 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
F-20
accrues on the principal amount of the Company's borrowings under this facility
at a floating 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 March 31, 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
March 31, 2003, there was $3,260 in outstanding borrowings and the Company had
the right to borrow an additional $3,790 under the revolving credit facility.
Commitment fees on the unused balance are equal to .375% per annum of the
average monthly amount by which $15,000 exceeds the sum of the outstanding
principal balance of the revolving credit loans. Commitment fees paid during the
year ended March 31, 2003 were $7.
The revolving credit agreement requires the Company 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 principal and interest
payments during that period.
As of March 31, 2003, the weighted average short-term interest rate on the
revolving credit facility was 5.25%. The average amount outstanding under this
agreement for the period from January 31, 2003 through March 31, 2003 was
$3,600. The Company maintains a letter of credit for $34 to guarantee the lease
of its facility in Fairfield, NJ.
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 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). 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, such as
stock splits, recapitalization, reorganization, merger, sale of the Company, or
stock dividend distributions.
The relative estimated fair value of the warrant of $452 was recorded as a
debt discount, and was charged to interest expense over the original term of the
debt, which was originally due on January 31, 2003.
AMENDMENT TO BRIDGE LOAN
The Company used a portion of the proceeds from the FCC 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 security interest and rights of Castletop under the bridge loan
agreement were subordinated to those of FCC; and
- The non-default interest rate under the bridge loan was increased to
11%.
- .
There were no amendments to the warrant issued as part of the bridge loan
transaction.
SECOND AMENDMENT TO BRIDGE LOAN
On April 11, 2003, the Company entered into a second amendment to the
bridge loan to increase the aggregate principal amount of the Subordinated Note
in favor of Castletop Capital, L.P. from $2,000 to $5,000. No other changes were
made to the note. See Note 16 "Commitments and Contingencies". The additional
borrowing was used to fund the $3,200 renewal premium payable in connection with
the renewal of the Company's Directors and Officers liability insurance coverage
(which renewal premium represents a combination of the market premium for D&O
coverage for the period from April 7, 2003 through April 7, 2004 plus the
Company's contribution toward a potential settlement in the class action
lawsuit). (Note 16).
F-21
THE COMPANY'S FORMER CREDIT AGREEMENT
The Company and its wholly-owned subsidiary, Measurement Specialties UK
Limited, were the borrowers under an Amended and Restated Revolving Credit, Term
Loan and Security Agreement dated February 28, 2001, as amended (the "credit
agreement"), among Wachovia Bank, National Association (formerly known as First
Union National Bank) as lender and agent, JP Morgan Chase Bank as lender and
Fleet National Bank as lender (Wachovia, Chase and Fleet are hereafter referred
to as the "lenders"). The credit agreement included: (i) a revolving line of
credit of up to $17,000, which including a sub-line of credit of up to $3,500
made available to Measurement Specialties UK Limited, (ii) a term loan in the
original principal amount of $25,000, and (iii) an excess revolving credit
facility in the original principal amount of $6,000, which was scheduled to
expire on March 31, 2002.
EVENTS OF DEFAULT UNDER THE COMPANY'S FORMER CREDIT AGREEMENT
Because of the Company's inability to comply with certain financial
covenants contained in the former credit agreement, events of default occurred
under the former credit agreement. The Company sought, but did not obtain, a
waiver of such events of default from the lenders. The occurrence of the events
of default under the former credit agreement gave the lenders the right to
require immediate repayment of all amounts outstanding under the former credit
agreement and exercise their remedies as a secured creditor, including taking
immediate possession of all of the Company's assets and requiring its customers
to pay all amounts owed to it directly to the lenders. As a result of the
defaults under our former credit agreement and the lenders' consequent right to
accelerate the loans, the Company was required to classify the long-term portion
of its debt to current.
FORBEARANCE AGREEMENT
On July 2, 2002, the Company signed an agreement with its lenders pursuant
to which the lenders agreed to forbear from exercising the rights and remedies
available to them under the former credit agreement as a result of the Company's
defaults until the earliest of (i) November 1, 2002, (ii) the Company's breach
or violation of the provisions of the forbearance agreement, (iii) the
institution of bankruptcy proceedings under the federal bankruptcy laws, or (iv)
the occurrence of additional defaults under the former credit agreement. The
Company was required under the forbearance agreement to, among other things,
comply with certain strict financial covenants, actively seek purchasers for
certain of its assets, continue to make required term loan payments, pledge
certain unencumbered assets in favor of the lenders and issue to the lenders
warrants to purchase up to 4.99% of the Company's common stock. Half of these
warrants were canceled when the Company repaid certain obligations as required
prior to October 1, 2002 and the balance of the warrants were canceled when the
Company repaid all amounts outstanding under the credit agreement on October 31,
2002, as more fully described below. The forbearance agreement also provided
that the interest for the Company's borrowings was equal to the lenders' prime
rate plus 3%, which rate was subject to a 2% increase in the event of a default
under the forbearance agreement.
