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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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, FAIRFIELD, NEW JERSEY 07004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(973) 808-3020
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- --
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act ).
Yes No X
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 12,371,891 shares of common
stock, no par value per share, at October 31, 2003.
1
PART I. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) . . . . . . 3
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) . . . . . . . . . . . 4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) . 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) . . . . . . 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED). . . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . 33
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . . . . . . 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . 36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . 37
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2
ITEM 1. FINANCIAL STATEMENTS
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- --------------------------
2003 2002 2003 2002
----------- ------------ ------------ ------------
Net sales $ 28,559 $ 32,300 $ 54,600 $ 56,025
Cost of goods sold 16,252 21,624 29,704 37,432
----------- ------------ ------------ ------------
Gross profit 12,307 10,676 24,896 18,593
----------- ------------ ------------ ------------
Operating expenses (income):
Selling, general and administrative 7,508 9,749 15,002 17,801
Non-cash equity based compensation 1,835 - 1,908 -
Research and development 854 765 1,760 1,791
Customer funded development - (70) - (346)
Restructuring costs - 530 - 1,123
----------- ------------ ------------ ------------
Total operating expenses 10,197 10,974 18,670 20,369
----------- ------------ ------------ ------------
Operating income (loss) 2,110 (298) 6,226 (1,776)
Interest expense, net 135 626 300 1,346
Gain on sale of Wafer Fab - (109) - (109)
Other expense (income) 2 192 (6) 143
----------- ------------ ------------ ------------
Income (loss) from continuing operations before income tax 1,973 (1,007) 5,932 (3,156)
Income tax 258 - 546 18
----------- ------------ ------------ ------------
Income (loss) from continuing operations 1,715 (1,007) 5,386 (3,174)
----------- ------------ ------------ ------------
Discontinued operations:
Income (loss) from discontinued units - (374) 112 (3,910)
Gain on sale of Terraillon - 340 - 340
----------- ------------ ------------ ------------
Income (loss) from discontinued units - (34) 112 (3,570)
----------- ------------ ------------ ------------
Net income (loss) $ 1,715 $ (1,041) $ 5,498 $ (6,744)
=========== ============ ============ ============
Income (loss) per common share - Basic
Income (loss) from continuing operations $ 0.14 $ (0.09) $ 0.44 $ (0.27)
Income (loss) from discontinued units - 0.00 0.01 (0.30)
----------- ------------ ------------ ------------
Net income (loss) $ 0.14 $ (0.09) $ 0.45 $ (0.57)
----------- ------------ ------------ ------------
Income (loss) per common share - Diluted
Income (loss) from continuing operations $ 0.12 $ (0.09) $ 0.39 $ (0.27)
Income (loss) from discontinued units - 0.00 0.01 (0.30)
----------- ------------ ------------ ------------
Net income (loss) $ 0.12 $ (0.09) $ 0.40 $ (0.57)
----------- ------------ ------------ ------------
Weighted average shares outstanding - Basic 12,349,546 11,912,958 12,151,050 11,906,025
=========== ============ ============ ============
Weighted average shares outstanding - Diluted 13,844,523 11,912,958 13,587,597 11,906,025
=========== ============ ============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
MEASUREMENT SPECIALTIES, INC.
CONDENSEND CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
2003 2003
- ---------------------------------------------------------------------- --------------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,442 $ 2,694
Accounts receivable, trade, net of allowance for doubtful
accounts of $451, and $1,038 respectively 12,861 10,549
Inventories 14,566 14,275
Prepaid expenses and other current assets 2,362 1,885
--------------- -----------
Total current assets 33,231 29,403
--------------- -----------
PROPERTY AND EQUIPMENT, NET 11,128 11,818
--------------- -----------
OTHER ASSETS:
Goodwill 4,191 4,191
Other assets 611 756
--------------- -----------
4,802 4,947
--------------- -----------
Total assets $ 49,161 $ 46,168
=============== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
MEASUREMENT SPECIALTIES, INC.
CONDENSEND CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
2003 2003
--------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 3,260
Accounts payable 11,855 9,846
Accrued compensation 2,491 1,207
Accrued expenses and other current liabilities 5,287 5,744
Accrued litigation expenses 750 3,550
--------------- -----------
Total current liabilities 20,383 23,607
OTHER LIABILITIES:
Long-term debt-related party - 2,000
Other liabilities 1,656 1,615
--------------- -----------
Total liabilities 22,039 27,222
--------------- -----------
SHAREHOLDERS' EQUITY
Serial preferred stock; 221,756 shares authorized; none outstanding
Common stock, no par; 20,000,000 shares authorized; 12,363,891
and 11,922,958 shares issued and outstanding, respectively 5,502 5,502
Additional paid-in capital 45,905 43,197
Accumulated deficit (24,185) (29,683)
Accumulated other comprehensive loss (100) (70)
--------------- -----------
Total shareholders' equity 27,122 18,946
--------------- -----------
$ 49,161 $ 46,168
=============== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Other
Additional Compre-
Common paid-in Accumulated hensive Comprehensive
stock capital Deficit Loss Total Income (Loss)
BALANCE, APRIL 1, 2002 $ 5,502 $ 42,346 $ (20,586) $ (435) $ 26,827
Net income - - (6,744) - (6,744) $ (6,744)
Currency translation adjustment - - - 369 369 369
--------------
Comprehensive Income - - - - - $ (6,375)
==============
Warrants Issued for professional services - 153 - - 153
Proceeds from exercise of stock options - 117 - - 117
----------- -------- ------------- --------- ---------------
BALANCE, SEPTEMBER 30, 2002 5,502 42,616 (27,330) (66) 20,722
----------- -------- ------------- --------- ---------------
Net income - - (2,353) - (2,353) $ (2,353)
Currency translation adjustment - - - (4) (4) (4)
--------------
Comprehensive Income - - - - - $ (2,357)
==============
Warrants Issued for professional services - 112 - - 112
Proceeds from exercise of stock options - 17 - - 17
Warrants issued for debt - 452 - - 452
----------- -------- ------------- --------- ---------------
BALANCE, APRIL 1, 2003 5,502 43,197 (29,683) (70) 18,946
----------- -------- ------------- --------- ---------------
Net income - - 5,498 - 5,498 $ 5,498
Currency translation adjustment - - - (30) (30) (30)
--------------
Comprehensive Income - - - - - $ 5,468
==============
Warrants Issued for non-cash equity based - 1,908 - - 1,908
compensation
Proceeds from exercise of stock options - 32 - - 32
Tax benefit from stock options - 5 - - 5
Proceeds from exercise of stock warrants - 763 - - 763
----------- -------- ------------- --------- ---------------
BALANCE, SEPTEMBER 30, 2003 $ 5,502 $ 45,905 $ (24,185) $ (100) $ 27,122
=========== ======== ============= ========= ===============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2003 2002
-------------------- ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 5,498 $ (6,744)
Adjustments to reconcile net loss to net cash provided by
Operating activities of income:
Income from discontinued operations - 3,570
Depreciation and amortization 1,454 1,897
Assets Write-off 140 -
Deferred rent (13) 28
Provision for bad debt 173 43
Non-cash equity based compensation 1,908 153
Gain on sale of Wafer Fab - (109)
Net changes in operating assets and liabilities:
Accounts receivable, trade (2,485) (6,904)
Inventories (291) 1,069
Prepaid expenses and other current assets (472) (434)
Other assets 144 (102)
Accounts payable 2,009 4,084
Accrued Litigation Costs (2,800) -
Accrued expenses and other liabilities 882 3,481
-------------------- ---------------------
Net cash provided by operating activities 6,147 32
-------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (904) (386)
Proceeds from sale of Wafer Fab - 3,300
Proceeds from sale of Terraillon - 16,668
Cash received from receiver - 770
-------------------- ---------------------
Net cash (used in) provided by investing activities (904) 20,352
-------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under bank line of credit agreement 3,000 2,450
Repayments of debt (8,260) (107)
Payment of deferred financing costs - (22,266)
Proceeds from exercise of options and warrants 795 117
-------------------- ---------------------
Net cash (used in) financing activities (4,465) (19,806)
-------------------- ---------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS, CONTINUING OPERATIONS 778 578
Effect of exchange rates (30) 369
Cash used for discontinued operations - (1,860)
Cash and cash equivalents, beginning of period 2,694 3,760
-------------------- ---------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,442 $ 2,847
==================== =====================
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 313 $ 1,328
Income taxes $ 182 $ -
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATIONS:
Interim financial statements:
These interim financial statements were prepared pursuant to accounting
principles for interim financial information, the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and
Exchange Commission, and have not been audited. Accordingly, while they conform
to the measurement and classification provisions of accounting principles
generally accepted in the United States, they do not include the footnote
information required by accounting principles generally accepted in the United
States for annual financial statements. Preparation of these financial
statements requires management to make estimates and assumptions, which affect
the amounts reported. Actual results could differ from those estimates. In the
opinion of management, these financial statements include all normal and accrual
adjustments for a fair presentation. Reference is made to the annual financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 2003. Operating results for the three and six months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2004. These statements have been
prepared on a basis that is substantially consistent with the accounting
principles applied in our annual report on Form 10-K for the year ended March
31, 2003.
