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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11906
MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2378738
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
710 ROUTE 46 EAST, SUITE 206, 07004
FAIRFIELD, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (973) 808-3020
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ X ] No [ ]
At September 30, 2003, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $166.9 million
based on the closing price of the registrant's common stock on September 30,
2003.
At May 13, 2004, 13,265,724 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM 10-K
IS SET FORTH IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 31, 2004 TO BE FILED BY THE REGISTRANT WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT
1
LATER THAN 120 DAYS AFTER THE FISCAL YEAR ENDED MARCH 31, 2004.
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MEASUREMENT SPECIALTIES, INC.
FORM 10-K
TABLE OF CONTENTS
MARCH 31, 2004
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . 16
EXECUTIVE OFFICERS OF REGISTRANT . . . . . . . . . . . . . . . . . . . . . 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES. . . . . . . . . . . . . . . . . . 18
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 9A CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . 31
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . 32
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . 32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . 32
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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PART I
ITEM 1. BUSINESS
INTRODUCTION
NOTES:
(1) AS MORE FULLY DESCRIBED BELOW UNDER "CHANGES TO OUR BUSINESS," WE
DISCONTINUED CERTAIN OF OUR BUSINESSES DURING THE FISCAL YEAR ENDED MARCH
31, 2003, AND SOLD ASSETS DURING THE FISCAL YEARS ENDED MARCH 31, 2003 AND
2004. EXCEPT AS OTHERWISE NOTED, THE DESCRIPTIONS OF OUR BUSINESS, RESULTS
AND OPERATIONS CONTAINED IN THIS REPORT REFLECT ONLY OUR CONTINUING
OPERATIONS.
(2) AS MORE FULLY DESCRIBED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED MARCH 31, 2002, OUR FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDED MARCH 31, 2001 AND FOR THE FIRST THREE QUARTERS OF THE FISCAL YEAR
ENDED MARCH 31, 2002 WERE RESTATED. ALL AMOUNTS INCLUDED IN THIS ANNUAL
REPORT ON FORM 10-K REFLECT THIS RESTATEMENT.
(3) ALL DOLLAR AMOUNTS IN THIS REPORT ARE IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND PRODUCT PRICES.
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. We are a New Jersey
corporation organized in 1981.
Our Sensor segment designs and manufacturers sensors for original equipment
manufacturers (OEMs). These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. Our sensor products include
piezoresistive pressure sensors, transducers and transmitters, electromagnetic
displacement sensors, piezoelectric polymer film sensors, tilt sensors, membrane
switch panel sensors, custom microstructures, load cells and accelerometers.
Our Consumer Products segment designs and manufactures sensor-based
consumer products. Our sensor-based consumer bath and kitchen scale products are
sold and marketed primarily under the brand names of our original equipment
manufacturer customers. Our tire pressure gauges and distance measurement
products are sold and marketed under our own brand names, as well as those of
our OEM and private label customers.
Each of our businesses benefits from the same core technology base. Our
advanced technologies include piezoresistive silicon sensors,
application-specific integrated circuits, micro-electromechanical systems
(MEMS), piezoelectric polymers, foil strain gauges, force balance systems, fluid
capacitive devices, linear and rotational variable differential transformers,
electromagnetic displacement sensors and ultrasonics. These technologies allow
our sensors to operate precisely and cost effectively. We have a global
operation with facilities located in North America, Europe and Asia. By
functioning globally, we have been able to enhance our applications engineering
capabilities and increase our geographic proximity to our customers.
We are focusing our development efforts in both our Sensor business and
Consumer Products business on the OEM market. In particular, we are focused on
aggressively growing our Sensor segment, which management believes has greater
growth potential. We expect that growth of our Sensor business will come through
a combination of organic growth and acquisitions.
In the Consumer Products segment, having both a branded and OEM consumer
scale business has created channel conflicts. As part of our effort to focus on
the OEM market, we sold certain assets associated with our Thinner branded
bathroom and kitchen scale business to Conair Corporation on January 30, 2004.
We previously sold our Thinner branded scales directly to retailers,
predominately in the U.S. and Canada. On a going-forward basis, we expect to
supply these scales directly to Conair and intend to continue our efforts in the
design, development and manufacture of innovative scale products for sale to our
worldwide base of OEM customers. Although our development focus is on the OEM
market, we intend to continue to develop and manufacture our tire pressure
gauges and distance measurement products for sale to both retail customers and
OEM customers.
Key to executing our strategy is to utilize our expertise in sensor
technologies to target expanding market segments and to develop new products and
applications, thereby increasing demand for our sensors and sensor-based
consumer products. Our global design teams support our production facilities and
engineering resources in the United States and in China. By combining our
manufacturing expertise with our core technology, we strive to provide our
global customers with an advantageous price-value relationship.
OUR SENSORS
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The majority of our sensors are devices, sense elements and transducers
that convert mechanical information into a proportionate electronic signal for
display, processing, interpretation, or control. Sensors are essential to the
accurate measurement, resolution, and display of pressure, motion, force,
displacement, angle, flow, and distance. Our other Sensor products are
transducers that convert an applied electrical signal into a mechanical motion
corresponding to the amplitude and frequency of the electrical input.
MARKETS
Sensor manufacturers are moving toward smart sensors that use digital
intelligence to enhance measurement and control signals. The shift toward
sensors utilizing digital signal processing technologies has enhanced
applications in the automotive, medical, military, and consumer products
markets. Examples of our sensor applications include:
- automotive applications in braking, transmission, fuel pressure,
diesel common rail pressure monitoring, security sensing, and onboard
tire pressure monitoring;
- industrial sensors for regulating flow in industrial paint sprayers
and agricultural equipment, monitoring pressures in refrigeration and
heating/ventilating/air conditioning compressors, controlling valves
in process control and electrical power generation equipment and
traffic monitoring, vehicle speed and traffic light enforcement;
- medical sensors for invasive blood pressure measurement, drug infusion
flow monitoring, electronic stethoscopes, vascular health diagnostics,
sleep disorder sensing, and body activity feedback in heart
pacemakers;
- military applications, which continue to drive sensor development,
with new systems requiring small, high performance sensors for smart
systems such as navigation and weapons control systems, pressure
monitoring, and collision avoidance systems; and
- consumer products applications including the measurement of weight,
distance, and movement, digitizing information for electronic white
boards and pen input devices for laptops, acoustic devices for musical
instruments and speakers, and imbalance sensors for appliances.
TECHNOLOGY
In the rapidly evolving markets for sensors and sensor-based consumer
products, there is an increasing demand for technologies such as:
Piezoresistive Technology. Piezoresistive materials, most often silicon,
respond to changes in applied mechanical variables such as stress, strain, or
pressure by changing electrical conductivity. Changes in electrical conductivity
can be readily detected in circuits by changes in current with a constant
applied voltage, or conversely by changes in voltage with a constant supplied
current. Piezoresistive technology is widely used for the measurement of
pressure, load and acceleration, and its use in these applications is expanding
significantly.
Application Specific Integrated Circuits (ASICs). These circuits convert
analog electrical signals into digital signals for measurement, computation, or
transmission. Application specific integrated circuits are well suited for use
in consumer products because they can be designed to operate from a relatively
small power source and are inexpensive.
Micro-Electromechanical Systems (MEMS). Micro-electromechanical systems and
related silicon micromachining technology are used to manufacture components for
physical measurement and control. Silicon micromachining is an ideal technology
to use in the construction of miniature systems involving electronic, sensing,
and mechanical components because it is inexpensive and has excellent physical
properties. Micro-electromechanical systems have several advantages over their
conventionally manufactured counterparts. For example, by leveraging existing
silicon manufacturing technology, micro-electromechanical systems allow for the
cost-effective manufacture of small devices with high reliability and superior
performance.
Piezoelectric Polymer Technology. Piezoelectric materials convert
mechanical stress or strain into proportionate electrical energy, and
conversely, these materials mechanically expand or contract when voltages of
opposite polarities are applied. Piezoelectric polymer films are also
pyroelectric, converting heat into electrical charge. These polymer films offer
unique sensor design and performance opportunities because they are thin,
flexible, inert, broadband, and relatively inexpensive. This technology is ideal
for applications where the use of rigid sensors would not be possible or
cost-effective.
Strain Gauge Technology. A strain gauge consists of metallic foil that is
impregnated into an insulating material and bonded to a sensing element. The
foil is etched to produce a grid pattern that is sensitive to changes in
geometry, usually length, along the sensitive axis producing a change in
resistance. The gauge operates through a direct conversion of strain to a change
in gauge resistance. This
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technology is useful for the construction of reliable pressure sensors.
Force Balance Technology. A force-balanced accelerometer is a mass
referenced device that under the application of tilt or linear acceleration,
detects the resulting change in position of the internal mass by a position
sensor and an error signal is produced. This error signal is passed to a servo
amplifier and a current developed is fed back into a moving coil. This current
is proportional to the applied tilt angle or applied linear acceleration and
will balance the mass back to its original position. These devices are used in
military and industrial applications where high accuracy is required.
Fluid Capacitive Technology. This technology is also referred to as fluid
filled, variable capacitance. The output from the sensing element is two
variable capacitance signals per axis. Rotation of the sensor about its
sensitive axis produces a linear change in capacitance. This change in
capacitance is electronically converted into angular data, and provides the user
with a choice of ratiometric, analog, digital, or serial output signals. These
signals can be easily interfaced to a number of readout and/or data collection
systems.
Linear Variable Differential Transformers (LVDT). An LVDT is an
electromechanical sensor that produces an electrical signal proportional to the
displacement of a separate movable core. LVDT's are widely used as measurement
and control sensors wherever displacements of a few micro inches to several feet
can be measured directly, or where mechanical input, such as force or pressure,
can be converted into linear displacement. LVDT's are capable of extremely
accurate and repeatable measurements in severe environments.
Ultrasonic Technology. Ultrasonic sensors measure distance by calculating
the time delay between transmitting and receiving an acoustic signal that is
inaudible to the human ear. This technology allows for the quick, easy, and
accurate measurement of distances between two points without physical contact.
BUSINESS SEGMENTS
Our financial results by business segment for the fiscal years ended March
31, 2004, 2003 and 2002 are presented in Note 16 to the consolidated financial
statements included in this Annual Report on Form 10-K.