REPAYMENT OF THE COMPANY'S OBLIGATIONS UNDER THE FORMER CREDIT AGREEMENT
Under the forbearance agreement, the deadline for repayment in full of the
notes evidencing the term loan and revolving credit facility was changed to
November 1, 2002. The Company used the proceeds from a $9,300 bridge loan from
Castletop Capital, L.P., to repay all its obligations under the term loan and
revolving credit facility. Accordingly, the facilities were eliminated.
CAPITAL LEASE OBLIGATIONS
During the year ended March 31, 2003, the Company eliminated its capital
lease obligations through fulfillment of the monthly amortization schedule, and
utilization of approximately $900 from the sale of its Milpitas, CA facility in
July 2002. The capital lease liability of $943 associated with the Milpitas, CA
facility was included in liabilities held for sale at March 31, 2002.
INTEREST RATE SWAPS
As a hedge of its interest rate risk associated with the Company's former
credit agreement, the Company entered into two Interest Rate Swap Agreements
(the "Swaps"). As of March 31, 2002, the Swaps had an initial notional amount of
$14,000 and matured June 2004. The Swaps required the Company to pay a fixed
rate of 6.98% (an effective rate of 10.23%) and receive a floating rate of 6.75%
(an effective weighted-average floating rate of 10.0%). In conjunction with the
repayment of the Company's former term loan, the interest rate swap agreements
were eliminated in October 2002. The cost of these financial instruments for the
fiscal year ended March 31, 2003 was $ 154 and has been reflected in interest
expense.
F-22
9. SHAREHOLDERS' EQUITY:
The Company is authorized to issue 21,200,000 shares of capital stock, of
which 221,756 shares have been designated as serial preferred stock and
20,000,000 shares have been designated as common stock. Each share of common
stock has one vote. The Board of Directors has not designated 978,244 authorized
shares of preferred stock.
In December 2001, the Company issued 314,081 shares of its newly issued,
unregistered shares of common stock in connection with a private placement with
a member of the Board of Directors. The purchase price was $2,000 or $6.37 per
share, which was an eight percent discount from the average closing price for
the twenty trading days preceding December 24, 2001, the effective date of the
purchase. These monies that were received in January 2002 were used to fund
operations and repay debt. The Company is required to file a registration
statement on Form S-3 to register the resale of these shares following the first
anniversary from the effective date or as soon as it shall become eligible to
use such form. As of March 31, 2003 such form has not yet been filed.
In August 2001, the Company completed an underwritten offering of 2,530,000
shares of its common stock, including the exercise of the over allotment option.
The stock was priced at $13.50 per share resulting in proceeds of $30,874, net
of underwriting discount of $2,201 and expenses of $1,080. Of the proceeds,
$10,669 was used to fund the Terraillon acquisition (see Note 2), and $9,169 was
used to repay then outstanding principal on the former term loan.
Warrants were issued to Corporate Revitalization Partners, (CRP) for
successfully achieving objectives outlined by the Company's Board of Directors
and Compensation Committee. In November 2002, warrants to purchase 87,720 shares
of the Company's common stock were issued to CRP for the successful negotiation
and execution of a long term forbearance agreement, and for the Company being in
compliance with the forbearance agreement as of September 30, 2002. On January
31, 2003, warrants to purchase an additional 32,895 shares of the Company's
common stock were issued to CRP for the successful refinancing of the Company's
lines of credit. Expense related to these warrants for the fiscal year ended
March 31, 2003 was calculated at $234 using a Black-Scholes model . All warrants
issued to CRP have an exercise period of three years and exercise prices equal
to $2.28.
On October 31, 2002, Castletop Capital, LP was issued warrants to purchase
297,228 shares of the Company's common stock in conjunction with the $9,300 loan
issued on that date. The warrants have an exercise price of $1.64, and have an
exercise period of five years . The Company valued these warrants using a
Black-Scholes model at $452, recorded such value as debt discount and charged
the discount to interest expense over the life of the debt, which was originally
due on January 31, 2003. See Note 8.
JL is subject to certain Chinese government regulations, including currency
exchange controls, which limit cash dividends and loans to ML and MSI. At March
31, 2003 and 2002, JL's restricted net assets approximated $13,743, and $10,921,
respectively
10. BENEFIT PLANS:
DEFINED CONTRIBUTION PLANS:
The Company has a defined contribution plan qualified under Section 401(k)
of the Internal Revenue Code. Substantially all of its U.S. employees are
eligible to participate after completing three months of service. Participants
may elect to contribute a portion of their compensation to the plan. Until April
1, 2002, the Company matched a portion of participants' contributions, at which
time the Company decided to suspend the Company's contribution to the 401(k)
program. There were no matching contributions to the plan in fiscal 2003. For
the years ended March 31, 2002 and 2001, the Company's matching contributions
were $598 and $463, respectively. At the discretion of the Board, the Company
may make profit sharing contributions. No profit sharing contributions were made
for fiscal 2003, 2002, or 2001.
DEFINED BENEFIT PLANS:
The Company had provided a contributory defined benefit retirement plan for
certain Schaevitz UK employees. As a result of the Company's decision to
liquidate Schaevitz UK in the fiscal quarter ended June 30, 2002, the Company
wrote off the Schaevitz UK net prepaid pension asset of $2,309 in that quarter.
The Company has received a letter from the plan's actuary stating that he has
determined that there is no further statutory liability for the Company in
accordance with current UK legislation.