The following information is unaudited. This report should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2003.
Description of business:
Measurement Specialties, Inc., a New Jersey corporation ("MSI" or the
"Company"), is a designer and manufacturer of sensors and sensor-based consumer
products. The Company produces a wide variety of sensors that use advanced
technologies to measure precise ranges of physical characteristics, including
pressure, motion, force, displacement, angle, flow and distance. The Company
has a Sensor segment and a Consumer Products segment. The Sensor segment
designs and manufactures sensors for leading original equipment manufacturers
for, automotive, medical, consumer, military/aerospace and industrial
applications. Sensor products include pressure and electromagnetic displacement
sensors, custom microstructures, load cells and accelerometers. The Consumer
Products segment designs and manufactures sensor based consumer products which
are sold to leading retailers and distributors in both the United States and
Europe. Consumer products include bathroom and kitchen scales, tire pressure
gauges and distance estimators.
Liquidity and Going Concern:
The Company is currently the defendant in several lawsuits, including a 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. Further, the United States Attorney for the District of New
Jersey is conducting an inquiry into the matters being investigated by the SEC.
(See Note 10)
The Company's cash and amounts available under the revolving credit facility may
not be available or adequate to fund 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 its 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 the Company's 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,
8
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 satisfactorily resolve
its loss contingencies and does not obtain additional funds, the Company will
likely be unable to continue operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements included in this report do not contain
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
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 ("ML"),
organized in Hong Kong; Jingliang Electronics ("JL") (Shenzhen) Co. Ltd.,
organized in the People's Republic of China ("China"); IC Sensors Inc. ("IC
Sensors"), a California corporation; Measurement Specialties, U.K. Limited
("Schaevitz UK"), organized in the United Kingdom; and Terraillon Holdings
Limited, organized in Ireland, and its wholly-owned subsidiaries ("Terraillon");
all collectively referred to as the "Company." As discussed in Note 7, the
Company placed Schaevitz UK in receivership in June 2002 and sold Terraillon in
September 2002; accordingly, the results from these operations are reflected as
discontinued operations. All significant intercompany balances and transactions
have been eliminated.
Reclassifications:
The presentation of certain prior year information has been reclassified to
conform with the current year presentation.
Stock Based Compensation:
The Company has three stock-based employee compensation plans. 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 the first six months of the fiscal year ending March 31, 2004 or
in the fiscal year ended March 31, 2003 as a result of options issued with an
exercise price below the underlying stock's market price. The table below
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". The options were valued using the Black-Scholes
option pricing model, using a risk free rate of 2.8% and 4.9%, volatility of
2.06 and 0.90, and option life of five years for the options granted in 2003 and
2002, respectively.
9
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
--------------- -------------- --------------- -------------
Net income (loss), as reported $ 1,715 $ (1,041) $ 5,498 $ (6,744)
Add: Stock-based employee compensation expense
included in reported net income, net of related tax effects - - - -
Deduct: Total stock-based employee compensation
under fair value based method for awards granted,
net of related tax effects (19) (51) (56) (86)
--------------- -------------- --------------- -------------
Pro forma net income (loss) $ 1,696 $ (1,092) $ 5,442 $ (6,830)
=============== ============== =============== =============
Net Income (loss) per share
Basic-as reported $ 0.14 $ (0.09) $ 0.45 $ (0.57)
Basic Proforma 0.14 (0.09) 0.45 (0.57)
Diluted- as reported 0.12 (0.09) 0.40 (0.57)
Diluted proforma 0.12 (0.09) 0.40 (0.57)
Recent Accounting Pronouncements:
On May 15, 2003, the Financial Accounting Standards Board ("FASB") 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
manditorily 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 has evaluated
the requirements of SFAS 150 and has determined that SFAS 150 will not have a
material effect on the Company's financial position.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123"
("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123") and provides alternative methods for accounting
for a change by registrants to the fair value method of accounting for
stock-based compensation. Additionally, SFAS 148 amends the disclosure
requirements of SFAS 123 to require disclosure in the significant accounting
policy footnote of both annual and interim financial statements of the method of
accounting for stock-based compensation and the related pro-forma disclosures
when the intrinsic value method continues to be used. The statement is effective
for fiscal years beginning after December 15, 2002, and disclosures are
effective for the first fiscal quarter beginning after December 15, 2002. The
Company has 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 Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). The statement 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
statement 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. SFAS 146 is required to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company does not have any exit or disposal costs for the three or six month
periods ended September 30, 2003.
10
The Company's previous policy was to accrue restructuring and other costs at the
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, the Company has
provided for certain restructuring costs incurred prior to December 31, 2002.
(See Note 3).
3. RESTRUCTURING AND OTHER COSTS:
During the quarter ended March 31, 2002, management and the Board of Directors
approved a plan of reduction of workforce and a reduction of operating capacity
at certain locations. During the year ended March 31, 2003, the Company recorded
restructuring and other costs of $1,219, consisting of $150 for severance, $839
for lease termination, and $230 for the write down of fixed assets. At March
31, 2003, the Company had an accrual of $837 for lease termination costs. At
September 30, 2003, the Company still maintained the accrual of $837 to cover
the expected cost of lease terminations, which is included in accrued expenses.
The Company did not make any payments during the three and six month periods
ended September 30, 2003 related to these lease termination costs.
4. INVENTORIES:
Inventories net, consists of the following:
SEPTEMBER 30, MARCH 31,
2003 2003
-------------- ----------
RAW MATERIALS $ 6,523 $ 6,930
WORK-IN-PROCESS 2,212 2,630
FINISHED GOODS 5,831 4,715
-------------- ----------
$ 14,566 $ 14,275
============== ==========
Inventory reserves were $4,871 at September 30, 2003 and $4,996 at March 31,
2003.
5. LONG-TERM DEBT:
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
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 September 30, 2003, the interest rate
applicable to borrowings under the revolving credit facility was 5.0%. 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 September 30, 2003, there were no outstanding borrowings and the
Company had the right to borrow an additional $9,473 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 three and six month periods ended September 30, 2003, were approximately $16
and $29, respectively.
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 was 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 ended June 30, 2003. This covenant expired on
August 7, 2003. In addition, the Company is required to keep a minimum fixed
charge ratio of 1 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 taxes paid and minus capital
expenditures, divided by the sum of scheduled principal and interest payments
during that period. The Company is currently in compliance to with all
covenants in the agreement.