PRODUCTS
Sensors. A summary of our Sensor business product offerings as of March 31,
2004 is presented in the following table:
PRODUCT TECHNOLOGY BRAND NAME APPLICATIONS
- ---------------- ------------------ ------------ ---------------------------------------
Pressure Sensors Micro- IC Sensors Disposable catheter blood pressure,
Electromechanical altimeter, dive tank pressure, process
Systems (MEMS) instrumentation, fluid level,
measurement and intravenous drug
administration monitoring
- -------------------------------------------------------------------------------------------
Piezoresistive microFused Fertilizer and paint spraying, diesel
engine control, hydraulics,
refrigeration and
automotive power train
- -------------------------------------------------------------------------------------------
Strain Gauge Schaevitz Instrumentation-grade aerospace and
weapon control systems, sub-sea
pressure, ship cargo level, and steel
mills
- -------------------------------------------------------------------------------------------
Accelerometers Piezoelectric PiezoSensors Transportation shipment monitoring,
Polymer audio speaker feedback, appliance
imbalance and consumer
exercise monitoring
- -------------------------------------------------------------------------------------------
Micro- IC Sensors Traffic alert and collision avoidance
Electromechanical systems, railroad, tilt, and
Systems (MEMS) instrumentation
- -------------------------------------------------------------------------------------------
Force Balance Schaevitz Aerospace, weapon fire control,
inertial navigation, angle, and tilt
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- -------------------------------------------------------------------------------------------
Rotary Linear and Rotary Schaevitz Aerospace, machine control systems,
Displacement Variable knitting machines, industrial process
Sensors Displacement control, and hydraulic actuators
Transducer
- -------------------------------------------------------------------------------------------
Tilt/Angle Fluid Capacitive Schaevitz Tire balancing, heavy equipment level
Sensors measurement, and consumer
electronic level measurement
- -------------------------------------------------------------------------------------------
Traffic Sensors Piezoelectric PiezoSensors Traffic survey, speed and traffic light
Polymer enforcement, toll, and in-motion
vehicle weight measurement
- -------------------------------------------------------------------------------------------
Custom Piezofilm Piezoelectric PiezoSensors Medical diagnostics, ultrasound,
Sensors Polymer consumer electronic, electronic
stethoscope, and sonar
- -------------------------------------------------------------------------------------------
Custom Micro- IC Sensors Atomic force microscopes, optical
Microstructures Electromechanical switching, hydrogen and humidity
Systems (MEMS) sensors
Consumer Products. A summary of our sensor-based consumer products as of
March 31, 2004 is presented in the following table:
PRODUCT TECHNOLOGY BRAND NAMES(1) TYPES OF PRODUCTS PRICE RANGE
- ------------- --------------- ---------------- ------------------ ------------
Scales Piezoresistive, Thinner (2) Bathroom Scales $ 5.00-60.00
Application Health-o-meter,
Specific Laica,
Integrated Salter, Weight
Circuits Watchers and
Babyliss
Portion Power Kitchen Scales $ 3.00-25.00
- -------------------------------------------------------------------------------------------
Tire Pressure Piezoresistive Accutire Digital and $ 0.50-35.00
Gauges Mechanical Tire
Pressure Gauges
- -------------------------------------------------------------------------------------------
Distance Ultrasonic Accutape Interior Distance $13.00-22.00
Measurement Estimator
Products
Park-Zone Distance Estimator $10.00-25.00
for Parking
(1) Health-o-Meter, Laica, Salter, Babyliss, and Weight Watchers are
trademarks, trade names, or service marks of our customers and are not owned by
us.
(2) On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner branded bathroom and kitchen scale business, and now owns worldwide rights
to the Thinner brand name and exclusive rights to the Thinner designs in North
America. We previously sold our Thinner branded scales directly to retailers,
predominately in the U.S. and Canada. On a going-forward basis, we agreed to
supply these scales directly to Conair on an OEM basis.
CUSTOMERS
We sell our sensor products throughout the world. Our Sensor business
designs, manufactures, and markets sensors for original equipment manufacturer
applications. Our extensive customer base consists of manufacturers of
electronic, automotive, medical, military, and industrial products. None of our
Sensor business customers accounted for more than 10% of our net sales during
the last three fiscal years. Our key Sensor customers during fiscal 2004
included:
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- Alaris Medical - Allison Transmission - Ingersol Rand
- Argon Medica l - Badger Meter - Graco
- Smtek - St. Jude Medical - Texas Instruments
Our Consumer Products business customers are primarily retailers,
resellers, or manufacturers of consumer products in the United States and
Europe. No Consumer Products customer accounted for more than 10% of our net
sales during the last three fiscal years.
Our key Consumer Products customers during fiscal 2004 included:
- Bed Bath & Beyond * - Conair - Beurer
- Sears - Sunbeam - OBH
- Linens N Things * - Target - Babyliss
- Sharper Image * - Victor - Sam's
- Laica - Martex - Canadian Tire
* As a result of the Conair transaction, we no longer sell bath or
kitchen scales directly to these customers.
SALES AND DISTRIBUTION
We sell our sensor products through a combination of experienced direct
sales engineers, distributors and generally exclusive sales relationships with
outside sales representatives throughout the world. Our engineering teams work
directly with our global customers to tailor our sensors to meet their specific
application requirements.
As a result of the Conair transaction, our sensor-based consumer bath and
kitchen scale products are now sold and marketed primarily under the brand names
of our original equipment manufacturer customers. Our tire pressure gauges and
distance measurement products are sold and marketed under our own brand names,
as well as those of our OEM and private label customers.
We sell our products primarily in North America and Western Europe. The
growing Asian market is a significant target of opportunity for our business.
International sales accounted for 31.3% of net sales of our business for the
fiscal year ended March 31, 2004, 24.0% of net sales of our business for the
fiscal year ended March 31, 2003 and 27.8% of net sales of our business for the
fiscal year ended March 31, 2002.
SUPPLIERS
We rely on contract manufacturers for a significant portion of our
consumer-finished products. The majority of our sensor-based consumer products
are assembled by a single contract manufacturer located in China. We utilize
alternative manufacturers located in China to assemble additional sensor-based
consumer products. We procure components and finished products as needed,
through purchase orders, and do not have long-term contracts with any of our
suppliers. We believe that the components we utilize could be obtained from
alternative sources, or that our products could be redesigned to use alternative
suppliers' components, if necessary.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on expanding our core
technologies, improving our existing products, developing new products, and
designing custom sensors for specific customer applications. To maintain and
improve our competitive position, our research, design, and engineering teams
work directly with customers to design custom sensors for specific applications.
Our gross research and development expenses, including customer funded projects,
were $3,468, or 3.1% of net sales, for the fiscal year ended March 31, 2004,
$3,594, or 3.3% of net sales, for the fiscal year ended March 31, 2003, $7,596 ,
or 7.8% of net sales, for the fiscal year ended March 31, 2002. Research and
development expenses for our Sensor business were $2,085, or 3.5% of net sales
of our Sensor business, for the fiscal year ended March 31, 2004, $2,191, or
4.2% of net sales of our Sensor business, for the fiscal year ended March 31,
2003, and $5,312, or 10.9% net sales of our Sensor business, for the fiscal year
ended March 31, 2002. Included in gross research and development was $4, $367,
and $1,784 of customer funded development for the fiscal years ended March 31,
2004, 2003, and 2002, respectively. The primary cause of the reduction in
customer-funded development was the sale of the IC Sensors wafer fab in July
2002. See Note 6 to the consolidated financial statements included in this
Annual Report on Form 10-K for a discussion of the sale of the IC Sensor wafer
fab.
Research and development expenses in the Consumer Products business, which
are historically lower than Sensor business research and development expenses,
were $1,383, or 2.6% of net sales of our Consumer Products business, for the
fiscal year ended March 31, 2004, $1,403, or 2.5% of net sales of our Consumer
Products business, for the fiscal year ended March 31, 2003, and $673, or 1.4%
net sales of our Consumer Products business, for the fiscal year ended March 31,
2002.
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COMPETITION
The global market for sensors includes many diverse products and
technologies and is highly fragmented and subject to low to moderate pricing
pressures.
Our piezoresistive, MEMS and microFused pressure sensing technologies
compete directly within the largest and fastest growing segments in the global
market for industrial pressure sensors. Most of our Sensor business competitors
are small companies or divisions of large corporations such as Emerson,
Motorola, Siemens, General Electric and Honeywell. The principal elements of
competition in the sensor market are production capability, price, quality,
service, and the ability to design unique applications to meet specific customer
needs.
The market for sensor-based consumer products is characterized by frequent
introductions of competitive products and pricing pressures. Recently, a number
of brand name scale companies have been acquired by larger brand name companies
or by Asian original equipment manufacturers. The principal elements of
competition in the sensor-based consumer products market are price, quality and
the ability to introduce new and innovative products.
Although we believe that we compete favorably in our Sensor and Consumer
Products businesses, new product introductions by our competitors could cause a
decline in sales or loss of market acceptance for our existing products. If
competitors introduce more technologically advanced products, the demand for our
products would likely be reduced.
INTELLECTUAL PROPERTY
We rely in part on patents to protect our intellectual property. We own 60
United States utility patents, 37 United States design patents, and 40 foreign
patents to protect our rights in certain applications of our core technology. We
have 20 United States patent applications pending, including provisionals. These
patent applications may never result in issued patents. Even if these
applications result in patents being issued, taken together with our existing
patents, they may not be sufficiently broad to protect our proprietary rights,
or they may prove unenforceable. We have not obtained patents for all of our
innovations, nor do we plan to do so.
We also rely on a combination of copyrights, trademarks, service marks,
trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect our proprietary rights. In addition, we seek to protect
our proprietary information by using confidentiality agreements with certain
employees, consultants, advisors, customers, and others. We cannot be certain
that these agreements will adequately protect our proprietary rights in the
event of any unauthorized use or disclosure, that our employees, consultants,
advisors, customers, or others will maintain the confidentiality of such
proprietary information, or that our competitors will not otherwise learn about
or independently develop such proprietary information.
Despite our efforts to protect our intellectual property, unauthorized
third parties may copy aspects of our products, violate our patents, or use our
proprietary information. In addition, the laws of some foreign countries do not
protect our intellectual property to the same extent as the laws of the United
States. The loss of any material trademark, trade name, trade secret, patent
right, or copyright could harm our business, results of operations and financial
condition.
We believe that our products do not infringe on the rights of third
parties. However, we cannot be certain that third parties will not assert
infringement claims against us in the future or that any such assertion will not
result in costly litigation or require us to obtain a license to third party
intellectual property. In addition, we cannot be certain that such licenses will
be available on reasonable terms or at all, which could harm our business,
results of operations and financial condition.
FOREIGN OPERATIONS
We manufacture the majority of our sensor products, and most of our sensor
subassemblies used in our consumer products, in leased premises located in
Shenzhen, China. Sensors are also manufactured at our U.S. facilities in
Hampton, VA and San Jose, CA. Additionally, certain key management, sales and
support activities are conducted at leased premises in Wayne, PA and in Hong
Kong. Substantially all our consumer products are assembled in China, primarily
by a single supplier, River Display, Ltd. ("RDL"), although we also utilize
alternative assemblers in China. There are no agreements which would require us
to make minimum payments to RDL, nor is RDL obligated to maintain capacity
available for our benefit, though we account for a significant portion of RDL's
revenues. Additionally, most of our products contain key components that are
obtained from a limited number of sources. These concentrations in external and
foreign sources of supply present risks of interruption for reasons beyond our
control, including political and other uncertainties regarding Hong Kong and
China.