F-23
The following tables set forth reconciliation of the beginning and ending
balances of the benefit obligation, fair value of plan assets, funded status and
amounts included in assets held for sale and discontinued operations related to
the defined benefit plan.
YEAR ENDED
MARCH 31,
2002
------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 2,862
Service cost 285
Interest cost 171
Benefits paid (413)
Plan participants' contributions --
Acquisition --
Actuarial (gain) loss 345
------------
Benefit obligation at end of year $ 3,250
============
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 5,737
Actual return on plan assets (834)
Benefits paid (413)
Acquisition --
Plan participants' contributions 827
------------
Fair value of plan assets at end of year $ 5,317
============
RECONCILIATION OF FUNDED STATUS:
Funded status $ 2,067
Unrecognized net actuarial loss (gain) 242
------------
Net amount recognized $ 2,309
============
The assumptions used in determining the projected benefit obligations were as
follows:
YEAR ENDED
MARCH 31,
2002
-----------
Weighted-average assumed discount rate 5.9%
Expected long-term rate of return on assets
used in determining net periodic pension cost 7.3%
Rate of compensation increase used to
measure the projected benefit obligation 5.0%
The net periodic pension cost which is included in discontinued operations,
included the following components:
YEAR ENDED MARCH 31,
---------------------
2002 2001
---------- ---------
Service cost $ 285 $ 142
Interest cost 171 115
Expected return on plan assets (428) (267)
---------- ---------
Net periodic pension cost $ 28 $ (10)
========== =========
11. RELATED PARTY TRANSACTIONS:
The Company paid approximately $15 in legal fees to a member of its Board
of Directors during each of the years ended March 31, 2002 and 2001. No fees
were paid in 2003.
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. During the fiscal year ended March 31, 2003 , the Company
incurred $2,600 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 $175 to $275, capped
at a maximum of 50 hours per consultant each week), CRP earned an aggregate
"success fee" of $138 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 fiscal year ended March 31, 2003, the Company expensed $234
relating to the CRP warrants (See Note 9).
F-24
See Note 8 for a discussion of the bridge loan from Castletop Capital,
L.P., a limited partnership controlled by the Chairman of the Company's Board of
Directors.
In September 2001, the Company loaned $125 to Steven Petrucelli, a former
member of its Board of Directors. The loan, which was subsequently memorialized
by a Promissory Note dated August 1, 2002, accrues interest at a rate of 6% per
year. Bimonthly payments of principal and interest in the amount of $1,000 are
payable until September 15, 2006. Under the terms of the Promissory Note, Mr.
Petrucelli was able to reduce the outstanding balance of loan by the amount of
any un-submitted business expenses. In April 2003, Mr. Petrucelli submitted
prior business expenses totaling $49, which were used to reduce the balance of
the loan. Accordingly, at March 31, 2003, there was $61 outstanding under the
loan. The entire unpaid balance of principal and accrued interest under the note
is due and payable on September 15, 2006. The loan is included in other assets.
In connection with the resignation of the Chief Executive Officer of the
Company, Joseph R. Mallon, Jr., effective February 4, 2003, the Company has
agreed to make a severance payment of $225 (one year's salary) to Mr. Mallon and
to provide continued medical insurance coverage under its group plan for one
year following the date of his termination. The Company has also agreed to
extend the exercise period for certain options held by Mr. Mallon until January
31, 2004, and has agreed to reimburse for up to $25 in tuition for continuing
business education. An aggregate of $ 286 was included in selling, general and
administrative expenses during the year ended, March 31, 2003 relating to such
severance. As of March 31, 2003, an accrual for such costs of $242 is included
in accrued expenses.
The Company sublets a residence used by employees in China from Damon
Germanton, a former officer and director, under a month-to-month arrangement.
Rent expense was approximately $6, for each of the fiscal years ended March 31,
2003, 2002 and 2001.