11
For the quarter ended September 30, 2003, the weighted average short-term
interest rate on the revolving credit facility was 5.0%. The Company did not
have any borrowings under this agreement for the period from July 1, 2003
through September 30, 2003. The Company maintains a letter of credit for $34 to
guarantee the lease of its facility in Fairfield, New Jersey.
Bridge Loan
On October 31, 2002, the Company received a $9,300 bridge loan from Castletop
Capital, L.P. ("Castletop"), a limited partnership controlled by Morton Topfer,
Chairman of the Company's Board of Directors. The proceeds from this loan were
used to repay all of the Company's obligations under its previous term loan and
revolving credit facility. The loan was evidenced by a Senior Secured Note
originally due January 31, 2003 and did 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 the
Company's common stock for an exercise price equal to the average closing price
of the Company's common stock on the American Stock Exchange for the first five
trading days after October 31, 2002 ($1.64 per share). This warrant had a term
of 5 years. On June 26, 2003, Castletop exercised its warrant to purchase
297,228 shares of stock at an exercise price of $1.64.
On October 31, 2002, the relative estimated fair value of the warrant of $452
was recorded as debt discount, and was subsequently charged to interest expense
over the life of the debt, 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 from $2,000 to $5,000. No other changes were made to the
note. See Note 10, "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). The
revolving credit agreement prohibited the Company from prepaying the bridge loan
before September 30, 2003. In September 2003, with authorization from FCC,
the Company retired this facility by repaying the remaining $5,000 in borrowings
to Castletop.
12
6. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
SEPTEMBER 30, MARCH 31,
--------------- ----------- -----------------
2003 2003 USEFUL LIFE
--------------- ----------- -----------------
Production machinery and equipment $ 14,111 $ 13,800 5-7 years
Tooling costs 3,743 3,579 5-7 years
Furniture and equipment 4,944 4,922 3-10 years
Leasehold improvements 1,793 1,721 Term of the lease
Construction in progress 356 283
--------------- -----------
Total 24,947 24,305
Less: accumulated depreciation and
amortization (13,819) (12,487)
--------------- -----------
$ 11,128 $ 11,818
=============== ===========
Depreciation expense was $724 and $1,454 for the three and six months periods
ended September 30, 2003, and was $871 and $1,897 for the three and six month
periods ended September 30, 2002, respectively.
7. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE, AND GAIN OR
LOSS ON SALE OF ASSETS AND DISCONTINUED UNITS:
The Company sold all of the outstanding stock of Terraillon (previously a
component of the Company's Consumer Products segment) in September 2002 and sold
the assets, principally property and equipment, related to its IC Sensors
silicon wafer fab manufacturing operations (previously a component of the
Company's Sensor segment) in July 2002. The amounts for Terraillon on the
consolidated statements of operations for the three and six months ended
September 30, 2002 have been reclassified as discontinued operations to reflect
the disposal of this operating unit.
The Company placed its United Kingdom subsidiary, Schaevitz UK (previously a
component of the Company's Sensor segment), into receivership on June 5, 2002
pursuant to the terms of a Mortgage Debenture dated February 28, 2001. The
receiver's function was to dispose of Schaevitz UK's business and assets for the
best price possible. The book debt recoveries and sale proceeds were applied in
settlement of the receiver's remuneration, costs and expenses, the preferential
creditors' claims (i.e., the claims of the Inland Revenue, Customs & Excise and
employee claims up to certain statutory limits) and then to (i) claims by the
Company's lenders in accordance with UK insolvency legislation (the Insolvency
Act 1986) and (ii) priority arrangements. Schaevitz UK's landlord has a
potential dilapidations claim of up to 350 Pounds Sterling (approximately $620
United States dollars based on market exchange rates as of October 31, 2003)
against Schaevitz UK that arose on the expiration of the lease of 543/544
Ipswich Road Trading Estate, Slough, Berkshire, England on June 23, 2002. The
results of operations of Schaevitz UK are reflected as discontinued operations
from April 1, 2002 through the June 5, 2002 date of liquidation. During the
fiscal year ended March 31, 2003, the Company incurred approximately $3,511 of
costs and expenses in connection with the liquidation of Schaevitz UK, which
consisted of write-down of prepaid pension costs of $2,309 and receiver and
other costs of $1,202. The amount recovered from the liquidation was
approximately $1,176.
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
13
equipment lease obligation. The prepaid credit for products and services, as
utilized, are being accounted as a reduction to cost of sales. The gain on this
sale was approximately $159, net of tax, and has been reflected in the Condensed
Consolidated Statements of Operations as "Gain on Sale of Wafer Fab" of $109 for
the three months ended September 30, 2002, and an additional $50 for the three
months ended December 31, 2002.
In September 2002, the Company sold all of the outstanding stock of Terraillon
Holdings Limited, a European manufacturer of branded consumer bathroom scales,
to Fukuda S.a.r.l, an investment holding company incorporated in Luxembourg, for
$22,300. On January 24, 2003, the Company received $1,384 of the funds that had
been placed in escrow at the time of closing to secure certain of the Company's
indemnification obligations. The estimated gain at the time of sale was
approximately $340, net of tax, and subject to further adjustments. As a result
of final settlement of escrowed amounts, the Company recorded an additional gain
of $357, as certain amounts previously provided for were no longer required.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
TERRAILLON SCHAEVITZ, UK TOTAL TERRAILLON SCHAEVITZ, UK TOTAL
------------ -------------- ---------- ------------- --------------- ----------
Net sales $ 10,007 $ - $ 10,007 $ 18,678 $ 905 $ 19,583
Cost of goods sold 7,925 - 7,925 13,244 617 13,861
------------ -------------- ---------- ------------- --------------- ----------
Gross profit 2,082 - 2,082 5,434 288 5,722
Operating expenses:
Selling, general and administrative 2,477 - 2,477 5,835 149 5,984
Research and development - - - - 68 68
Restructuring costs - - - - 3,577 3,577
------------ -------------- ---------- ------------- --------------- ----------
Total operating expenses 2,477 - 2,477 5,835 3,794 9,629
Operating income (loss) (395) - (395) (401) (3,506) (3,907)
Interest income (expense) (13) - (13) (25) 2 (23)
Other income 39 - 39 27 (7) 20
------------ -------------- ---------- ------------- --------------- ----------
(Loss) before income taxes (369) - (369) (399) (3,511) (3,910)
Provision for income taxes 5 - 5 - - -
------------ -------------- ---------- ------------- --------------- ----------
Net loss from discontinued
operations $ (374) $ - $ (374) $ (399) $ (3,511) $ (3,910)
============ ============== ========== ============= =============== ==========
8. PER SHARE INFORMATION AND STOCK OPTION ISSUED:
Basic per share information is computed based on the weighted average common
shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or conversion
of stock options and warrants, less the shares that may be repurchased with the
funds received from their exercise. Diluted earnings per share are not presented
in fiscal periods for which the results are antidilutive. Excluded from diluted
earnings per share are approximately 92,000 and approximately 169,000 equivalent
shares for the three and six month periods ended September 30, 2002.
14
The computation of the basic and diluted net income per share is as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2003
Income Shares Per Share Income Shares Per Share
------------ ---------- ---------- ---------- ---------- ----------
Income from continuing operations $ 1,715 12,349,546 $ 0.14 $ 5,386 12,151,050 $ 0.44
Income from discontinued operations - 12,349,546 $ - 112 12,151,050 $ 0.01
------------------------------------ ----------------------------------
Basic EPS:
Income available to common shareholders $ 1,715 12,349,546 $ 0.14 $ 5,498 12,151,050 $ 0.45
Effect of dilutive securities:
Warrants 410,162 444,169
Stock options 1,084,815 992,378
------------------------------------ ----------------------------------
Diluted EPS:
Income available to common stockholders
and assumed conversions $ 1,715 13,844,523 $ 0.12 $ 5,498 13,587,597 $ 0.40
==================================== ==================================
9. SEGMENT INFORMATION:
The Company has two business segments, a Sensor segment and a Consumer Products
segment.