9
The Chinese government has continued to pursue economic reforms hospitable
to foreign investment and free enterprise, although the continuation and success
of these efforts is not assured. Our operations could be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation
and currency exchange controls, by the imposition of economic austerity measures
intended to reduce inflation, and by social and political unrest. China became a
member of World Trade Organization (WTO) on December 11, 2001. Such membership
requires China and other members of the WTO to grant one another reciprocal
"Normal Trade Relations" (NTR) status (formerly known as Most Favored Nation).
Accordingly, China's preferred trading status with the United States (and other
WTO members) is no longer subject to annual review and Chinese goods exported to
the United States are subject to a low tariff and receive other favorable
treatment.
The continued stability of political, legal, economic or other conditions
in Hong Kong cannot be assured. No treaty exists between Hong Kong and the
United States providing for the reciprocal enforcement of foreign judgments.
Accordingly, Hong Kong courts may not enforce judgments predicated on the laws
of the United States, whether arising from actions brought in the United States
or, if permitted, in Hong Kong
Most of our revenues are priced in United States dollars. Most of our costs
and expenses are priced in United States dollars, Chinese renminbi and Hong Kong
dollars. Accordingly, the competitiveness of our products relative to products
produced locally (in foreign markets) may be affected by the performance of the
United States dollar compared with that of our foreign customers' currencies.
United States sales were $77,537, $81,794, and $70,278, or 68.7%, 76.0%, and
72.2% of net sales, for the fiscal years ended March 31, 2004, 2003, and 2002,
respectively. Foreign sales were $35,276, $25,882 and 26,995, or 31.3%, 24.0%,
and 27.8% of net sales, for the fiscal years ended March 31, 2004, 2003, and
2002, respectively. While limited, we are exposed to foreign currency
transaction and translation losses, which might result from adverse fluctuations
in the value of the Hong Kong dollar and Chinese renminbi. Based on the net
exposure of renminbi to United State dollars for the fiscal year ended March 31,
2004, we estimated an impact of negative $105 on our operating income for a 1%
appreciation in renminbi against United State dollar.
At March 31, 2004, we had net assets of $23,893 in the United States. At
March 31, 2004, we had net assets of $4,836 subject to fluctuations in the value
of the Hong Kong dollar and net assets of $7,330 subject to fluctuations in the
value of the Chinese renminbi. We had net assets of $7,088 and $1,626 the United
States, at March 31, 2003 and 2002, respectively. At March 31, 2003, we had net
liabilities of $2,045 subject to fluctuations in the value of the Hong Kong
dollar and net assets of $13,743 subject to fluctuations in the value of the
Chinese renminbi. At March 31, 2002, we had net liabilities of $3,680 subject to
fluctuations in the value of the Hong Kong dollar and net assets of $10,864
subject to fluctuations in the value of the Chinese renminbi.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to potential foreign currency,
transaction and translation risks, we may purchase currency exchange forward
contracts, currency options, or other derivative instruments, provided such
instruments may be obtained at suitable prices. However, to date we have not
done so.
EMPLOYEES
As of March 31, 2004, we had 1,353 employees, including 172 in the United
States, 4 in the United Kingdom, 1,173 in Shenzhen, China, 3 in Hong Kong,
China, and 1 in Germany.
As of March 31, 2004, 1,031 employees were engaged in manufacturing, 141
were engaged in administration, 29 were engaged in sales and marketing and 152
were engaged in engineering.
Our employees are not covered by collective bargaining agreements.
ENVIRONMENTAL MATTERS
We are subject to comprehensive and changing foreign, federal, state, and
local environmental requirements, including those governing discharges to the
air and water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
We believe that we are in compliance with current environmental requirements.
Nevertheless, we use hazardous substances in our operations and as is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from our properties, we may be held liable, and may be required to pay the cost
of remedying the condition. The amount of any resulting liability could be
material.
BACKLOG
At March 31, 2004, the dollar amount of backlog orders believed to be firm
was approximately $27,200. We include in backlog orders that have been accepted
from customers that have not been filled or shipped and are supported with a
purchase order. It is expected that the majority of these orders will be shipped
during the next 12 months. At March 31, 2003, our backlog of unfilled orders was
approximately $31,800. All orders are subject to modification or cancellation by
the customer with limited charges. We
10
believe that backlog may not be indicative of actual sales for the current
fiscal year or any succeeding period.
SEASONALITY
Our Consumer Products sales are seasonal, with highest sales during the
second and third fiscal quarters. There is not significant seasonality to our
Sensor sales.
AVAILABLE INFORMATION
We maintain an Internet website at the following address: www.msiusa.com. The
--------------
information on our website is not incorporated by reference into this Annual
Report on Form 10-K.
We make available on or through our website certain reports and amendments to
those reports that we file with or furnish to the Securities and Exchange
Commission (the "SEC") in accordance with the Securities Exchange Act of 1934.
These include our annual reports on Form 10-K, our quarterly reports on Form
10-Q and our current reports on Form 8-K. We make this information available on
our website free of charge as soon as reasonably practicable after we
electronically file the information with, or furnish it to, the SEC.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. Forward looking statements may
be identified by such words or phrases as "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will," "may" and similar expressions. All
statements that address operating performance, events or developments that we
expect or anticipate will occur in the future are forward-looking statements.
The forward-looking statements above are not guarantees of future performance
and involve a number of risks and uncertainties. Factors that might cause actual
results to differ materially from the expected results described in or
underlying our forward-looking statements include:
- Conditions in the general economy and in the markets served by us;
- Competitive factors, such as price pressures and the potential
emergence of rival technologies;
- Interruptions of suppliers' operations or the refusal of our suppliers
to provide us with component materials;
- Timely development, market acceptance and warranty performance of new
products;
- Changes in product mix, costs and yields and fluctuations in foreign
currency exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the European consumer products market;
- A decline in the United States consumer products market;
- The [pending SEC investigation] and other legal proceedings described
below under "Item 3 - Legal Proceedings"; and
- The risk factors listed from time to time in our SEC reports.
This list is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the filing of this Annual Report on Form 10-K, whether as a result of new
information, future events, changes in assumptions or otherwise.
RISK FACTORS
An investment in our common stock is speculative in nature and involves a
high degree of risk. No investment in our common stock should be made by any
person who is not in a position to lose the entire amount of such investment.
In addition to being subject to the risks described elsewhere in this Form
10-K, including those risks described below under "Liquidity and Capital
Resources," an investment in our common stock is subject to the following risks
and uncertainties:
PENDING LITIGATION COULD RESULT IN SIGNIFICANT LIABILITIES.
We are currently the defendant in several pending lawsuits. We are also the
subject of a formal investigation being conducted by the Division of Enforcement
of the United States Securities and Exchange Commission. We could incur
significant additional liabilities as a result of these pending legal
proceedings, which are described below in "Item 3- Legal Proceedings" and in
Note 15 to our consolidated financial statements included in this Annual Report
on Form 10-K.
11
Under the terms of our credit agreement, we are prohibited from making any
cash payment in settlement of 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 securities class action
lawsuit, the DeWelt litigation or the Hibernia litigation without the prior
written consent of the lender under our revolving credit facility. We settled
the Hibernia lawsuit in November 2003, and made payment after receiving approval
from our lender, Bank of America Business Capital ("BOA") (formerly Fleet
Capital Corporation). On April 1, 2004, we reached an agreement in principle to
settle the securities class action lawsuit, and made payment after receiving
approval from BOA. On May 18, 2004, we reached an agreement in principle with
the SEC which would resolve the commission's investigation of the Company. See
Note 15 to the consolidated financial statements included in this Annual Report
on Form 10-K for a detailed discussion on the terms and conditions related to
the pending class action settlement and SEC investigation.
IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, WE MAY NOT
BE ABLE TO MEET THE NEEDS OF OUR CUSTOMERS AND OUR NET SALES MAY DECLINE.
Our success depends upon our ability to develop and introduce new sensor
products, sensor-based consumer products, and product line extensions. If we are
unable to develop or acquire new products in a timely manner, our net sales will
suffer. The development of new products involves highly complex processes, and
at times we have experienced delays in the introduction of new products. Since
many of our sensor products are designed for specific applications, we must
frequently develop new products jointly with our customers. We are dependent on
the ability of our customers to successfully develop, manufacture and market
products that include our sensors. Successful product development and
introduction of new products depends on a number of factors, including the
following:
- accurate product specification;
- timely completion of design;
- achievement of manufacturing yields;
- timely and cost-effective production; and
- effective marketing.
SUCCESSFUL INTEGRATION OF FUTURE ACQUISITIONS IS CRITICAL TO ACHIEVING OUR
FUTURE GROWTH AND PROFITIBILITY GOALS.
We have embarked on a growth strategy that includes acquisitions. Our
future performance is dependent, in part, on the successful integration of those
transactions.
WE HAVE SUBSTANTIAL NET SALES AND OPERATIONS OUTSIDE OF THE UNITED STATES,
INCLUDING SIGNIFICANT OPERATIONS IN CHINA, THAT EXPOSE US TO INTERNATIONAL
RISKS.
Our international sales accounted for approximately 31.3% of our net sales
in the fiscal year ended March 31, 2004 and 24.0% of our net sales in the fiscal
year ended March 31, 2003. At March 31, 2004, our foreign subsidiaries' total
assets aggregated $24,132, $8,807 was in Hong Kong and $15,325 was in China. We
are subject to the risks of foreign currency transaction and translation losses,
which might result from fluctuations in the values of the Hong Kong dollar and
Chinese renminbi. At March 31, 2004, we had net assets of $4,836 subject to
possible fluctuations in the value of the Hong Kong dollar and net assets of
$7,330 subject to fluctuations in the value of the Chinese renminbi. Our foreign
subsidiaries' operations reflect intercompany transfers of costs and expenses,
including interest on intercompany trade receivables, at amounts established by
us.
We manufacture or source nearly all of our sensor-based consumer products
and the majority of our sensor products in China. Our China subsidiary is
subject to certain government regulations, including currency exchange controls,
which limit the subsidiary's ability to pay cash dividends or lend funds to us.
The inability to operate in China or the imposition of significant restrictions,
taxes, or tariffs on our operations in China would impair our ability to
manufacture products in a cost-effective manner and could reduce our
profitability significantly.
Risks specific to our international operations include:
- political conflict and instability in the relationships among Hong
Kong, Taiwan, China, the United States and in our target international
markets;
12
- political instability and economic turbulence in Asian markets;
- changes in United States and foreign regulatory requirements resulting
in burdensome controls, tariffs and import and export restrictions; -
difficulties in staffing and managing international operations;
- changes in foreign currency exchange rates, which could make our
products more expensive as stated in local currency, as compared to
competitive products priced in the local currency;
- enforceability of contracts and other rights or collectability of
accounts receivable in foreign countries due to distance and different
legal systems;
- delays or cancellation of production and delivery of our products due
to the logistics of international shipping, which could damage our
relationships with our customers;
- a recurrence of last year's outbreak of SARS and the associated risks
to our operations in China and Hong Kong; and
- tax policy change in China, which could affect the profitability of
our operations in China. On January 1, 2004, China adopted a new Value
Added Tax (VAT) export refund rate, which has dropped from 17% to 13%,
with the intention of reducing their trade surplus and increasing
pressure on local currency.