12. RESTRUCTURING AND OTHER COSTS:
During the fiscal 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 reduction in workforce consisted of 106
employees in the fiscal quarter ended March 31, 2002 and 49 additional employees
in the fiscal quarter ended June 30, 2002 in the consumer and sensor segments,
in addition to the corporate offices. The following table summarizes the
restructuring charges:
PAYMENT
RESTRUCTURING MADE DURING RESTRUCTURING PAYMENTS MADE
COST FOR THE THE YEAR COST FOR THE YEAR DURING THE YEAR BALANCE AS
YEAR ENDED ENDED MARCH BALANCE AS OF ENDED MARCH 31, ENDED MARCH OF MARCH
MARCH 31, 2002 31, 2002 MARCH 31, 2002 2003 31, 2003 31, 2003
--------------- ------------- --------------- ------------------ ----------------- -----------
Severance (106 employees) $ 955 $ (870) $ 85 $ - $ (85) $ -
Severance (49 employees) 150 (150) -
Lease termination 839 (2) 837
--------------- ------------- --------------- ------------------ ----------------- -----------
$ 955 $ (870) $ 85 $ 989 $ (237) $ 837
--------------- ============= =============== ------------------ ================= ===========
Write down of fixed assets - 230
--------------- ------------------
TOTAL $ 955 $ 1,219
=============== ==================
F-25
13. INCOME TAXES:
INCOME (LOSS) BEFORE INCOME TAXES AND THE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
CONSISTS OF THE FOLLOWING:
2003 2002 2001
--------- --------- ------------------
AS RESTATED NOTE 3
------------------
DOMESTIC $(10,550) $(19,156) $ 814
FOREIGN 4,694 (2,566) 2,656
--------- --------- ------------------
$ (5,856) $(21,722) $ 3,470
========= ========= ==================
THE INCOME TAX PROVISION (BENEFIT) CONSISTS OF THE FOLLOWING:
2003 2002 2001
--------- --------- ------------------
AS RESTATED NOTE 3
------------------
CURRENT
FEDERAL $ - $ (132) $ 1,139
FOREIGN 329 59 691
STATE 138 (55) 125
--------- --------- ------------------
TOTAL $ 467 $ (128) $ 1,955
--------- --------- ------------------
DEFERRED
FEDERAL - 1,689 (769)
FOREIGN - 110 (65)
STATE - 841 (113)
--------- --------- ------------------
TOTAL - 2,640 (947)
--------- --------- ------------------
$ 467 $ 2,512 $ 1,008
========= ========= ==================
DIFFERENCES BETWEEN THE FEDERAL STATUTORY INCOME TAX RATE AND THE EFFECTIVE TAX
RATES ARE AS FOLLOWS:
2003 2002 2001
--------- --------- ------------------
AS RESTATED NOTE 3
------------------
SATUTORY TAX RATE (34.0%) (34.0%) (34.0%)
EFFECT OF FOREIGN TAXES 1.4% 3.1% (13.8%)
STATE TAXES AND OTHER 1.0% (0.1%) 0.4%
OTHER NONDEDUCTIBLE 0.0% 0.0% 25.1%
VALUATION ALLOWANCE 37.0% 40.6% 0.0%
--------- --------- ------------------
5.4% 9.6% (22.3%)
========= ========= ==================
The Company's share of cumulative undistributed earnings of its foreign
subsidiaries was approximately $7,100 and $9,373 at March 31, 2003 and 2002 (as
restated), respectively. No provision has been made for U.S. or additional
foreign taxes on the undistributed earnings of foreign subsidiaries because such
earnings are expected to be reinvested indefinitely in the subsidiaries'
operations. It is not practical to estimate the amount of additional tax that
might be payable on these foreign earnings in the event of distribution or sale.
However, under existing law, foreign tax credits would be available to
substantially reduce, or in some cases, eliminate U.S. taxes payable.
Pursuant to current Chinese tax policies, JL qualifies for a special
corporate tax rate of 15 percent. Additionally, because JL has agreed to operate
in China for a minimum of ten years, a tax holiday (which expired on March 31,
1998) was available for two years, and a 50 percent tax rate reduction to 7.5
percent (which expired on March 31, 2001) was available for the three years
thereafter. In July 2001, JL was granted and treated as an advanced technology
enterprise. As a result, JL is entitled to a 50 percent tax rate reduction to
7.5 percent for the following three years. The Hong Kong corporate tax rate, at
which ML's earnings are taxed, is 16 percent.
F-26
The significant components of the net deferred tax assets consist of the
following:
YEAR ENDED MARCH 31,
--------------------
2003 2002
-------- ----------
Current Deferred Tax Assets (Liabilities):
Accrued expenses 1,611 574
Inventory 1,208 1,622
Accounts receivable allowance 718 641
Other 128 144
Valuation allowance (3,665) (2,981)
-------- ----------
Total: $ - $ -
======== ==========
Long-Term Deferred Tax Assets (Liabilities):
Basis difference in acquired property and equipment 2,648 2,648
Net operating loss carryforward 8,515 7,639
Other (49) (254)
Valuation allowance (11,114) (10,033)
-------- ----------
Total: $ - $ -
======== ==========
The Company has a pretax loss for financial reporting purposes. Recognition
of deferred tax assets will require generation of future taxable income. As
there can be no assurance that the Company will generate earnings in future
years, the Company has established a valuation allowance on deferred tax assets
of approximately $14,779 and $13,014 as of March 31, 2003 and 2002,
respectively.
The Company has federal net operating loss carry forwards of approximately
$22,180, which expire beginning in fiscal year 2022. The utilization of these
net operating loss carry forwards may be significantly limited under the
Internal Revenue Code as a result of ownership changes due to sales of the
Company's stock and other equity offerings.
The Company also has net operating loss carry forwards for state tax
purposes, which expire beginning in the fiscal year ending March 31, 2010.
14. PER SHARE INFORMATION:
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, less the shares that may be repurchased with the funds
received from their exercise. Potentially dilutive securities are not included
in earnings per share for the years ended March 31, 2003 and 2002 as their
inclusion would be antidilutive.
The following is a reconciliation of the numerators and denominators of
basic and diluted EPS computations for the year ended March 31, 2001:
Income
(Loss) from Weighted
continuing Average Shares Per-
operations (in 000's) Share
(Numerator) (Denominator) Amount
------------- --------------- --------
March 31, 2001
Basic per share information $ 1,197 8,144 $ 0.15
Effect of dilutive securities 901 (0.02)
------------- --------------- --------
Diluted per-share information $ 1,197 9,045 $ 0.13
============= =============== ========
F-27
For the years ended March 31, 2003 and 2002, an aggregate of 655,000, and
446,000 options and warrants respectively, were excluded from the earnings per
share calculation because the effect would be antidilutive. No dilutive
securities were excluded in the year ended March 31, 2001.