The Company's Sensor segment designs, manufactures, and markets sensors for
original equipment manufacturer applications. These products include pressure
sensors, custom microstructures, accelerometers, tilt/angle sensors, force and
displacement sensors for medical, consumer, automotive, military/aerospace and
industrial applications.
The Company's Consumer Products segment manufactures and markets sensor-based
consumer products. These products include bathroom and kitchen scales, tire
pressure gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive and ultrasonic
technologies.
Segment data have been presented on a basis consistent with how business
activities are reported internally to management.
The accounting policies of the segments are substantially the same as those
described in Note 2.
The Company has no material intersegment sales.
The following is information related to industry segments:
15
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
------------------------------- -----------------------------
2003 2002 2003 2002
------------------------------- -----------------------------
Net sales
Consumer Products $ 14,338 $ 18,298 $ 25,589 $ 29,492
Sensors 14,221 14,002 29,011 26,533
------------------------------- -----------------------------
Total 28,559 32,300 54,600 56,025
------------------------------- -----------------------------
Operating income (loss)
Consumer Products 2,685 3,571 4,793 4,404
Sensors 3,690 654 8,287 1,558
------------------------------- -----------------------------
Total segment operating income 6,375 4,225 13,080 5,962
Unallocated expenses (4,265) (4,523) (6,854) (7,738)
------------------------------- -----------------------------
Total operating income (loss) 2,110 (298) 6,226 (1,776)
Interest expense, net of interest income 135 626 300 1,346
Other (income) 2 192 (6) 143
Gain on sale of Wafer Fab - (109) - (109)
------------------------------- -----------------------------
Income (loss) from continuing operations before income tax 1,973 (1,007) 5,932 (3,156)
Income Tax 258 - 546 18
------------------------------- -----------------------------
Income (loss) from continuing operations 1,715 (1,007) 5,386 (3,174)
Income (loss) from Discontinued Operations - (34) 112 (3,570)
------------------------------- -----------------------------
Net Income(loss) $ 1,715 $ (1,041) $ 5,498 $ (6,744)
=============================== =============================
SEPTEMBER 30, MARCH 31,
2003 2003
-------------- ----------
Segment Assets
Consumer Products $ 16,086 $ 11,478
Sensors 32,878 34,391
Unallocated 197 299
-------------- ----------
Total $ 49,161 $ 46,168
============== ==========
16
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
Securities Litigation
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 of the Company's August 2001 public offering as well as 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. Present and former officers and directors have made
claims for indemnification and advancement of expenses under the Company's
by-laws. On September 30, 2003, the court denied the Company's motion to dismiss
this case and the parties expect to commence the discovery process.
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). Our primary
D&O insurance carrier initially denied coverage of this claim, which the Company
contested. The insurer reversed its previous coverage position and agreed to
participate in the defense and 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. 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
to cover losses, if any, arising from this litigation. The Company's excess D&O
insurance carrier has denied coverage for this claim and the Company is
contesting this position. No assurance can be given that the Company's excess
insurance will be available or adequate to cover losses, if any, 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. The Company is currently engaged in settlement discussions related to this
litigation but cannot predict when, or if, such discussions will be successful.
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 the Company's
auditors that a waiver of a covenant default under the Company's credit
agreement had been obtained when, in fact, the Company's 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 the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2001. The Company is currently engaged in settlement
discussions with the staff of the Division of Enforcement in connection with the
investigation but cannot predict when, or if, such discussions will be
successful.
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.
17
Present and former officers and directors have made claims for indemnification
and advancement of expenses under the Company's by-laws in connection with the
SEC and U.S. Attorney investigations. The Company cannot predict how long these
investigations will continue or their outcome.
Hibernia Capital Partners I, ilp and Hibernia Capital Partners II, ilp.
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
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 filed a Defense, 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
On July 17, 2002, Robert DeWelt, the Company's former acting chief financial
officer and general manager of the Company's Schaevitz Division, filed a lawsuit
against the Company and certain of the Company's officers and directors. Mr.
DeWelt resigned on March 26, 2002 in disagreement with management's decision not
to restate certain of 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 filed a Motion to Dismiss
this case, which was denied on June 30, 2003. The Company has answered the
complaint and commenced the discovery process. This litigation is ongoing and
the Company cannot predict its outcome at this time.
Clark Material Handling Company, et al. v. Lucas Control Systems
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.
Semex, Inc.
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. In addition to seeking rent and other charges in
the sum of $770, plaintiff is also seeking $1,015 for building cleanup,
restoration, failure to remove alterations and environmental testing of the
premises. An answer has been filed disputing the amounts claimed to be due.
Exeter Technologies, Inc. and Michael Yaron
Exeter Technologies, Inc. ("Exeter") and Michael Yaron have alleged
underpayments of approximately $322 relating to a January 5, 2000 Product Line
Acquisition Agreement. The parties commenced arbitration proceedings in
September 2003. After two days and before completion of these proceedings,
Exeter requested that the arbitration be suspended so that it could consider
whether or not to continue such proceedings. The Company has acknowledged that
the Company owed Exeter approximately $128 as of September 30, 2003.
18
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.
11. RELATED PARTY TRANSACTIONS:
Restructuring Services
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(See "Executive Services and Non-Cash Equity Based Compensation" below
for a discussion of the current agreement relating to Mr. Guidone's services as
Chief Executive Officer of the Company). As of September 30, 2003, and as of
October 20, 2003, on a cumulative basis, the Company has incurred $3,293 and
$3,352 respectively, in consulting fees and expenses to CRP (excluding the
success fees described in this paragraph). In addition to consulting fees based
on hours billed by CRP consultants (at hourly rates that range from $175 to $275
and that are 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. On June 12 and 13, and July
14, 2003, CRP exercised its warrant to purchase 120,615 shares of stock at an
exercise price of $2.28.
Executive Services and Non-Cash Equity Based Compensation
On April 21, 2003, the Compensation Committee of the Company's Board of
Directors reached a verbal agreement with Frank Guidone regarding his long term
retention as Chief Executive Officer. Definitive agreements memorializing this
arrangement were entered into on July 22, 2003, between the Company and Four
Corners Capital Partners, LP ("Four Corners"), a limited partnership of which
Mr. Guidone is a principal. Pursuant to this arrangement, Four Corners will make
Mr. Guidone available to serve as the Company's Chief Executive Officer for
which it will receive an annual fee of $400 (plus travel costs for Mr. Guidone)
and will be eligible to receive a performance-based bonus. The agreement is for
an indefinite period of time and both parties have the right to terminate the
agreement on sixty day's advance notice. Through September 30, 2003, the
Company paid an aggregate of $132 to Four Corners under this agreement.
In connection with the retention of the services of Mr. Guidone, Four Corners
was also issued a warrant to purchase up to 600,000 shares of the Company's
common stock at an exercise price of $3.16 per share. Subject to the continued
service of Mr. Guidone, the right to purchase the shares vests at a rate of 35%,
30%, 20% and 15%, respectively, in each of the four years following the grant
date of the warrant, with the potential of a reduced vesting period if certain
performance targets are achieved. On September 18, 2003, the first 35% of the
warrant shares became vested as a result of the performance of the Company's
common stock. The Company recorded a non-cash equity based compensation charge
of $1,835 ($0.13 per share diluted) and $1,908 ($0.14 per share diluted) during
the three month and six month periods ended September 30, 2003, respectively,
representing the estimated fair value of the portion of the warrant that vested.