COMPETITION IN THE MARKETS WE SERVE IS INTENSE AND COULD REDUCE OUR NET SALES
AND HARM OUR BUSINESS.
Highly fragmented markets and high levels of competition characterize our
Sensor business. Despite recent consolidations, including the acquisition of
several smaller competitors of ours by larger competitors like General Electric,
Honeywell, and Danaher Corporation, the sensor industry remains highly
fragmented. The Consumer Products business is also highly competitive and is
becoming more competitive as a result of the emergence of new scale
manufacturers and enhanced product lines from existing competitors. We cannot
assure that our original equipment manufacturer customers, who are also
competitors, will not develop their own production capability or locate
alternative sources of supply, and discontinue purchasing products from us. In
addition, the barriers to entry are being reduced in the scale industry due to
the emergence of low cost, commercially available electronics and load cells.
Some of our competitors and potential competitors may have a number of
significant advantages over us, including:
- greater financial, technical, marketing, and manufacturing resources;
- preferred vendor status with our existing and potential customer base;
- more extensive distribution channels and a broader geographic scope;
- larger customer bases; and
- a faster response time to new or emerging technologies and changes in
customer requirements.
A SUBSTANTIAL PORTION OF OUR NET SALES IS GENERATED BY A SMALL NUMBER OF LARGE
CUSTOMERS. IF ANY OF THESE CUSTOMERS REDUCE OR POSTPONE ORDERS, OUR NET SALES
AND EARNINGS WILL SUFFER.
Historically, a relatively small number of customers have accounted for a
significant portion of our net sales. For the fiscal year ended March 31, 2004,
the five largest customers of our Consumer Products business represented
approximately 40% of net sales for that business. One customer accounted for
14.7% of our net sales in the Consumer products business for the fiscal year
ended March 31, 2004. Looking forward, as a result of the Conair transaction
(see Item I - "Business", above), Conair is expected to represent approximately
25% of net sales for the Consumer Products business in the fiscal year ending
March 31, 2005. In addition, the top five Consumer Products customers are
expected to account for over 45% of net sales of our Consumer Products business
in the fiscal year ending March 31, 2005. Because we have no long-term volume
purchase commitments from any of our significant customers, we cannot be certain
that our current order volume can be sustained or increased. The loss of or
decrease in orders from any major customer could significantly reduce our net
sales and profitability.
OUR TRANSFER PRICING PROCEDURES MAY BE CHALLENGED, WHICH MAY SUBJECT US TO
HIGHER TAXES AND ADVERSELY AFFECT OUR EARNINGS.
13
Transfer pricing refers to the prices that one member of a group of related
companies charges to another member of the group for goods, services, or the use
of intellectual property. If two or more affiliated companies are located in
different countries, the laws or regulations of each country generally will
require that transfer prices be the same as those charged by unrelated companies
dealing with each other at arm's length. If one or more of the countries in
which our affiliated companies are located believes that transfer prices were
manipulated by our affiliate companies in a way that distorts the true taxable
income of the companies, the laws of countries where our affiliated companies
are located could require us to redetermine transfer prices and thereby
reallocate the income of our affiliate companies in order to reflect these
transfer prices. Any reallocation of income from one of our companies in a lower
tax jurisdiction to an affiliated company in a higher tax jurisdiction would
result in a higher overall tax liability to us. Moreover, if the country from
which the income is being reallocated does not agree to the reallocation, the
same income could be subject to taxation by both countries.
We have adopted transfer-pricing procedures with our subsidiaries to
regulate intercompany transfers. Our procedures call for the transfer of goods,
services, or intellectual property from one company to a related company at
prices that we believe are arm's length. We have established these procedures
due to the fact that some of our assets, such as intellectual property developed
in the United States, are transferred among our affiliated companies. If the
United States Internal Revenue Service or the taxing authorities of any other
jurisdiction were to successfully require changes to our transfer pricing
practices, we could become subject to higher taxes and our earnings would be
adversely affected. Any determination of income reallocation or modification of
transfer pricing laws can result in an income tax assessment of the portion of
income deemed to be derived from the United States or other taxing jurisdiction.
WE RELY ON PROMOTIONAL PROGRAMS FOR A SIGNIFICANT PORTION OF OUR CONSUMER
PRODUCTS REVENUES. ANY REDUCTION IN CUSTOMER PROMOTIONS MAY RESULT IN A LOSS OF
NET SALES.
Promotional programs by our Consumer Products customers resulted in net
sales of $1,593 for the fiscal year ended March 31, 2004, net sales of $3,336
for the fiscal year ended March 31, 2003 and net sales of $2,568 for the fiscal
year ended March 31, 2002. These promotional programs result in significant
orders by customers who do not carry our products on a regular basis.
Promotional programs often involve special pricing terms or require us to spend
funds to have our products promoted. We cannot assure you that promotional
purchases by our retail industry customers will be repeated regularly, or at
all. These promotional sales could cause our quarterly results to vary
significantly. Any reduction in customer promotions may result in a loss of net
sales.
PRESSURE BY OUR CUSTOMERS TO REDUCE PRICES AND TO AGREE TO LONG-TERM SUPPLY
ARRANGEMENTS MAY CAUSE OUR NET SALES OR PROFIT MARGINS TO DECLINE.
Our customers are under pressure to reduce prices of their products.
Therefore, we expect to experience pressure from our customers to reduce the
prices of our products. Our customers frequently negotiate supply arrangements
with us well in advance of delivery dates, thereby requiring us to commit to
price reductions before we can determine if we can achieve the assumed cost
reductions. We believe that we must reduce our manufacturing costs and obtain
larger orders to offset declining average sales prices. If we are unable to
offset declining average sales prices, our gross profit margins will decline.
ITEM 2. PROPERTIES
As of March 31, 2004, we leased all of our properties under operating leases as follows:
LOCATION PRIMARY USE BUSINESS SQ. FT. LEASE EXPIRATION
- ---------------------- -------------------------- ------------ ------- --------------------
Fairfield, NJ USA Corporate headquarters Consumer and 6,500 November 2004**
Corporate
Headquarters
Wayne, PA USA Research and development, Sensor 2,900 December 2004
sales and marketing
San Jose, CA USA Manufacturing, research Sensor 4,700 August 2005
and development, sales and
marketing
Shenzhen, China Sensors principal Asian Sensor 125,860 Between August 2003
manufacturing and February 2005
facility
14
Shenzhen, China Research and development Consumer 12,214 February 2005
product support facility
Hampton, VA USA Sensors principal domestic Sensor 80,725 July 2011
manufacturing and
distribution facility
Hampton, VA Distribution and warehouse Consumer 39,275 July 2011
USA *
Hong Kong, China Trading office Consumer 2,000 March 2006
Kings Langley, England Sales and marketing Consumer 1,070 Month to Month
*Our Consumer distribution and warehouse space in Hampton, Virginia is
presently vacant due to the Conair transaction., as we no longer sell the
Thinner branded of bath and kitchen scales to retailers. We are presently
attempting to sublease the unused space.
**The company elected to exercise an early termination clause in its
Fairfield, NJ lease. As a result, the lease which originally expired in November
2007 will terminate in November 2004.
Our sensor manufacturing facilities located in China and Virginia are ISO
9001 certified. We believe that these premises are suitable and adequate for our
present operations.
ITEM 3. LEGAL PROCEEDINGS
Pending Matters
U.S. Attorney Investigation
We have learned that the Office of the United States Attorney for the
District of New Jersey is conducting an inquiry into the matters described below
under the caption "SEC Investigation". We cannot predict how long this
investigation will continue or its ultimate outcome.
Robert L. DeWelt v. Measurement Specialties, Inc. et al. 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 and certain of our
officers and directors in the United States District Court for the District of
New Jersey. 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 are engaged in the discovery process. This litigation is ongoing
and we cannot predict its outcome at this time.
Service Merchandise Company, Inc. v. Measurement Specialties, IncWe are
currently the defendant in a lawsuit filed in March 2001 by Service Merchandise
Company, Inc. ("SMC") and its related debtors (collectively, the "Debtors") in
the United States District Court for the Middle District of Tennessee in the
context of the Debtors' Chapter 11 bankruptcy proceedings. The Bankruptcy Court
entered a stay of the action in May 2001, which was lifted in February 2002. On
March 30, 2004, the court entered an order allowing written discovery in the
form of interrogatories and requests for production of documents to begin. All
other discovery remains stayed. The action alleges that we received
approximately $645 from one or more of the Debtors during the ninety (90) day
period before the Debtors filed their bankruptcy petitions, that the transfers
were to our benefit, were for or on account of an antecedent debt owed by one or
more of the Debtors, made when one or more of the Debtors were insolvent, and
that the transfers allowed the company to receive more than the company would
have received if the cases were cases under Chapter 7 of the United States
Bankruptcy Code. The action seeks to disgorge the sum of approximately $645 from
the company. It is not possible at this time to predict the outcome of the
litigation or estimate the extent of any damages that could be awarded in the
event that we are found liable to the estates of SMC or the other Debtors.
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 the we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
15
Pending Settlements
Measurement Specialties, Inc. Securities Litigation. 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 alleged violations of the federal securities laws. The lawsuit
sought an unspecified award of money damages. After March 20, 2002, nine
additional similar class actions were filed in the same court. The ten lawsuits
were 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
made a claim for indemnification under the underwriting agreement.
On April 1, 2004, we reached an agreement in principle to settle this class
action lawsuit. Pursuant to the agreement, the case will be settled as to all
defendants in exchange for payments of $7,500 from the company and $590 from
Arthur Andersen, our former auditors. Both our primary and excess D&O insurance
carriers initially denied coverage for this matter. After discussion, our
primary D&O insurance carrier agreed to contribute $5,000 and our excess
insurance carrier agreed to contribute $1,400 to the settlement of this case. As
part of the arrangement with our primary carrier, we agreed to renew our D&O
coverage for the period from April 7, 2003 through April 7, 2004. The $3,200
renewal premium represented a combination of the market premium for an aggregate
of $6,000 in coverage for this period plus a portion of our contribution toward
the settlement.
The settlement agreement is subject to court approval and can be terminated
by plaintiffs or defendants, under certain circumstances.
SEC 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, the company 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.
On May 18, 2004, we reached an agreement in principle with the SEC which
would resolve the commission's investigation of the company. Pursuant to the
agreement, we will pay $1,000 in disgorgement and civil penalties. The
settlement agreement is subject to court approval.
As of March 31, 2004, we have provided an accrual of $2,100 associated with
certain of the legal matters discussed above. However, there can be no assurance
that additional amounts may not be required to dispose of such matters.