15. STOCK OPTION PLANS:
Options to purchase up to 1,828,000 common shares were eligible to be
granted under MSI's 1995 Stock Option Plan and its predecessor plan (together
the "1995 Plan"), until its expiration on September 8, 2005. Shares issueable
under 1995 Plan grants which expire or otherwise terminate without being
exercised become available for later issuance. All shares eligible for grant
were issued prior to April 1, 1999.
Options to purchase up to 1,500,000 shares may be granted under the
Company's 1998 Stock Option Plan, (the "1998 Plan") until its expiration on
October 19, 2008. Shares issuable under 1998 Plan grants which expire or
otherwise terminate without being exercised become available for later issuance.
The aggregate numbers of shares available for grant of options under the 1998
Plan were 29,750, 661,558 and 639,008 as of March 31, 2003, 2002 and March 31,
2001, respectively. A total of 1,411,070, 728,438 and 818,692 options to
purchase shares were outstanding at March 31, 2003, 2002 and 2001, respectively.
Options under all Plans generally vest over service periods of up to five
years, and expire no later than ten years from the date of grant. Options may,
but need not, qualify as "incentive stock options" under section 422 of the
Internal Revenue Code. Tax benefits are recognized upon nonqualified exercises
and disqualifying dispositions of shares acquired by qualified exercises. There
were no changes in the exercise prices of outstanding options, through
cancellation and reissuance or otherwise, for 2003, 2002, or 2001.
A summary of the status of stock options as of March 31, 2003, 2002, and
2001 and changes during the years ended on those dates is presented below:
NUMBER OF SHARES WEIGHTED-AVERAG EEXERCISE PRICE
------------------------- ---------------------------------
OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE
------------ ----------- --------------- ----------------
March 31, 2000 1,084,384 601,400 2.50 2.46
Granted at market 466,600 15.67
Forfeited (13,800) 8.81
Exercised (337,300) 2.33
------------
MARCH 31, 2001 1,199,884 458,044 7.60 2.71
Granted at market 222,300 15.10
Forfeited (190,080) 11.53
Exercised (182,434) 2.35
------------
MARCH 31, 2002 1,049,670 514,660 9.39 4.55
Granted at market 971,400 2.32
Forfeited (252,100) 16.40
Exercised (58,000) 2.30
------------
MARCH 31, 2003 1,710,970 539,530 4.59 5.70
============
Summarized information about stock options outstanding at March 31, 2003
follows:
WEIGHTED-
WEIGHTED-AVERAGE AVERAGE
NUMBER OF UNDERLYING SHARES EXERCISE EXERCISE PRICE REMAINING
- ----------------------------- -------------- -------------------------- ----------------
OUTSTANDING EXERCISABLE PRICE RANGE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
- ----------------------------- -------------- -------------------------- ----------------
1,337,870 361,990 $ 1.38 $ 3.81 $ 1.82 $ 2.05 8.43
70,000 62,800 $ 6.19 $ 9.50 $ 8.48 $ 18.48 7.04
229,100 90,140 $14.19 $18.80 $ 14.34 $ 14.27 7.31
74,000 24,600 $19.38 $24.88 $ 20.72 $ 20.83 7.74
- -------------- ------------- ------------ ------------ ----------------
1,710,970 539,530 $ 4.59 $ 5.70 8.23
============== ============= ============ ============ ================
Based on calculations using the Black-Scholes option pricing model, the
weighted-average fair value of options granted in 2003, 2002, and 2001 at the
date of grant was $2.29, $9.03, and $7.93 per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model (single grant assumption with straight-line
amortization) with the following weighted-average assumptions:
2003 2002 2001
------- ----- -----
Expected volatility . . 205.7 % 90.0% 53.0%
Risk-free interest rate 2.8 % 4.9% 5.8%
Dividend yield. . . . . -- -- --
Expected life in years. 5.0 5.0 5.0
F-28
16. COMMITMENTS AND CONTINGENCIES:
LEASES. The Company leases certain property and equipment under non-cancellable
operating leases expiring on various dates through July 2011. Company leases
that include escalated lease payments are straight-lined over that base lease
period, in accordance with SFAS 13. Rent expense, including real estate taxes,
insurance and maintenance expenses associate with net operating leases
approximate $969 for 2003, $3,032 for 2002, and $1,864 for 2001. At March 31,
2003, total minimum rent payments under leases with initial or remaining
noncancellable lease terms of more than one year were:
YEAR ENDING MARCH 31,
-----------------------------
2004 $ 2,006
2005 1,559
2006 985
2007 885
2008 905
Thereafter $ 3,176
LITIGATION:
In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No.
1071 (D.N.J.).
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 the Company and certain of the Company's present
and former officers and directors. The complaint was subsequently amended to
include the underwriters in the Company's August 2001 public offering and the
Company's former auditors. The lawsuit alleges violations of the federal
securities laws. 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 have fully briefed motions to dismiss the
case, which remain under consideration by the court.