The warrant was valued using the Black-Scholes option pricing model, using a
risk free rate of 0.81% and 1.01%, volatility of 0.27 and 0.46, and warrant life
of one month and six months, for the periods ended June 30, 2003 and September
30, 2003, respectively. The Company will record future charges for the remaining
390,000 warrant shares as they vest. See Note 8 for impact on diluted earnings
per share for the 600,000 warrant shares issued to Four Corners.
In addition, in connection with this arrangement, Mr. Guidone entered into a
non-competition agreement and Four Corners was granted registration rights
relating to any shares purchased under the warrant.
See Note 5 for a discussion of the bridge loan from Castletop Capital, L.P., a
limited partnership controlled by Morton L. Topfer, Chairman of the Company's
Board of Directors.
19
12. SUBSEQUENT EVENT:
Effective October 15, 2003, Mr. Joseph R. Mallon, Jr. resigned from the
Company's Board of Directors. Effective the same day, R. Barry Uber was
appointed to fill the vacancy created by Mr. Mallon's resignation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following discussion of our results of operations and financial condition
should be read together with the other financial information, consolidated
financial statements and related notes included in this Quarterly Report on Form
10-Q. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of factors.
Our fiscal year begins on April 1 and ends on March 31. References in this
report to the year 2003 or fiscal 2003 refer to the 12-month period from April
1, 2002 through March 31, 2003 and references in this report to the year 2004 or
fiscal 2004 refer to the 12-month period from April 1, 2003 through March 31,
2004.
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, tilt/angle, flow and distance. We have two businesses, a
Sensor business and a Consumer Products business.
Our Sensor business designs, manufactures and markets sensors for original
equipment manufacturer applications. These products include pressure sensors,
custom microstructures, accelerometers, tilt/angle sensors, force and
displacement sensors for medical, consumer, automotive, military/aerospace and
industrial applications.
Our Consumer Products business manufactures and markets sensor-based consumer
products. These products include bathroom and kitchen scales, tire pressure
gauges and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive and ultrasonic
technologies.
20
The following table sets forth, for the periods indicated, certain items in our
consolidated statements of income as a percentage of net sales:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
2003 2002 (1) 2003 2002 (1)
-------------- ------------- ------------ -------------
Net Sales
Sensors 49.8% 43.3% 46.9% 52.6%
Consumer products 50.2 56.7 53.1 47.4
-------------- ------------- ------------ -------------
Total net sales 100.0 100.0 100.0 100.0
Cost of Sales 56.9 66.9 54.4 66.8
-------------- ------------- ------------ -------------
Gross profit 43.1 33.1 45.6 33.2
Operating expenses (income)
Selling, general, and administrative 26.3 30.2 27.5 31.8
Non-cash equity based compensation 6.4 - 3.5 -
Research and development 3.0 2.4 3.2 3.2
Customer funded development - (0.2) - (0.6)
Restructuring costs - 1.6 - 2.0
Interest expense, net 0.5 1.9 0.5 2.4
Gain on sale of wafer fab - (0.3) - (0.2)
Other expenses - 0.6 - 0.2
-------------- ------------- ------------ -------------
36.2 36.2 34.7 38.8
Income (loss) from continuing operations before income taxes 6.9 (3.1) 10.9 (5.6)
Income Tax Provision 0.9 - 1.0 -
Income (loss) from discontinued units - (0.1) 0.2 (6.4)
-------------- ------------- ------------ -------------
Net income (loss) 6.0% (3.2)% 10.1% (12.0)%
============== ============= ============ =============
(1) The consolidated financial statements for the six months ended September 30, 2002 include the results of the ongoing
operations of Measurement Specialties, Inc. As a result of our restructuring plan, we sold all of the outstanding stock
of Terraillon in September 2002 and placed Schaevitz UK into receivership in June 2002. Accordingly, Terraillon and
Schaevitz UK are classified as discontinued operations in the consolidated financial results for all periods presented.
The comparisons above exclude the results of these discontinued operations, except for "Income (loss) from discontinued
units," and "Net income (loss)."
21
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 "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 and title passes to the customer.
Certain consumer products may be sold with a provision allowing the customer to
return a portion of the 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 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; payments subsequently received on such
receivables are credited to the allowance for doubtful accounts. Actual
uncollectible accounts could exceed our estimates and 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.
22
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 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 due to potential loss contingencies related to our pending litigation.
Realization of a deferred tax asset is dependent on generating future taxable
income. See Note 10 to the condensed consolidated financial statements included
in this Quarterly Report on Form 10-Q for further discussion of contingencies
and litigation.
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.
23
WARRANTY RESERVE:
Our sensors 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:
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 or judgment 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. See Note 10 to the condensed
consolidated financial statements included in this Quarterly Report on Form 10-Q
for further discussion of contingencies and litigation.
NON-CASH EQUITY BASED COMPENSATION:
We have issued warrants, under an agreement for the services of our Chief
Executive Officer, to a limited partnership (LP). The LP is partially
controlled by our chief executive officer. The warrant agreement allows the LP
to purchase a certain number of shares of our stock, at an agreed-upon exercise
price. The warrant shares vest at 35%, 30%, 20% and 15% each year over a
four-year period, with the potential of a reduced vesting period if certain
targets are achieved. We record non-cash equity based compensation expense on
the warrants as the shares vest. The warrants are valued using the
Black-Scholes option pricing model, using an appropriate risk free interest
rate, volatility factor, and warrant life.
24
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
The consolidated financial statements for the three and six month periods ended
September 30, 2003 and September 30, 2002 include the results of the ongoing
operations of Measurement Specialties, Inc. As a result of our restructuring
plan, we sold all of the outstanding stock of Terraillon in September 2002 and
placed Schaevitz UK into receivership in June 2002. Accordingly, Terraillon and
Schaevitz UK are classified as discontinued operations in the consolidated
financial results for all periods presented.
Net Sales. Net sales decreased to $28,559 for the three months ended September
30, 2003 from $32,300 for the three months ended September 30, 2002.
Net sales of our Sensor business increased $219, or 1.6%, to $14,221 for the
three months ended September 30, 2003 from $14,002 for the three months ended
September 30, 2002. Sales of our Microfused product line increased due to
expanded demand for our automotive pressure sensors and certain newly released
products. IC Sensors product line sales improved as a result of the
introduction of new products. PiezoSensor sales declined primarily due to our
decision to cease doing business with a customer because of collectability
issues.
Net sales of our Consumer Products business decreased $3,960, or 21.6%, to
$14,338 for the three months ended September 30, 2003 from $18,298 for the three
months ended September 30, 2002. Net sales during the quarter ended September
30, 2002 were higher mainly due to the aggressive liquidation of slow moving and
obsolete inventory, which accounts for $1,235, or 31.2%, of the change in net
sales. Excluding this event, net sales decreased by $2,725, or 14.9%, for the
three months ended September 30, 2003. The balance of the decrease is mainly
due to fewer seasonal promotional activities on tire pressure gauges in the U.S.
and decreased sales to original equipment manufacturers. In the quarter ended
September 30, 2002, we supplied two tire pressure gauge promotions offered by
our warehouse club customers. We did not participate in any tire pressure gauge
promotions in the quarter ended September 30, 2003. However, we expect to
supply one of these promotions in the quarter ending December 31, 2003.
Gross Profit. Gross profit increased $1,631, or 15.3%, to $12,307 for the three
months ended September 30, 2003 from $10,676 for the three months ended
September 30, 2002. Gross margin as a percent of sales for the three months
ended September 30, 2003 increased to 43.1% from 33.1% for the three months
ended September 30, 2002.
Gross margin as a percent of sales for our Sensor business increased to 53.5%
for the three months ended September 30, 2003 from 37.0% for the three months
ended September 30, 2002. The continued improvement of our Sensors margin is
due to both our production planning and restructuring efforts which have
resulted in a more efficient manufacturing operation, and reduced material costs
due to better management of material sourcing.