Settlement
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration). Exeter Technologies, Inc. ("Exeter") and Michael Yaron
alleged underpayments of approximately $322 relating to a January 5, 2000
Product Line Acquisition Agreement. We maintained the claim failed to recognize
our rights to certain contractual allowances and offsets. In March 2004, the
parties settled this matter for a $300 payment by the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter of fiscal 2004.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers as of March 31, 2004 were as follows:
NAME AGE POSITION
Frank Guidone 39 President, Chief Executive Officer and Director
Morton L. Topfer 67 Chairman of the Board
John P. Hopkins 43 Chief Financial Officer
Mark W. Cappiello 50 Vice President and General Manager of the
Consumer Products Division
J. Victor Chatigny 53 Vice President and General Manager of the
Sensors Products Division
Morton L. Topfer has been a director since January 2002 and was appointed
Chairman of the Board in January 2003. Mr. Topfer is Managing Director of
Castletop Capital, an investment firm. He previously served at Dell Computer
Corporation as Counselor to the Chief Executive Officer, from December 1999 to
February 2002, and Vice Chairman, from June 1994 to December 1999. Mr. Topfer
was a member of the Board of Directors of Dell from December 1999 to July 2004.
Prior to joining Dell, Mr. Topfer served for 23 years at Motorola, Inc. where he
held several executive positions, last serving as Corporate Executive Vice
President and President of the Land Mobile Products Sector. Mr. Topfer was
conferred the Darjah Johan Negeri Penang State Award in July 1996 by the
Governor of Penang for contributions to the development of the electronics
industry in Malaysia. He serves as a director for Staktek Technologies. Mr.
Topfer also serves on the advisory board of Singapore Technologies.
Frank Guidone has served as Chief Executive Officer since June 2002 and a
Director since December 2002. Mr. Guidone remains a principal of Corporate
Revitalization Partners (CRP), a Dallas-based turnaround/crisis management
consulting firm. Mr. Guidone has been a Managing Director/Principal of CRP since
2000. Mr. Guidone is also a partner/co-founder of Four Corners Capital Partners,
a boutique private investment and consulting firm founded in 1999. Prior to Four
Corners, Mr. Guidone spent 13 years in management consulting with Andersen
Consulting and George Group, Inc. Mr. Guidone has worked with numerous solvent
and insolvent companies, focusing on operational and financial restructurings.
Mr. Guidone received a B.S. in mechanical engineering from The University of
Texas at Austin.
John P. Hopkins was appointed Chief Financial Officer in July 2002. Prior
to joining Measurement Specialties, he was Vice President, Finance from April
2001, and was Vice President and Controller from January 1999 to March 2001,
with Cambrex Corporation, a provider of scientific products and services to the
life sciences industry. From 1988 to 1998, he held various senior financial
positions with ARCO Chemical Company, a manufacturer and marketer of specialty
chemicals and chemical intermediates. Mr. Hopkins is a Certified Public
Accountant and was an Audit Manager for Coopers & Lybrand prior to joining ARCO
Chemical. Mr. Hopkins holds a B.S. in Accounting from West Chester University,
and an M.B.A. from Villanova University.
Mark W. Cappiello was appointed Vice President and General Manager of our
Consumer Products Division in June 2002. Mr. Cappiello was our Vice President of
Sales and Marketing from January 1988 until June 2002. Mr. Cappiello has over
twenty-five years of experience in international consumer products marketing,
over twenty of which have been in the scale industry. From January 1985 to
October 1987, Mr. Cappiello was employed by Terraillon S.A., a French
manufacturer and distributor of scales and balance products. Mr. Cappiello
received a B.A. in business from the University of Connecticut.
J. Victor Chatigny has been Vice President and General Manager of our
Sensors Division since June 2002. Mr. Chatigny joined Measurement Specialties
through our 1998 acquisition of PiezoSensors from AMP Incorporated, where he
served as Director of Sales, Marketing and Research and Development since 1993.
He held management positions in PiezoSensors since 1982, and, previously, in the
Electronics Division of Corning International from 1978. Mr. Chatigny served in
US Army Corps of Engineers where he was Captain, 11th Engineering Battalion. He
holds B.S. and M.S. degrees in industrial engineering and management from
Clarkson University, and a M.B.A. (finance) from The American University.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
(A) Market Price
Our common stock, no par value, is traded on the American Stock Exchange
(AMEX) under the symbol MSS. The following table presents high and low sales
prices of our common stock as reported on the AMEX for the periods indicated:
HIGH LOW
------ ------
YEAR ENDING MARCH 31, 2004
Quarter ended June 30, 2003 $ 5.65 $ 2.96
Quarter ended September 30, 2003 13.50 5.15
Quarter ended December 31, 2003 22.10 11.85
Quarter ended March 31, 2004 23.55 18.36
YEAR ENDED MARCH 31, 2003
Quarter ended June 30, 2002 $ 3.25 $ 1.00
Quarter ended September 30, 2002 2.91 2.06
Quarter ended December 31, 2002 3.20 1.35
Quarter ended March 31, 2003 3.26 1.95
The trading of our common stock was suspended by the AMEX on February 15,
2002 because of delays in the filing of our quarterly report on Form 10-Q for
the three months ended December 31, 2001. Trading of the stock resumed on June
5, 2002. Trading of the stock was subsequently suspended from July 15, 2002
until November 1, 2002 as a result of our failure to timely file our Annual
Report on Form 10-K for the fiscal year ended March 31, 2002.
(B) Approximate Number of Holders of Common Stock
At May 13, 2004, there were approximately 129 shareholders of record of our
common stock.
(C) Dividends
We have not declared cash dividends on our common equity. Additionally, the
payment of dividends is prohibited under our credit agreement.
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.
See Item 12 for information about our equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and the related notes to the consolidated
financial statements included in this Annual Report on Form 10-K.
YEARS ENDED MARCH 31,
($IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003 2002 2001 2000
Results of operations:
Net sales $112,813 $107,676 $ 97,273 $ 97,033 $ 59,997
Income (loss) from continuing operations $ 21,374 $ (6,323) $(24,234) $ 2,462 $ 5,531
Net income (loss) $ 21,586 $ (9,097) $(29,047) $ 1,197 $ 5,531
Net cash provided by (used in):
Operating activities $ 7,405 $ 3,047 $ (6,077) $ (4,123) $ 8,129
18
Investing activities $ 9,687 $ 21,113 $(12,070) $(19,287) $(15,999)
Financing activities $ (3,508) $(24,178) $ 27,344 $ 27,539 $ 7,041
Income (loss) from continuing operations
per common share:
Basic $ 1.73 $ (0.53) $ (2.30) $ 0.30 $ 0.73
Diluted $ 1.53 $ (0.53) $ (2.30) $ 0.27 $ 0.64
Loss per common share from discontinued
operations
Basic $ 0.02 $ (0.23) $ (0.43) $ (0.15) $ -
Diluted $ 0.01 $ (0.23) $ (0.43) $ (0.14) $ -
Net Income (loss) per common share:
Basic $ 1.75 $ (0.76) $ (2.76) $ 0.15 $ 0.73
Diluted $ 1.54 $ (0.76) $ (2.76) $ 0.13 $ 0.64
Cash dividends declared per common share None None None None None
As of March 31,
Total assets $ 77,000 $ 46,168 $ 89,612 $ 67,685 $ 39,647
Long-term debt, net of current maturities (1) $ - $ 2,000 $ - $ - $ 9,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our results of operations and financial condition
should be read together with the other financial information and consolidated
financial statements and related notes included in this Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of factors.
OVERVIEW
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics including pressure, motion,
force, displacement, tilt/angle, flow and distance. We have two businesses, a
Sensor business and a Consumer Products business.
Our Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. Our sensor products include
piezoresistive pressure sensors, transducers and transmitters, electromagnetic
displacement sensors, piezoelectric polymer film sensors, tilt sensors, membrane
switch panel sensors, custom microstructures, load cells and accelerometers.
Our Consumer Products segment designs and manufactures sensor-based
consumer products. Our sensor-based consumer bath and kitchen scale products are
now sold and marketed primarily under the brand names of our original equipment
manufacturer customers; previously they were also sold directly to retailers.
Our tire pressure gauges and distance measurement products are sold and marketed
under our own brand names, as well as those of our OEM and private label
customers.
The following table sets forth, for the periods indicated, certain items in
our consolidated statements of income as a percentage of net sales:
FISCAL YEAR ENDED MARCH 31,
---------------------------------
2004 2003 2002
----------- -------- ----------
Net Sales
Sensors 53.4% 48.6% 50.3%
Consumer products 46.6 51.4 49.7
----------- -------- ----------
Total net sales 100.0 100.0 100.0
Cost of sales 55.4 64.7 71.5
----------- -------- ----------
Gross profit 44.6 35.3 28.5
Operating expenses (income)
Selling, general, and administrative 27.0 31.8 36.7
Litigation expense 1.3 3.3
19
Research and development 3.1 3.3 7.8
Customer funded development - (0.3) (1.8)
Non-cash equity based compensation 5.7 - -
Goodwill and Other Impairments - - 4.5
Restructuring costs 0.4 1.1 1.0
Interest expense, net 0.3 1.9 2.4
Other expenses (income) (1.3) (0.4) 0.2
----------- -------- ----------
36.5 40.7 50.8
Income(loss) from continuing operations before income
taxes and cumulative effect of accounting change 8.1 (5.4) (22.3)
Income tax benefit (expense) 10.8 (0.4) (2.6)
Loss from operations of discontinued units 0.2 (3.6) (4.7)
Gain on disposition of discontinued units - 1.0
Cumulative effect of accounting change - - (0.3)
----------- -------- ----------
NET INCOME (LOSS) 19.1% (8.4)% (29.9)%
=========== ======== ==========
OUR DEVELOPMENT /GROWTH STRATEGY
Development Strategy. We are focusing our development efforts in both our
Sensor business and Consumer Products business on the original equipment
manufacturers (OEM) market. In the Consumer Products business, having both a
branded and OEM consumer scale business has historically created channel
conflicts. As part of our effort to focus on the OEM market, we sold certain
assets associated with our Thinner branded bathroom and kitchen scale business
to Conair Corporation on January 30, 2004. We previously sold our Thinner
branded scales directly to retailers, predominately in the U.S. and Canada. On a
going-forward basis, we expect to supply these scales directly to Conair and
intend to continue our efforts in the design, development and manufacture of
innovative scale products for sale to our worldwide base of OEM customers. As
OEM margins have historically been lower than margins on sales to retail
customers, we expect our Consumer Products segment margins will decline as a
result of this transaction. Although our development focus is on the OEM market,
we intend to continue to develop and manufacture our tire pressure gauges, which
are sold directly to retail customers. See Note 6 to the consolidated financial
statements included in this Annual Report on Form 10-K for a more detailed
description of the Conair transaction.
Growth Strategy. We are focused on aggressively growing our Sensor segment.
We expect that this growth will come through a combination of organic growth and
acquisitions of sensor businesses. In order to finance any potential
acquisitions, we would consider using available cash, loans from financial
institutions, the sale of equity securities, or the sale of existing Company
assets, including assets in our Consumer Products segment.