The Company has Directors and Officers liability insurance that provides an
aggregate of $10,000 in coverage for the period during which this claim was
filed ($5,000 in primary coverage and $5,000 in excess coverage). The Company's
primary D&O insurance carrier initially denied coverage of this claim, which
position the Company contested. After discussion, the insurer reversed its
previous coverage position and agreed to participate in the potential settlement
of the class action lawsuit (subject to the $5,000 policy limit). As part of the
arrangement, the Company renewed its D&O coverage for the coming fiscal year.
The new policy provides for an aggregate of $6,000 in coverage. The $3,200
renewal premium represents a combination of the market premium for D&O coverage
for the period from April 7, 2003 through April 7, 2004 plus the Company's
contribution toward a potential settlement in the class action lawsuit. No
assurance can be given that this insurance will be adequate, or that the
Company's excess insurance coverage will be available or adequate, to cover
losses, if any, arising from this litigation.
In addition, the Company's credit agreement precludes it from making cash
payment in settlement of this litigation without the prior consent of Fleet
Capital Corporation.
This litigation is ongoing and the Company cannot predict its outcome at
this time However, if the Company were to lose this lawsuit, judgment would
likely have a material adverse effect on the Company's consolidated financial
position, results of operations and cash flows.
SEC/U.S. Attorney Investigation
In February 2002, the Company contacted the staff of the SEC after
discovering that the Company's former chief financial officer had made the
misrepresentation to senior management, the Company's Board of Directors and its
auditors that a waiver of a covenant default under the Company's credit
agreement had been obtained when, in fact, its lenders had refused to grant such
a waiver. Since February 2002, the Company and a special committee formed by the
Company's 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 the
Company that it is conducting a formal investigation relating to matters
reported in its Quarterly Report on Form 10-Q for the quarter ended December 31,
2001.
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 these investigations will continue or
their outcome.
Hibernia Litigation
On or about July 23, 2002, Hibernia Capital Partners I, ilp and Hibernia
Capital Partners II, ilp filed a lawsuit against the Company 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
F-29
sale of their shares in Terraillon Holdings Limited to the Company 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 has now filed its defence, which is similar to an
answer, and awaits commencement of the discovery process. This litigation is
ongoing and the Company cannot predict its outcome at this time.
Robert L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No.
02-CV-3431.
On July 17, 2002, Robert DeWelt, the Company's former acting chief
financial officer and general manager of its Schaevitz Division, filed a lawsuit
against the Company and certain of the its officers and directors. Mr. DeWelt
resigned on March 26, 2002 in disagreement with management's decision not to
restate certain of the Company's financial statements. 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. This litigation is ongoing and the Company cannot predict its outcome
at this time.
Semex, Inc. v. Measurement Specialties, Inc. and AMP Incorporated, Court of
Common Pleas of Montgomery County Pennsylvania, Docket Number NO. 02-23609.
On October 24, 2002, Semex, Inc. ("Semex") filed a lawsuit against the
Company and Amp Incorporated alleging breaches of the lease for the Company's
former facility in Valley Forge, Pennsylvania. The Company is the assignee of
Amp Incorporated under the lease. The plaintiff alleges that the Company owes at
least $770 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. An answer has been filed disputing
certain of the amounts claimed to be due.
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration).
Exeter Technologies, Inc. and Michael Yaron have alleged underpayments by
the Company of approximately $322 relating to a Product Line Acquisition
Agreement dated January 5, 2000. The parties are working together to resolve
their dispute through a non-binding arbitration and both sides have exchanged
documents in order to facilitate the resolution process. If these efforts are
not successful, an arbitration is scheduled for June 17 and June 18, 2003.
Czarnek & Orkin Laboratories, Inc. v. TRW, Inc. and Measurement
Specialties, Inc. (Arbitration)
Czarnek & Orkin Laboratories, Inc. ("Orkin") submitted a demand for
arbitration with the American Arbitration Association on July 8, 2002. The
demand indicated that Orkin was seeking approximately $2,000 in royalty revenue
from the Company. At issue was a license agreement relating to the expected
development and marketing of certain sensor technology. The arbitration was
concluded in the fiscal quarter ended March 31, 2003 and resulted in the Company
making a settlement payment in the amount of $165.
In re: Service Merchandise Company, Inc. (Service Merchandise Company, Inc.
v. Measurement Specialties, Inc.), 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 the
Company 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. This litigation is ongoing and the Company cannot predict its
outcome at this time.
In re: Clark Material Handling Company, et al. (Clark Material Handling
Company, et al. v. Lucas Control Systems, Case No. 02-997). The Company is
currently the defendant (as successor to Lucas Control Systems) in a lawsuit
filed in April 2002 by Clark Material Handling Company and its related debtors
(the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy
proceedings. Plaintiffs assert that Lucas Control Systems ("Lucas") received $34
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 Lucas'
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 Lucas 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 $34 from Lucas. This litigation is ongoing and the
Company cannot predict its outcome at this time.