Gross margin as a percent of sales for our Consumer Products business increased
to 31.5% for the three months ended September 30, 2003 from 30.5% for the three
months ended September 30, 2002. The increase is mainly due to improved margins
on sales to original equipment manufacturers as a result of, among other things,
reduced freight and labor costs, and a reduction in material costs as a
percentage of sales due to certain efficiency improvements in our manufacturing
process. The margin on our retail customer sales declined slightly as compared
to the quarter ended September 30, 2002 due to higher inventory reserves related
to certain products.
On a continuing basis our gross margin in the Sensors and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $2,241, or 23.0%, to $7,508 for the three months ended
September 30, 2003 from $9,749 for the three months ended September 30, 2002.
The decrease was primarily due to lower legal and professional fees incurred
during the three months ended September 30, 2003, as compared to the same
quarter in fiscal 2003. Legal and professional fees were higher in the three
months ended September 30, 2002 than in the three months ended September 30,
2003 due to defaults under our credit agreement, restatement of our financial
statements, class action lawsuits and the SEC investigation. These legal and
professional fees decreased approximately $2,509 compared to the quarter ended
September 30, 2002. In addition, costs have decreased in the Sensor segment due
25
to consolidation of certain support services. Offsetting these declines was an
increase to the employee profit sharing accrual as a result of the improvement
in our company performance.
Non-Cash Equity Based Compensation. During the three months ended September 30,
2003, the company recorded a non-cash equity based compensation charge of
$1,835, or $0.13 per share diluted, for the warrant issued to Four Corners
Capital Partners LP, a limited partnership of which Mr. Guidone is a principal.
If the market price of our common stock were to continue at its current level,
an additional 300,000 warrant shares would become vested under the terms of the
warrant agreement in the quarter ended December 31, 2003. See Note 11 to the
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q for a discussion of non-cash equity based compensation and the
arrangement with Four Corners.
Research and Development. Research and development costs increased to $854 for
the three months ended September 30, 2003 from $765 for the three months ended
September 30, 2002. We had no customer-funded development for the three months
ended September 30, 2003 compared with $70 for the three months ended September
30, 2002. On a net basis, research and development costs increased $159, or
22.9%, to $854 for the three months ended September 30, 2003 from $695 for the
three months ended September 30, 2002. The primary cause of the reduction in
customer-funded development was the sale of the IC Sensors wafer fab in July
2002. We do not expect significant customer funded research and development for
the remainder of fiscal 2004.
Interest Expense, Net. Net interest expense decreased $491, or 78.4%, to $135
for the three months ended September 30, 2003 from $626 for the three months
ended September 30, 2002. This decrease in interest expense is attributable to
a $18,806 reduction in average debt outstanding from $22,556 in the three months
ended September 30, 2002 to $3,750 in the three months ended September 30, 2003.
Income Taxes. Our provision for income taxes includes taxes payable by our
foreign subsidiaries. For U.S. tax purposes, we anticipate that our available
net operating loss carry-forwards will offset all current year taxable income.
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. We had a net loss of $34 for the three months
ended September 30, 2002 from these discontinued operations.
26
SIX MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2002
Net Sales. Net sales decreased to $54,600 for the six months ended September
30, 2003 from $56,025 for the six months ended September 30, 2002.
Net sales of our Sensor business increased $2,478, or 9.3%, to $29,011 for the
six months ended September 30, 2003 from $26,533 for the six months ended
September 30, 2002. Sales of our Microfused product line increased due to
expanded demand for our automotive pressure sensors and newly released products.
IC Sensors product line sales improved as a result of the introduction of new
products. PiezoSensor sales declined primarily due to our decision to cease
doing business with a customer because of collectability issues.
Net sales of our Consumer Products business decreased $3,903, or 13.2%, to
$25,589 for the six months ended September 30, 2003 from $29,492 for the six
months ended September 30, 2002. Net sales during the six months ended
September 30, 2002 were higher due to aggressive liquidation of slow moving and
obsolete inventory, heavy seasonal promotional activities on tire pressure
gauges in the US, and higher sales to original equipment manufacturers. In the
six months ended September 30, 2002, we supplied two tire pressure gauge
promotions offered by our warehouse club customers. We did not participate in
any tire pressure gauge promotions in the six months ended September 30, 2003.
However, we expect to supply one of these promotions in the quarter ending
December 31, 2003.
Gross Profit. Gross profit increased $6,303, or 33.9%, to $24,896 for the six
months ended September 30, 2003 from $18,593 for the six months ended September
30, 2002. Gross margin as a percent of sales for the six months ended September
30, 2003 increased to 45.6% from 33.2% for the six months ended September 30,
2002.
Gross margin as a percent of sales for our Sensor business increased to 55.3%
for the six months ended September 30, 2003 from 38.6% for the six months ended
September 30, 2002. The continued improvement of our Sensors margin is due to
both our production planning and restructuring efforts which have resulted in a
more efficient manufacturing operation, and reduced material costs due to better
management of material sourcing.
Gross margin as a percent of sales for our Consumer Products business increased
to 32.6% for the six months ended September 30, 2003 from 29.3% for the six
months ended September 30, 2002. The margin increased for both retail customer
sales and sales to original equipment manufacturers. The gross margin
improvement was mainly due to reduced freight and labor costs,and as a reduction
in material costs as a percentage of sales due to certain efficiency
improvements in our manufacturing process.
On a continuing basis our gross margin in the Sensors and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $2,799, or 15.7%, to $15,002 for the six months ended
September 30, 2003 from $17,801 for the six months ended September 30, 2002.
The decrease was primarily due to lower legal and professional fees incurred
during the first six months of fiscal year 2004, as compared to the first six
months of fiscal year 2003. Legal and professional fees were higher in the six
months ended September 30, 2002 than in the six months ended September 30, 2003
due to defaults under our credit agreement, restatement of our financial
statements, class action lawsuits and SEC investigation. These legal and
professional fees decreased approximately $3,042 compared to the six months
ended September 30, 2002. In addition, costs have decreased in the Sensor
segment due to consolidation of certain support services. Offsetting these
declines was an increase to the employee profit sharing accrual as a result of
the improvement in our company performance.
Non-Cash Equity Based Compensation. During the six months ended September 30,
2003, the company recorded a non-cash equity based compensation charge of
$1,908, or $0.14 per share diluted, for the warrant issued to Four Corners
Capital Partners LP, a limited partnership of which Mr. Guidone is a principal.
If the market price of our common stock were to continue at its current level,
an additional 300,000 warrant shares would become vested under the terms of the
warrant agreement in the quarter ended December 31, 2003. See Note 11 to the
27
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q for a discussion of non-cash equity based compensation and the
arrangement with Four Corners.
Research and Development. Research and development costs decreased $31, or
1.7%, to $1,760 for the six months ended September 30, 2003 from $1,791 for the
six months ended September 30, 2002. We had no customer-funded development for
the six months ended September 30, 2003 compared to $346 for the six months
ended September 30, 2002. On a net basis, research and development costs
increased $315, or 21.8%, to $1,760 for the six months ended September 30, 2003
from $1,445 for the six months ended September 30, 2002. The primary cause of
the reduction in customer-funded development was the sale of the IC Sensors
wafer fab in July 2002. We do not expect significant customer funded research
and development for the remainder of fiscal 2004.
Interest Expense, Net. Net interest expense decreased $1,046, or 77.7%, to $300
for the six months ended September 30, 2003 from $1,346 for the six months ended
September 30, 2002. This decrease in interest expense is attributable to a
$20,742 reduction in average debt outstanding from $25,224 in the six months
ended September 30, 2002 to $4,482 in the six months ended September 30, 2003.