Trends.
Sensor Business: The sensors market is highly fragmented with hundreds of
niche players. While the worldwide sensors market that we serve is expected to
have a 5% Compound Annual Growth Rate (CAGR), we expect to gain share and grow
our Sensor business in excess of the market.
Consumer Products Business: As a result of the Conair transaction, we are
now solely an OEM manufacturer of bath and kitchen scales. As OEM margins
historically have been lower than retail margins, including the effect of the
amortized gain related to the Conair transaction (see Note 6 to the consolidated
financial statements included in this Annual Report on Form 10-K), we anticipate
gross margins in the Consumer Products business to be in the 28% - 30% range for
the fiscal year ending March 31, 2005.
CHANGES IN OUR BUSINESS
DISCONTINUED OPERATIONS:
In September 2002, we sold all of the outstanding stock of Terraillon
Holdings Limited (referred to herein as Terraillon), a European manufacturer of
branded consumer bathroom and kitchen scales, to Fukuda (Luxembourg) S.a.r.l.,
an investment holding company incorporated in Luxembourg.
We placed our United Kingdom subsidiary, Measurement Specialties UK Limited
(referred to herein as Schaevitz UK), into
20
receivership on June 5, 2002 pursuant to the terms of a Mortgage Debenture dated
February 28, 2001.
Our consolidated financial statements for the fiscal years ended March 31,
2004, 2003, and 2002 include the results of our ongoing operations. As a result
of placing Schaevitz UK into receivership and selling Terraillon, these entities
have been classified as discontinued operations in the consolidated financial
results for all periods presented. Accordingly, all comparisons in Management's
Discussion and Analysis for each of the fiscal years ended March 31, 2004, 2003
and 2002 exclude the results of these discontinued operations except for "Loss
from discontinued units", "Cumulative effect of accounting change, net of tax",
and "Net income (loss)."
SALE OF ASSETS:
On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner brand name and exclusive rights to the Thinner designs in
North America. We previously sold our Thinner branded scales directly to
retailers, predominately in the U.S. and Canada. On a going-forward basis, we
expect to supply these scales directly to Conair and intend to continue our
efforts in the design, development and manufacture of innovative scale products
for sale to our worldwide base of OEM customers
In July 2002, we sold the assets, principally property and equipment,
related to our silicon wafer fab manufacturing operation in Milpitas, CA to
Silicon Microstructures, Inc. (SMI), a wholly-owned subsidiary of Elmos
Semiconductor AG. The wafer fab operation was formerly part of our IC Sensors
division.
IC Sensors continues to design and sell all, and manufacture most, of the
product lines it produced prior to the sale, including custom wafers and die,
pressure sensors, accelerometers and custom MEMS components, and to outsource to
SMI the manufacturing of silicon chips used in these products. This sale is
reflected in the results of operations of the Sensors segment.
EXECUTIVE SUMMARY
Measurement Specialties has seen a significant amount of change over the
last several years. There were considerable challenges encountered in
integrating the acquisition of the Piezo polymer division of AMP (acquired in
August 1998), the IC Sensor division of Perkin-Elmer (acquired in February,
2000), and the Schaevitz division of TRW (acquired in August 2000) into the
Sensors business. As a result, we experienced very poor historical margin
performance due mainly to under-absorption of the acquired overhead structure.
In May 2002, we embarked upon an aggressive restructuring effort to improve the
operating performance of the company. A key component of this restructuring was
the elimination of underutilized facilities to consolidate our operations in
Shenzhen, China and Hampton, Virginia. Having completed this restructuring,
Measurement Specialties is now a global sensor solutions company with a broad
range of technologies and capabilities. Our focus is engineered solutions where
we can use our engineering and manufacturing talent and depth of knowledge and
experience in sensors to provide a complete solution to our customers. A key to
our manufacturing strategy is leveraging the significant infrastructure we now
have in Shenzhen, China. As more fully described below, this infrastructure has
enabled us to reduce costs and improve financial performance while continuing to
provide our customers with low cost, highly reliable products.
NEW ACCOUNTING STANDARDS
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
mandatory redeemable preferred and common stock, and certain options and
warrants. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and is generally effective at the beginning of the
first interim period beginning after June 15, 2003. We do not believe that this
statement will have a material effect on our consolidated financial position or
results of operations.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), and
amended April 2004, FIN46 (R)-4"Consolidation of Variable Interest Entities".
FIN 46 (R)-4 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements", for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 (R)-4 will be required to be consolidated by their primary beneficiary.
The primary beneficiary of a variable interest entity is determined to be the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected returns, or both. FIN 46 (R)-4 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the
process of determining what impact, if any, the adoption of the provisions of
FIN 46 (R)-4 will have upon its financial condition or results of operations.
The Company does not believe that the adoption of FIN46(R)-4 will have a
material effect on its financial position or results of operations.
21
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. On January 30, 2004, Conair Corporation purchased certain
assets of our Thinner branded bathroom and kitchen scale business, and now owns
worldwide rights to the Thinner brand name and exclusive rights to the Thinner
designs in North America. We have accounted for the sale of this business under
the guidance of EITF 00-21. (See Note 6 to the consolidated financial statements
included in this Annual Report on Form 10-K for a discussion of the sale of the
sale of the business to Conair). Except for the Conair transaction, we do not
believe that the adoption of EITF 00-21 will have a material effect on our
financial position or results of operations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the periods reported. The following accounting policies involve a
"critical accounting estimates" because they are particularly dependent on
estimates and assumptions made by management about matters that are highly
uncertain at the time the accounting estimates are made. In addition, while we
have used our best estimates based on facts and circumstances available to us at
the time, different estimates reasonably could have been used in the current
period, or changes in the accounting estimates we used are reasonably likely to
occur from period to period which may have a material impact on the presentation
of our financial condition and results of operations. We review these estimates
and assumptions periodically and reflect the effects of revisions in the period
that they are determined to be necessary.
REVENUE RECOGNITION:
Revenue is recorded when products are shipped, at which time title
generally passes to the customer. Certain consumer products may be sold with a
provision allowing the customer to return a portion of products. Upon shipment,
we provide for allowances for returns based upon historical and estimated return
rates. The amount of actual returns could differ from our estimate. Changes in
estimated returns would be accounted for in the period of change.
We utilize manufacturing representatives as sales agents for certain of our
products. Such representatives do not receive orders directly from customers,
take title to or physical possession of products, or invoice customers.
Accordingly, revenue is recognized upon shipment to the customer.
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. We are not responsible for the ultimate sale to third party
customers and therefore record revenue upon shipment to the distributor.
On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner brand name and exclusive rights to the Thinner designs in
North America. We have accounted for the sale of this business under the
guidance of EITF 00-21. As a significant portion of the proceeds from the sale
was in fact an up-front payment for future lost margins, the majority of the
gain on sale has been deferred and will be amortized into revenues in future
periods over the estimated remaining lives for those products sold to Conair.
(See Note 6 to our consolidated financial statements included in this Annual
Report on Form 10-K for a discussion of the sale of the business to Conair).
ACCOUNTS RECEIVABLE:
The majority of our accounts receivable are due from manufacturers of
electronic, automotive, military, industrial products
22
and retailers. Credit is extended based on evaluation of a customer's financial
condition and, generally, collateral is not required. Accounts receivable are
generally due within 30 to 90 days and are stated as amounts due from customers
net of allowances for doubtful accounts, and other sales allowances. Accounts
outstanding longer than the contractual payment terms are considered past due.
We determine our allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, our previous loss
history, the customer's current ability to pay its obligation to us, and the
condition of the general economy and the industry as a whole. We write off
accounts receivable when we determine they are uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Actual uncollectible accounts could exceed our estimates and
changes to our estimates will be accounted for in the period of change.
INVENTORIES:
We make purchasing decisions principally based upon firm sales orders from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown in customer
demand, customer delay in the issuance of sales orders, miscalculation of
customer requirements, technology changes that render raw materials and finished
goods obsolete, loss of customers and/or cancellation of sales orders. We
establish reserves for our inventories to recognize estimated obsolescence and
unusable items on a continual basis. Market conditions surrounding products are
also considered periodically to determine if there are any net realizable
valuation matters, which would require a write-down of any related inventories.
If market or technological conditions change, it may result in additional
inventory reserves and write-downs, which would be accounted for in the period
of change.
GOODWILL IMPAIRMENT:
Management assesses goodwill for impairment at the reporting unit level on
an annual basis or more frequently under certain circumstances. Such
circumstances include (i) significant adverse change in legal factors or in the
business climate, (ii) an adverse action or assessment by a regulator, (iii)
unanticipated competition, (iv) a loss of key personnel, (v) a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of, and (vi) recognition
of an impairment loss in a subsidiary that is a component of a reporting unit.
Management must make assumptions regarding estimating the fair value of our
reporting units. If these estimates or related assumptions change in the future,
we may be required to record an impairment charge. Impairment charges would be
included in general and administrative expenses in our statements of operations,
and would result in reduced carrying amounts of the goodwill.
LONG LIVED ASSETS:
Management assesses the recoverability of long-lived assets, which consist
primarily of fixed assets and intangible assets whenever events or changes in
circumstance indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (i) significant
underperformance relative to expected historical or projected future operating
results; (ii) significant negative industry or economic trends; (iii)
significant decline in our stock price for a sustained period; and (iv) a change
in our market capitalization relative to net book value. If the recoverability
of these assets is unlikely because of the existence of one or more of the
above-mentioned factors, an impairment analysis is performed using a projected
discounted cash flow method. Management must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of
these assets.
If these estimates or related assumptions change in the future, we may be
required to record an impairment charge. Impairment charges would be included in
general and administrative expenses in our statements of operations, and would
result in reduced carrying amounts of the related assets on our balance sheets.
INCOME TAXES:
We file income tax returns in every jurisdiction in which we have reason to
believe that we are subject to tax. Historically, we have been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that our filing position regarding one or more of our transactions
is contrary to that jurisdiction's laws or regulations.
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of existing assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Realization of a deferred tax asset is dependent on generating future
taxable income. During the fiscal year ended March 31, 2002, we provided a
valuation allowance against deferred tax assets since we believed at the time
that enough uncertainty existed regarding the realizability of our deferred tax
assets. However, because of the current and expected future results of the
company, taking into account the current status of our litigation (see Note 13
to the consolidated financial statements included in this Annual
23
Report on Form 10-K for a discussion of our pending litigation), we have
concluded that this valuation allowance against the deferred tax assets is no
longer necessary, and have reversed the allowance against the provision for
taxes in the fiscal year ended March 31, 2004. (See Note 12 to the consolidated
financial statements included in this Annual Report on Form 10-K for a further
discussion of our taxes).
The income tax provision is based upon the proportion of pretax profit in
each jurisdiction in which we operate. The income tax rates in Hong Kong and
China are less than those in the United States. Deferred income taxes are not
provided on our subsidiaries' earnings which are expected to be reinvested.