F-30
As of March 31, 2003, the Company has provided an accrual of $3.6 million
associated with certain of the legal matters discussed above. However, there can
be no assurances that additional amounts may not be required to dispose of such
matters.
Measurement Specialties, Inc. vs. Stayhealthy.com, Docket Number 03-3017
(E.D. Pa.)
On or about May 8, 2003, the Company filed a complaint against Stayhealthy,
Inc. ("Stayhealthy") in United States District Court in the Eastern District of
Pennsylvania. The Complaint alleges that Stayhealthy owes the Company at least
$1,200 for failing to make certain payments in accordance with the terms of a
sales contract. The Complaint asserts claims against Stayhealthy for breach of
contract, sale of goods, action for price, collection of account, and unjust
enrichment. To date, the Company has not been served with Stayhealthy's answer
to the complaint. This action is ongoing and the Company cannot predict its
outcome at this time.
From time to time, the Company is subject to other legal proceedings and
claims in the ordinary course of business. The Company currently is not aware of
any such legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
business, financial condition, or operating results.
17. SEGMENT INFORMATION:
The Company's reportable segments are strategic business units that operate
in different industries and are managed separately. Management has organized the
business based on the nature of their respective products and services. For a
description of the products and services included in each segment, see Note 1.
The accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies.
The Company has no material intersegment sales.
At March 31, 2003, the foreign subsidiaries' total assets aggregated $20.5
million of which, $4.9 million was in Hong Kong and $15.6 million was in China.
At March 31, 2002 the foreign subsidiaries' total assets aggregated $19.7
million of which, $5.2 million was in Hong Kong and $14.5 million in China. The
Company is potentially subject to the risks of foreign currency transaction and
translation losses, which might result from fluctuations in the values of the
Hong Kong dollar and the Chinese renminbi. The foreign subsidiaries' operations
reflect intercompany transfers of costs and expenses, including interest on
intercompany trade receivables, at amounts established by the Company.
F-31
The following is information related to industry segments:
FOR THE YEAR ENDED MARCH 31,
2003 2002 2001
--------- --------- --------
AS RESTATED
SEE NOTE 3
--------
Net sales
Consumer Products $ 55,666 $ 47,879 52,916
Sensors 52,222 48,911 44,117
--------- --------- --------
Total $107,888 $ 96,790 $97,033
--------- --------- --------
Operating income (loss)
Consumer Products 9,592 3,887 6,912
Sensors 5,854 (12,991) 1,483
--------- --------- --------
Total segment operating income (loss) 15,446 (9,104) 8,395
Corporate expenses (19,854) (10,012) (3,219)
--------- --------- --------
Total operating income (loss) (4,408) (19,116) 5,176
Interest expense, net of interest income 2,075 2,371 2,634
Gain on wafer fab sales (159) - -
Other expense (income) (468) 235 (928)
--------- --------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of accounting change (5,856) (21,722) 3,470
Income tax 467 2,512 1,008
--------- --------- --------
Income (loss) from continuing operations before
cumulatvie effect of accounting change (6,323) (24,234) 2,462
--------- --------- --------
Discontinued Operations:
Income (loss) from operations of discontinued units (net
of income tax benefit) (3,910) (4,565) (1,265)
Gain on disposition of discontinued units (net
of income tax benefit) 1,136 - -
--------- --------- --------
Loss from discontinued units (2,774) (4,565) (1,265)
--------- --------- --------
Income (loss) before cumulative effect of accounting change (9,097) (28,799) 1,197
Cumulative effect of accounting change, net of taxes - 248 -
--------- --------- --------
Net income (loss) $ (9,097) $(29,047) $ 1,197
========= ========= ========
Depreciation and amortization:
Consumer Products $ 887 $ 866 $ 1,018
Sensors 2,444 3,683 1,552
--------- --------- --------
Total $ 3,331 $ 4,549 $ 2,570
========= ========= ========
F-32
March 31,
2003 2002 2001
------- -------
Segment Assets
Consumer products $11,478 $17,118
Sensors 34,391 33,668
Corporate 299 2,194
Assets held for sale - Consumer - 27,984
Assets held for sale - Sensors - 8,648
------- -------
Total $46,168 $89,612
======= =======
Capital Expenditures:
Consumer products 817 687 1,455
Sensors 701 1,679 4,198
------- ------- ------
Total $ 1,518 $ 2,366 $5,653
======= ======= ======
Geographic information for revenues, based on country of origin, and
long-lived assets, which included property, plant and equipment, goodwill and
other intangibles, net of related depreciation and amortization follows:
2003 2002
-------- -------
Net sales:
United States $ 82,006 $69,795
Germany 5,754 7,580
France 1,634 863
Other Europe 11,870 5,181
Other 6,624 13,371
-------- -------
Total: $107,888 $96,790
======== =======
Long-lived assets:
2003 2002
-------- -------
United States $ 8,117 $ 9,422
China 8,649 9,464
-------- -------
Total: $ 16,766 $18,886
======== =======
18. CONCENTRATIONS:
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, are principally cash, long-term debt and trade
accounts receivable.
The Company generally maintains its cash equivalents at major financial
institutions in the United States, Canada, Hong Kong and China. Cash held in
foreign institutions amounted to $1,709 and $150 at March 31, 2003 and 2002,
F-33
respectively. The Company periodically evaluates the relative credit standing of
financial institutions considered in its cash investment strategy.