Income Taxes. Our provision for income taxes includes taxes payable by our
foreign subsidiaries. For U.S. tax purposes, we anticipate that all current
year taxable income will be offset by our available net operating loss carry
- -forwards.
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. We had a net loss of $3,570 for the six months
ended September 30, 2002 from these discontinued operations. For the first six
months of fiscal 2004, a gain of $112 was recorded as additional funds were
received from the liquidation of Schaevitz UK.
28
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) increased by $594 from $14,978 as of March 31, 2003 to $15,572 as of
September 30, 2003. The increase was attributable to an increase in accounts
receivable of $2,312 from $10,549 at March 31, 2003 to $12,861 at September 30,
2003, an increase in inventory of $291 from $14,275 at March 31, 2003 to $14,566
at September 30, 2003, and partially offset by an increase in accounts payable
of $2,009 from $9,846 at March 31, 2003 to $11,855 at September 30, 2003. The
increases in accounts receivable and inventory are attributable to the seasonal
nature of sales for our Consumer Products segment. The increase in accounts
payable was as a result of the normal seasonal spending increase in our Consumer
Products segment.
Cash provided by operating activities was $6,147 for the six months ended
September 30, 2003, as compared to $32 for the six months ended September 30,
2002. This increase was as a result of the company's overall performance
improvement and reduced selling, general and administrative spending. Included
in cash provided from operations for the six month period ended September 30,
2003 is $2,800 of costs paid to our insurance carrier related to the D&O premium
renewal (See Note 10 to the condensed consolidated financial statements included
in this Quarterly Report on Form 10-Q.) Excluding this payment to our insurance
carrier, cash provided from operations would have been $8,947.
Capital spending increased to $904 for the six months ended September 30, 2003
from $386 for the six months ended September 30, 2002. The increase in capital
spending is primarily attributable to investment in revenue generating projects
at our Shenzen, China facility. Financing activities for the six months ended
September 30, 2003 utilized $4,465, primarily due to the repayment of all
outstanding indebtedness to Castletop Capital, L.P., and repayment of company
debt under our revolving credit facility. This reduction of debt was partially
offset by $795 in proceeds from the exercise of stock options and warrants.
29
Revolving Credit Facility
On January 31, 2003, we 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 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
September 30, 2003, the interest rate applicable to borrowings under the
revolving credit facility was 5.0%. 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.
Our revolving credit agreement requires us to meet certain financial covenants
during the term of the revolving credit facility. In addition to certain
affirmative and negative covenants, which include a restriction on the payment
of dividends, we were required to maintain a borrowing availability of at least
$2,000 through the filing of our quarterly report on Form 10-Q for the three
months ended June 30, 2003. This covenant expired on August 7, 2003. In
addition, beginning in the fiscal quarter ended June 30, 2003, we are required
to keep a minimum fixed charge ratio of 1 to 1 at the end of each fiscal
quarter. Fixed charge ratio is defined as operating cash flow, which is EBITDA
(earnings before interest, taxes, depreciation and amortization) minus cash
taxes paid and minus capital expenditures, divided by the sum of scheduled
principle payments and interest expense during that period. We are currently in
compliance with all covenants in the agreement.
Bridge Loan
On October 31, 2002, we received a $9,300 bridge loan from Castletop Capital
L.P. (Castletop), 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 was evidenced by a Senior Secured Note originally due January 31, 2003 and
did 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 had a term of five years. On June 26, 2003, Castletop exercised its
warrant to purchase 297,228 shares of our common stock at an exercise price of
$1.64.
On October 31, 2002, the relative estimated fair value of the warrant of $452
was recorded as a debt discount, and was subsequently charged to interest
expense over the life of the debt, originally due on January 31, 2003.
Amendment to Bridge Loan
We used a portion of the proceeds from the revolving credit facility to reduce
the principal amount outstanding under the bridge loan to $2,000. Also, in
connection with the revolving credit facility transaction, the terms of the
bridge loan were amended as follows:
- The maturity date of the Castletop note was extended to January 31,
2005;
- The non-default interest rate under the bridge loan was increased to
11%; and
- The security interest and rights of Castletop under the bridge loan
agreement were subordinated to those of FCC.
There were no amendments to the warrant issued as part of the bridge loan
transaction.
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 from $2,000 to $5,000. No other changes were made to the
note. The additional borrowing was used to fund the $3,200 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
30
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).
The revolving credit agreement prohibited the company from prepaying the bridge
loan before September 30, 2003. In September 2003, with authorization from FCC,
we retired this facility by repaying the remaining $5,000 in borrowings to
Castletop. We did not incur additional indebtedness in connection with the
repayment of this loan. The funds used to repay this debt were generated through
ongoing business operations.
Liquidity
At October 31, 2003, we had approximately $2,997 of available cash and $9,473 of
borrowing capacity under our revolving credit facility. Our ongoing capital
needs and other obligations include the payment of:
- Substantial professional fees that are being incurred as the result of
the class action lawsuits and SEC investigation; and
- Any judgments, settlement payments or penalties arising from the class
action lawsuit, SEC investigation or other matters described under
"Legal Proceedings."
Our cash and amounts available under our revolving credit facility may not be
available or adequate to fund amounts, if any, to be paid in settlement of our
pending legal proceedings. Under the terms of the credit agreement, we are
prohibited from making any cash payment in settlement of any litigation unless,
after giving effect to such payment and for a period of 30 consecutive days
prior thereto, availability under the credit facility is not less than $1,500.
Moreover, we are prohibited from making any cash payment in settlement of the
class action lawsuit, the DeWelt litigation or the Hibernia litigation without
the prior written consent of FCC. See "Legal Proceedings" below for a more
complete discussion of our pending legal proceedings.
Our cash and amounts available under our revolving credit facility may not be
sufficient to satisfy the obligations discussed above. If we are unable to
satisfy these obligations, we may need to explore other fund raising
alternatives, including the sale of assets or equity securities. No assurance,
however, can be given that we will be able to successfully sell assets or stock,
or, even if such transactions are possible, that they will be on terms
reasonable to us, that they will enable us to satisfy our obligations or that
such actions will be permitted under our credit agreement. Additionally, any
sale of 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.
Dividends
We have not declared cash dividends on our common equity. Additionally, the
payment of dividends is prohibited under our credit agreement. If permitted
under applicable law and consented to by our lenders, we may, in the future,
declare dividends under certain circumstances.
At present, there are no material restrictions on the ability of our Hong Kong
subsidiary to transfer funds to us in the form of cash dividends, loans,
advances, or purchases of materials, products, or services. Chinese laws and
regulations, including currency exchange controls, restrict distribution and
repatriation of dividends by our China subsidiary.
Seasonality
Our sales of consumer products are seasonal, with highest sales during the
second and third fiscal quarters.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(DOLLARS IN THOUSANDS)
We are exposed to a certain level of foreign currency exchange risk.
The majority of our net sales are priced in United States dollars. Our costs and
expenses are priced in United States dollars, Hong Kong dollars and Chinese
renminbi. Accordingly, the competitiveness of our products relative to products
produced domestically (in foreign markets) may be affected by the performance of
the United States dollar compared with that of our foreign customers'
currencies. Additionally, we are exposed to the risk of foreign currency
transaction and translation losses, which might result from adverse fluctuations
in the values of the Hong Kong dollar and the Chinese renminbi. At September 30,
2003, we had net assets of approximately $700 subject to fluctuations in the
value of the Hong Kong dollar and net liabilities of approximately $16,300
subject to fluctuations in the value of the Chinese renminbi. At September 30,
2002, we had net liabilities of approximately $2,600 subject to fluctuations in
the value of the Hong Kong dollar and net assets of approximately $11,600
subject to fluctuations in the value of Chinese renminbi. At March 31, 2003, we
had net liabilities of approximately $2,000 subject to fluctuations in the value
of the Hong Kong dollar and the net assets of approximately $13,700 subject to
fluctuations in the value of Chinese renminbi.