Distribution, in the form of dividends or otherwise, would subject our
subsidiaries' earnings to United States income taxes, subject to an adjustment
for foreign tax credits. Determination of the amount of unrecognized deferred
United States income tax liability is not practicable because of the
complexities associated with its hypothetical calculation.
WARRANTY RESERVE:
Our sensor and consumer products generally are marketed under warranties to
end users of up to ten years. Factors affecting our warranty liability include
the number of products sold and historical and anticipated rates of warranty
claims and cost per claim. We provide for estimated product warranty obligations
at the time of sale, based on our historical warranty claims experience and
assumptions about future warranty claims. This estimate is susceptible to
changes in the near term based on introductions of new products, product quality
improvements/declines and changes in end user application and/or behavior.
CONTINGENCIES AND LITIGATION:
We periodically assess the potential liabilities related to any lawsuits or
claims brought against us. While it is typically very difficult to determine the
timing and ultimate outcome of these actions, we use our best judgment to
determine if it is probable that we will incur an expense related to a
settlement for such matters and whether a reasonable estimation of such probable
loss, if any, can be made. Given the inherent uncertainty related to the
eventual outcome of litigation, it is possible that all or some of these matters
may be resolved for amounts materially different from any estimates that we may
have made with respect to their resolution.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2003
ANALYSIS OF CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------
(in thousands, except percentages) FISCAL YEAR END ED MARCH 31,
------------------------------- PERCENTAGE
2004 2003 CHANGE
---------------- ------------- -----------
Net Sales 112,813 107,676 4.8%
Sensors 60,247 52,326 15.1%
Consumer products 52,566 55,350 -5.0%
Gross profit 50,300 37,996 32.4%
Selling, general, and administrative 30,448 34,245 -11.1%
Litigation expense 1,500 3,550 -57.7%
Non-Cash Equity Based Compensation 6,483 -
Research and development 3,464 3,227 7.4%
Restructuring costs 506 1,219 -58.5%
Interest expense, net 323 2,057 -84.3%
Income taxes (12,262) 483 -2638.7%
Income (loss) from discontinued units 212 (3,910) -105.4%
24
The consolidated financial statements for the fiscal years ended March 31, 2004,
2003 and 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.
Sensor Business. The increase in net sales of our Sensor business during the
fiscal year ended March 31, 2004 is due to increased IC Sensors and Microfused
product line sales as compared to the same period in the prior fiscal year. The
improved ICS (ICS) product line sales is the result of increased demand from
existing and new customers in the medical field, the introduction of a new line
of instrumentation grade pressure transducers, as well as increased sales in the
European and Asian markets. The improved Microfused product line sales are
primarily due to continued growth in demand in the automotive sector due to the
introduction of new customer platforms, and a general increase in demand for our
Microfused products. The Microfused product line sales increased across multiple
markets including medical, industrial, refrigeration, and flow measurement.
Piezo sales declined due to the loss of a large customer. Schaevitz sales
increased by 3%.
Consumer Products Business. The decrease in net sales of our Consumer Products
business in the fiscal year ended March 31, 2004 is primarily attributable to
lower bath scale and kitchen accessory sales, which were slightly offset by an
increase in tire gauge sales in the U.S. Bath scale sales decreased due to the
Conair transaction, as Conair made virtually no purchases in the month of
February as they assessed the inventory that was acquired as part of the
transaction. In addition, net sales will decline for the portion of the scale
business that was sold to Conair because we are no longer selling at retail
sales prices, which are higher than sales prices to OEM customers. Kitchen
accessory sales decreased during the quarter ended March 31, 2004 compared to
the prior year due to underperformance in this product category. Accordingly, we
have decided to discontinue selling kitchen accessories. Tire gauge sales
improved in the U.S. consumer market due to increases in core business with our
major customers.
Gross Margin.
Gross margin as a percent of sales for the fiscal year ended March 31, 2004
increased to 44.6% from 35.3% for the fiscal year ended March 31, 2003.
Sensor Business. Gross margin as a percent of sales for our Sensor business
increased to 54.2% for the fiscal year ended March 31, 2004 from 41.1% for the
fiscal year ended March 31, 2003. The continued margin improvement in the Sensor
Business is primarily due to more efficient manufacturing operations and
decreased material costs, as more raw materials are purchased in Asia. Our
increased operations efficiency over the prior year was the direct result of our
continued focus on production planning and implementation of our restructuring
plan. Freight costs have continued to fall as a percentage of sales through more
effective management of the freight costs.
Consumer Products Business. Gross margin as a percent of sales in our Consumer
Products business increased to 32.0% for the fiscal year ended March 31, 2004
from 30.7% for the fiscal year ended March 31, 2003. The increase in gross
margin for our Consumer Products business in the fiscal year ended March 31,
2004 is primarily due to improved margins on our sales to original equipment
manufacturers. The margins on sales to original equipment manufacturers improved
as a result of improved product mix, lower freight costs and a reduction in
material costs due to our concentration on the more efficient use of raw
materials in the manufacturing process. The margin on our retail customer sales
increased slightly for the period ended March 31, 2004 as compared to the same
period ended March 31, 2003. This increase was mainly due to lower freight and
material costs, offset slightly by lower margins for the kitchen accessories
product category. We have decided to no longer sell kitchen accessories and
liquidated much of the remaining inventory in the fiscal year ended March 31,
2004 at margins below historical levels.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling ,General and Administrative. The decrease in selling, general and
administrative expenses is primarily due to lower legal and professional fees
incurred during the fiscal year ended March 31, 2004 as compared to the same
period in prior fiscal year. These legal and professional fees decreased
approximately $6,260 in the fiscal year ended March 31, 2004 as compared to the
fiscal year ended March 31, 2003. The higher professional fees in the fiscal
2003 period as compared to the fiscal 2004 period were due to a higher level of
professional activity with respect to the restatement of our financial
statements and the class action lawsuit and SEC
25
investigation. In addition, costs have decreased in the Sensor business due to
consolidation of certain support services. Offsetting these declines is an
overall charge of $2,851 in the fiscal year ended March 31, 2004 for employee
bonus payouts and the employer's match against the employee contributions to the
401-K plan as a result of the improvement in company performance. Our employee
bonus and 401-K plan is 100% variable and is funded based upon performance
against budget. Costs in the fiscal year ended March 31, 2003 decreased due to a
refund of property taxes and a reduction in bonus accruals, as there were no
incentive based bonuses paid in that year. Based upon our current budget for the
fiscal year ended March 31, 2005, we would expect to fund approximately $2,500
for the employee bonus and 401-K match in fiscal 2005.
Litigation Expense. We recorded a net charge of $1,500 during the fiscal year
ended March 31, 2004 relating to the SEC investigation, class action lawsuit,
and the Hibernia Capital Partners litigation. This net charge represents the
combination of a $1,000 charge relating to the SEC investigation, an additional
$1,100 charge relating to the class action lawsuit, offset by the reversal of
$600 from the prior accrual upon the favorable settlement of the Hibernia
lawsuit. (See Note 15 to our consolidated financial statements included in this
Annual Report on Form 10-K.)
Non-Cash Equity Based Compensation. During the fiscal year ended March 31, 2004,
we recorded a non-cash equity based compensation charge of $6,483, or $.46 per
share diluted, for the vesting of the warrant issued to Four Corners Capital
Partners LP, a limited partnership of which Mr. Guidone is a principal. (See
Note 10 to the consolidated financial statements included in this Annual Report
on Form 10-K.) There will be no additional charges resulting from these warrants
issued to Four Corners as all the warrants vested in the fiscal year ended March
31, 2004.
Research and Development We had virtually no customer-funded development for the
fiscal year ended March 31, 2004 compared with $367 for the fiscal year ended
March 31, 2003. On a net basis, research and development costs increased $238,
or 7.4%, to $3,465 for the fiscal year ended March 31, 2004 from $3,227 for the
fiscal year ended March 31, 2003. This change resulted from decreased
customer-funded development which was partially offset by decreased research and
development efforts in our Sensor business.
Restructuring Costs. During the fiscal year ended March 31, 2004, we recorded a
charge of $506 for additional costs relating to our restructuring plan. This
charge resulted from the settlement of litigation related to our former facility
in Valley Forge, Pennsylvania.
Interest Expense, Net. The decrease in interest expense is attributable to a
$14,122 reduction in average debt outstanding from $16,298 for the fiscal year
ended March 31, 2003 to $2,176 for the fiscal year ended March 31, 2004.
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 fiscal year taxable
income.
During the fiscal year ended March 31, 2002, we provided a valuation allowance
against deferred tax assets since we believed at the time that enough
uncertainty existed regarding the realizability of our deferred tax assets.
However, because of the current and expected future results of the company,
taking into account the status of our current litigation, the company has
concluded that this valuation allowance against the deferred tax assets is no
longer necessary, and has accordingly reversed the allowance against the
provision for taxes in the fiscal year ended March 31, 2004. (See Note 12 to the
consolidated financial statements included in this Annual Report on Form 10-K
for a further discussion on taxes.)
Discontinued Operations. The income from discontinued operations in the fiscal
year ended March 31, 2004 reflects additional proceeds from the receiver
associated with the Schaevitz UK liquidation.
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2002
ANALYSIS OF CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------
(in thousands, except percentages) FISCAL YEAR ENDED MARCH 31, PERCENTAGE
-------------------------------
2003 2002 CHANGE
--------------- --------------
Net Sales 107,676 97,273 10.7%
Sensors 52,326 48,911 7.0%
Consumer products 55,350 48,362 14.4%
26
Gross profit 37,996 27,757 36.9%
Selling, general, and administrative 34,245 35,681 -4.0%
Litigation expense 3,550 - -
Research and development 3,227 5,812 -44.5%
Restructuring costs 1,219 955 27.6%
Interest expense, net 2,057 2,371 -13.2%
Income taxes 483 2,512 -80.8%
Income (loss) from discontinued units (3,910) (4,565) -14.3%
Net Sales.
Sensor Business.
Sensor Business. The increase in net sales of our Sensor business for the fiscal
year ended March 31, 2003 was primarily the result of strong sales in our
Microfused pressure product line, with increased demand across our expanding OEM
customer base and increased sales in the automotive sector due to the
introduction of new customer platforms.
Consumer Products Business. Approximately 18.8% of the sales improvement in our
Consumer Products business for the fiscal year ended March 31, 2003 resulted
from the liquidation of $1,315 of slow moving and obsolete inventory during that
period. Excluding this liquidation of inventory, Consumer Products sales
increased $5,673, or 11.7%, to $54,035 for the fiscal year ended March 31, 2003
as compared to the fiscal year ended March 31, 2002. The balance of the improved
sales was mainly attributable to increased sales of bath scales and tire
pressure gauges. In addition, sales increased due to the introduction of our
kitchen accessories line. OEM sales were consistent year over year.
Gross Margin
Gross margin as a percent of sales for the fiscal year ended March 31, 2003
increased to 35.3% from 28.5% for the fiscal year ended March 31, 2002.