Accounts receivable are concentrated in United States and European
distributors and retailers of consumer products. To limit credit risk, the
Company evaluates the financial condition and trade payment experience of
customers to whom credit is extended. The Company generally does not require
customers to furnish collateral, though certain foreign customers furnish
letters of credit.
The Company manufactures the substantial majority of its sensor products,
and most of its sensor subassemblies used in its consumer products, in leased
premises located in Shenzhen, China. Sensors are also manufactured at the
Company's United States facilities located in Virginia, and California.
Additionally, certain key management, sales and support activities are conducted
at leased premises in Hong Kong. Substantially all of the Company's consumer
products are assembled in China, primarily by a single supplier, River Display,
Ltd. ("RDL"), although the Company is utilizing alternative Chinese assemblers.
There are no agreements, which would require the Company to make minimum
payments to RDL, nor is RDL obligated to maintain capacity available for the
Company's benefit, though the Company accounts for a significant portion of
RDL's revenues. Additionally, most of the Company's products contain key
components, which are obtained from a limited number of sources. These
concentrations in external and foreign sources of supply present risks of
interruption for reasons beyond the Company's control, including, political,
economic and legal uncertainties resulting from the Company's operations in
China.
A United States manufacturer and distributor of electric housewares
accounted for 7.1%, 8.1%, and 7.9% of net sales for the fiscal years ended March
31, 2003, 2002 and 2001, respectively. A German distributor of diversified house
wares accounted for 8.3%, 7.3%, and 0.3% of net sales for the fiscal years ended
March 31, 2003, 2002 and 2001, respectively. Both customers are in the Company's
Consumer Products segment.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Presented below is a schedule of selected restated quarterly operating
results (see Note 3).
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
ENDED JUNE 30 ENDED SEPT. 30 ENDED DEC. 31 ENDED MARCH 31
YEAR ENDED MARCH 31, 2003
As Reported
Net sales $ 23,646 $ 32,437 $ 28,413 $ 23,392
Gross profit $ 7,785 $ 10,423 $ 10,817 $ 8,816
Net income (loss) $ (5,703) $ (1,041) $ 1,608 $ (3,961)
Income (loss) per share, basic and diluted (0.48) (0.09) 0.13 (0.33)
YEAR ENDED MARCH 31, 2002
As Reported
Net sales $ 25,658 $ 34,612 $ 42,658 $ 29,691
Gross profit $ 6,505 $ 7,735 $ 11,474 $ 9,294
Net income (loss) $ (2,545) $ (5,835) $ (1,980) $ (18,687)
Income (loss) per share, basic and diluted (0.30) (0.57) (0.17) (1.57)
As Adjusted for Discontinued Operations
Net sales $ 23,701 $ 25,835 $ 26,549 $ 20,705
Gross profit $ 6,361 $ 6,394 $ 7,997 $ 4,221
Net income (loss) $ (2,545) $ (5,835) $ (1,980) $ (18,687)
Income (loss) per share, basic and diluted (0.30) (0.57) (0.17) (1.57)
Earnings per share are computed independently for each of the quarters
presented, on the basis described in Note 14. The sum of the quarters may not be
equal to the full year earnings per share amounts.
F-34
SCHEDULE II
Measurement Specialties, Inc.
VALUATION AND QUALIFYING ACCOUNTS
Year Ended March 31, 2003, 2002, and 2001
Col. A Col. B Col. C Col. D Col. E
- -------------------------------------------- ------------- ------------------------- ------------------ ---------------
Additions
-------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts Deductions- Balance at End
Description Year Expenses Describe Describe of Year
- -------------------------------------------- ------------- ----------- ------------ ------------------ ---------------
Year ended March 31, 2003
Deducted from asset accounts:
Allowance for doubtful accounts $ 658 $ 842 - $ (462) (a) $ 1,038
Sales reserve 389 - 1,703(e) (1,577) (b) 515
Inventory allowance 5,106 1,285 - (1,395) (c) 4,996
Valuation allowance for deferred taxes 13,014 1,765 - 14,779
Warranty Reserve 685 641 - (564) (d) 762
Year ended March 31, 2002*
Deducted from asset accounts:
Allowance for doubtful accounts $ 914 $ 809 - $ (1,065) (a) $ 658
Sales reserve 337 876(e) (824) (b) 389
Inventory allowance 2,074 3,577 - (545) (c) 5,106
Valuation allowance for deferred taxes 500 12,514 - 13,014
Warranty Reserve 619 614 - (548) (d) 685
Year ended March 31, 2001*
Deducted from asset accounts:
Allowance for doubtful accounts $ 318 $ 698 $ (102) (a) $ 914
Sales reserve 80 380(e) (123) (b) 337
Inventory allowance 2,897 893 (1,716) (c) 2,074
Valuation allowance for deferred taxes 500 500
Warranty Reserve 410 572 (363) (d) 619
(a) Bad debts written off, net of recoveries
(b) Actual returns received
(c) Inventory sold or destroyed
(d) Costs of product repaired or replaced
(e) Charged as a reduction of revenues
* As Restated
S-1