Fluctuations in the value of the Hong Kong dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong dollar to that of the United States dollar. However, there can be no
assurance that the value of the Hong Kong dollar will continue to be tied to
that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to foreign currency and
translation risks, we may purchase currency exchange forward contracts, currency
options, or other derivative instruments, provided such instruments may be
obtained at suitable prices. However, to date we have not done so.
Interest on our revolving credit facility accrues on the principal amount of our
borrowings under the facility at a fluctuating rate per year equal to the lesser
of FCC's prime rate for commercial loans plus one percent (subject to a two
percent increase upon the occurrence of an event of default under the loan
agreement) or the maximum rate permitted by applicable law. Our results will be
adversely affected by any increase in interest rates. For example, for every
$1,000 of debt outstanding, an annual interest rate increase of 100 basis points
would increase interest expense and thus decrease our after tax profitability by
$10.
We do not hedge this interest rate exposure.
CAUTIONARY STATEMENT
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. Forward looking statements may be
identified by such words or phrases as "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will," "may" and similar expressions. All
statements that address operating performance, events or developments that we
expect or anticipate will occur in the future are forward-looking statements.
The forward-looking statements above are not guarantees of future performance
and involve a number of risks and uncertainties. Factors that might cause actual
results to 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;
32
- Competitive factors, such as price pressures and the potential
emergence of rival technologies;
- Interruptions of suppliers' operations or the refusal of our suppliers
to provide us with component materials;
- Timely development and market acceptance, and warranty performance of
new products;
- Changes in product mix, costs, yields and fluctuations in foreign
currency exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the European consumer products market;
- The class action lawsuits filed against us and the pending SEC
investigation; and
- The risk factors listed from time to time in our SEC reports.
This list is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the filing of this Quarterly Report on Form 10-Q, whether as a result of new
information, future events, changes in assumptions or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
The company's management, with the participation of the company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the company's disclosure controls and procedures as of September 30, 2003.
Based on this evaluation, the company's Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective for gathering, analyzing and disclosing the information
the company is required to disclose in the reports it files under the Securities
Exchange Act of 1934, within the time periods specified in the SEC's rules and
forms. Such evaluation did not identify any change in the company's internal
control over financial reporting that occurred during the quarter ended
September 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(DOLLARS IN THOUSANDS)
CLASS ACTION LAWSUIT
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
of our August 2001 public offering as well as 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. Present and
former officers and directors have made claims for indemnification and
advancement of expenses under our by-laws. On September 30, 2003, the court
denied our motion to dismiss this case and the parties expect to commence the
discovery process.
33
We have 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). 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 defense and potential settlement of the class action
lawsuit (subject to the $5,000 policy limit). As part of the arrangement, we
renewed our D&O coverage. 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 our contribution toward a potential settlement in the class action lawsuit.
No assurance can be given that this insurance will be adequate to cover losses,
if any, arising from this litigation. Our excess D&O insurance carrier has
denied coverage for this claim and the company is contesting this position. No
assurance can be given that our excess insurance will be available or adequate
to cover losses, if any, 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. We
are currently engaged in settlement discussions related to this litigation but
cannot predict when, or if, such discussions will be successful. 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 the company 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 are currently engaged in settlement discussions with the
staff of the Division of Enforcement in connection with the investigation but
cannot predict when, or if, such discussions will be successful.
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.
Present and former officers and directors have made claims for indemnification
and advancement of expenses under our by-laws in connection with the SEC and
U.S. Attorney investigations.
We cannot predict how long these investigations will continue or their outcome.
Measurement Specialties, Inc. v. Hibernia Capital Partners I, ilp and
Hibernia Capital Partners II, ilp.
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
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, 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 filed a 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, the former acting Chief Financial Officer and
general manager of our Schaevitz Division, filed a lawsuit against the company
34
and certain of our officers and directors. Mr. DeWelt resigned on March 26,
2002 in disagreement with management's decision not to restate certain of our
financial statements. 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 filed a Motion to Dismiss this case, which was denied on June 30,
2003. We have answered the complaint and commenced the discovery process. 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 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 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 the company
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. In addition to seeking rent and other charges in the sum of $770
plaintiff is also seeking $1,015 for building cleanup, restoration, failure to
remove alterations and environmental testing of the premises. An answer has
been filed disputing the amounts claimed to be due.
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration).
Exeter Technologies, Inc. ("Exeter") and Michael Yaron have alleged
underpayments of approximately $322 relating to a January 5, 2000 Product Line
Acquisition Agreement. The parties commenced arbitration proceedings in
September 2003. After two days and before completion of these proceedings,
Exeter requested that the arbitration be suspended so that it could consider
whether or not to continue such proceedings. We have acknowledged that we owed
Exeter approximately $128 as of September 30, 2003.
From time to time, we are subject to other legal proceedings and claims in the
ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the retention of the services of Mr. Guidone, Four Corners
Capital Partners LP, a limited partnership of which Mr. Guidone is a principal,
was issued a warrant to purchase up to 600,000 shares of our common stock at an
exercise price of $3.16 per share. Subject to the continued service of Mr.
Guidone, the right to purchase the shares vests at a rate of 35%, 30%, 20% and
15%, respectively, in each of the four years following the grant date of the
warrant, with the potential of a reduced vesting period if certain targets are
achieved. On September 18, 2003, the first 35% of the warrant shares became
vested as a result of the performance of our common stock. The warrant was
issued in reliance upon the exemption from registration under Section 4(2) of
the Securities Act or 1933, as a transaction not involving a public offering.
On June 12, 13 and July 14, 2003, Corporate Revitalization Partners, a
turnaround/crisis management firm of which Mr. Guidone is a managing director
and principal, exercised warrants to purchase 120,615 shares of our common stock
at an exercise price of $2.28 per share. The shares were issued in reliance upon
the exemption from registration under Section 4(2) of the Securities Act of
1933, as a transaction not involving a public offering.
35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an Annual Meeting of Shareholders on September 23, 2003. At that
meeting, our shareholders elected two directors for terms that will expire at
our Annual Meeting in 2006. In addition, our shareholders approved the adoption
of the Measurement Specialties, Inc. 2003 Stock Option Plan and ratified the
appointment of Grant Thornton LLP as our independent auditors for the fiscal
year ending March 31, 2004. The results of the shareholder voting are as
follows:
VOTES FOR VOTES AGAINST
---------- -------------
Election of Directors:
Joseph R. Mallon, Jr. 10,358,905 599,532
The Honorable Dan J. Samuel 10,701,795 256,642
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
---------- ------------- ----------- ----------------
2003 Stock Option Plan 5,284,972 904,612 95,850 4,673,003
Ratification of Auditors 10,925,036 18,085 15,315 1
36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Exhibit Index.
(b) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed from July 1, 2003 through October
31, 2003:
On August 8, 2003, we filed a current report on Form 8-K pursuant to Item 12
(Results of Operations and Financial Condition) to attach a press release
reporting results for our first quarter ended June 30, 2003.
On October 20, 2003, we filed a current report on Form 8-K pursuant to Item 5
(Other Events and Required FD Disclosure) to attach a press release reporting a
change in the membership of our Board of Directors.
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEASUREMENT SPECIALTIES, INC.
(Registrant)
/s/ John P. Hopkins
- --------------------------------------------------------------------------------
Date: November 4, 2003 John P. Hopkins
Chief Financial Officer
(authorized officer and
principal financial officer)
38
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------
31.1 Certification of Frank D. Guidone required by Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certification of John P. Hopkins required by Rule 13a-14(a) or Rule 15d-14(a)
32.1 Certification of Frank D. Guidone and John P. Hopkins required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
39