Sensor Business. Gross margin as a percent of sales for our Sensor business
increased to 41.1%for the fiscal year ended March 31, 2003 from 34.2% for the
fiscal year ended March 31, 2002. The significant improvement of our Sensors
margin was primarily due to the transfer of production and materials sourcing to
our lower cost China facility from our facilities located in Milpitas, CA,
Hampton VA, and Valley Forge, PA. As a result of the sale and closure of the
Milpitas, CA wafer fab and Valley Forge, PA facility, we were able to transfer
production to a lower cost manufacturing environment in China and to eliminate
significant fixed costs associated with these two facilities. Offsetting some of
this margin improvement in the fiscal year ended March 31, 2003 was the negative
margin impact associated with the write-down of inventory. During the fiscal
year ended March 31, 2003, we produced certain custom products for one of our
customers, Stayhealthy Inc. In the fiscal year ended March 31, 2003, we
concluded that collectability for certain of the products manufactured for
Stayhealthy could not be reasonably assured. Accordingly, gross margin was
negatively affected due to the write-down of inventory related to the products
manufactured for Stayhealthy.
Consumer Products Business. Gross margin as a percent of sales for our Consumer
Products business increased to 30.7% for the fiscal year ended March 31, 2003
from 24.6% for the fiscal year ended March 31, 2002. Consumer Products gross
margins for the fiscal year ended March 31, 2002 reflect $1,322 in write-downs
of slow moving and obsolete inventory to net realizable value. These write downs
were largely comprised of Park Zone inventory.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling, General and Administrative. The decrease in selling, general and
administrative expenses is primarily due to savings in payroll, facility and
other expenses resulting from our cost reduction activities in the fiscal year
ended March 31, 2002, largely offset by increased legal and professional fees
incurred during the fiscal year ended March 31, 2003 as compared to the same
period in the prior fiscal year. These legal and professional fees increased
approximately $6,960 in the fiscal year ended March 31, 2003 over the
27
prior fiscal year. The reasons for the increased legal fees are described in the
fiscal year to fiscal year comparison of selling, general and administrative
expenses above. In addition, the increases were offset by a $967 reduction in
bad debt provisions and a $274 refund of property taxes.
Litigation Expense. The net charge of $3,550 relates to $2,800 accrual for the
class action lawsuit and $750 accrual for the Hibernia Capital Partners
Research and Development. We had $367 of customer-funded development for the
fiscal year ended March 31, 2003 as compared to $1,784 of customer funded
development for the fiscal year ended March 31, 2002. On a net basis, research
and development costs decreased $2,585, or 44.5%, to $3,227 for the fiscal year
ended March 31, 2003 from $5,812 for the fiscal year ended March 31, 2002. The
primary cause of the reduction in customer-funded development was the sale of
the IC Sensors wafer fab in July 2002.
Restructuring Costs. The restructuring charges of $1,219 and $955 for the fiscal
years ended March 31, 2003 and 2002, respectively relate to severance and lease
costs relating to reductions in our workforce and consolidation of operations.
Interest Expense, Net. The decrease in interest expense is attributable to a
$17,296 reduction in average debt outstanding from $33,594 in the fiscal year
ended March 31, 2002 to $16,298 in the fiscal year ended March 31, 2003.
Interest expense includes $452 associated with the issuance of the warrants in
connection with the $9,300 bridge loan from Castletop Capital, L.P., a limited
partnership controlled by Morton Topfer, Chairman of our board of directors.
Income Taxes. Our provision for income taxes includes taxes payable by our
foreign subsidiaries. For U.S. tax purposes, all fiscal 2003 taxable income was
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 net losses from these discontinued
operations of $2,774 and $4,565 for the fiscal years ended March 31, 2003 and
2002.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) increased by $1,284 from $14,978 as of March 31, 2003 to $16,261 as of
March 31, 2004. The increase was attributable to an increase in accounts
receivable of $3,461 from $10,549 at March 31, 2003 to $14,010 at March 31,
2004, a decrease in accounts payable of $1,928 from $9,846 at March 31, 2003 to
$ 7,919 at March 31, 2004, and offset by a decrease in inventory of $4,105 from
$14,275 at March 31, 2003 to $10,170 at March 31, 2004. The increase in accounts
receivable is attributable to the improved sales in the Sensors business and
higher OEM sales in March 2004 in the Consumer Products business, partially
offset by a decrease in retail sales in the Consumer Product segment due to the
Conair transaction. The decrease in accounts payable was primarily the result of
our decision to accelerate payments to certain Consumer Product vendors in order
to expedite the consolidation of financial systems used in our Consumer Products
business. The decrease in inventory is attributable to our continued inventory
management efforts, and sales of $3,112 of Thinner branded scale inventory to
Conair as part of the transaction..
Cash provided by operating activities was $10,405 for the fiscal year ended
March 31, 2004 as compared to $3,047 for the fiscal year ended March 31, 2003.
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 fiscal year ended March 31, 2004 is $2,800 of
costs paid to our insurance carrier related to the D&O insurance policy renewal,
$1,425 paid to our former landlord related to the settlement of litigation
related to the termination of the lease for our former Valley Forge,
Pennsylvania facility, and $1,284 of increased operating working capital, as
described above. Excluding these payments towards litigation, restructuring, and
changes in our working capital, cash provided by operations would have been
$15,914.
Investing activities included $11,418 of proceeds from the Conair transaction.
In addition, capital spending increased to $1,943 for the fiscal year ended
March 31, 2004 from $1,518 for the fiscal year ended March 31, 2003. The
increase in capital spending is primarily attributable to investment in revenue
generating projects at our Shenzen, China facility. Financing activities for the
fiscal year ended March 31, 2004 utilized $3,508 primarily due to the repayment
of the remaining $2,000 of indebtedness to Castletop Capital, L.P., and
repayment of $3,260 of Company debt under our revolving credit facility, leaving
no outstanding borrowings at March 31, 2004. Financing activities for the fiscal
year ended March 31, 2004 also reflect $1,777 in proceeds from the exercise of
stock options and warrants.
Revolving Credit Facility
On January 31, 2003, we entered into a $15,000 revolving credit facility with
Bank of America Business Capital (formerly Fleet Capital Corporation) ("BOA").
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 BOA's prime rate
for
28
commercial loans plus one percent (subject to a two percent increase upon the
occurrence of an event of default under the loan agreement) or the maximum rate
permitted by applicable law. As of March 31, 2004, 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, 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. As of March
31, 2004, there were no outstanding borrowings and we had the ability to borrow
$ 5,595 under the revolving credit facility.
Bridge Loan
On October 31, 2002, we received a $9,300 bridge loan from Castletop Capital,
L.P., a limited partnership controlled by Morton Topfer, Chairman of our Board
of Directors. We repaid all amounts owed to Castletop in September 2003. (See
Note 7 to the consolidated financial statements included in this Annual Report
on Form 10-K.)
Liquidity
At May 13, 2004, we had approximately $23,309 of available cash and $ 5,595 of
borrowing capacity under our revolving credit facility. Our ongoing capital
needs and other obligations include the payment of substantial professional fees
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 BOA. We settled the Hibernia lawsuit in November
2003, and made payment after receiving approval from BOA. On April 1, 2004, we
reached an agreement in principle to settle the class action lawsuit, and made
payment after receiving approval from BOA. See "Legal Proceedings" below for a
detailed discussion on the terms and conditions related to the pending class
action settlement.
OFF BALANCE SHEET ARRANGEMENTS
None.
AGGREGATE CONTRACTUAL OBLIGATINS
As of March 31, 2004, the company's contractual obligations, including payments
due by period, are as follows:
Contractual Obligations
Payment due by period
Less than 1 More than 5
Total year 1-3 years 3-5 years years
----------------------------------------------
(Long-Term Debt Obligations) - - - - -
(Capital Lease Obligations) - - - - -
(Operating Lease Obligations) 8,973 - 3,808 1,896 3,269
(Purchase Obligations) - - - - -
(Other) 92 92 - - -
----- ----------- --------- --------- -----------
Total 9,065 92 3,808 1,896 3,269
----- ----------- --------- --------- -----------
(1) $25 relates to part of the severance agreement with our former Chief Executive
Officer, and $67 relates to the agreement with Four Corners that requires a 60 day
notice period by either the Company or Mr. Guidone in order to terminate the
agreement.
29
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.
Inflation
We believe that inflation has not had a material effect on our business. We
compete on the basis of product design, features, and value. Accordingly, our
revenues generally have kept pace with inflation, notwithstanding that inflation
in the countries where our subsidiaries are located has been consistently higher
than inflation in the United States. Increases in labor costs have not had a
significant impact on our business because most of our employees are in China,
where prevailing labor costs are low. Additionally, we believe that while we
have not experienced any significant increases in materials costs, such
increases are likely to affect the entire electronics industry and, accordingly,
may not have a significant adverse effect on our competitive position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a certain level of foreign currency exchange risk.
The majority of our net sales are priced in United States dollars. Our
costs and expenses are priced in United States dollars, Hong Kong dollars, and
Chinese renminbi. Accordingly, the competitiveness of our products relative to
products produced domestically (in foreign markets) may be affected by the
performance of the United States dollar compared with that of our foreign
customers' currencies. Additionally, we may be exposed to the risk of foreign
currency transaction and translation losses, which might result from adverse
fluctuations in the values of the Hong Kong dollar and the Chinese renminbi. At
March 31, 2004, we had net assets of $4,836 subject to fluctuations in the value
of the Hong Kong dollar and net assets of $7,330 subject to fluctuations in the
value of the Chinese renminbi. At March 31, 2003, we had net liabilities of
$2,045 subject to fluctuations in the value of the Hong Kong dollar and net
assets of $13,743 subject to fluctuations in the value of the Chinese renminbi.
Fluctuations in the value of the Hong Kong dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong dollar to that of the United States dollar. However, there can be no
assurance that the value of the Hong Kong dollar will continue to be tied to
that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange. The
Chinese government is currently reevaluating its foreign currency policy but is
not expected to have any major changes in the foreseeable future. China approved
current account convertibility of the Chinese renminbi on July 1, 1996, followed
by formal acceptance of the International Monetary Fund's Articles of Agreement
on December 1, 1996. These regulations eliminated the requirement for prior
government approval to buy foreign exchange for ordinary trade transactions,
though approval is still required to repatriate equity or debt, including
interest thereon.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to foreign currency transaction
and translation risks, we may purchase currency exchange forward contracts,
currency options, or other derivative instruments, provided such instruments may
be obtained at suitable prices. However, to date we have not done so.
We are exposed to a certain level of interest rate risk. Interest on the
principal amount of our borrowings under our revolving credit facility accrues
at a fluctuating rate per year equal to the lesser of BOA'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 decrease our after tax profitability by $10. We do not hedge this
interest rate exposure. As of March 31, 2004, the company did not have any long
or short term debt.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data, together with the report
thereon by our Independent Certified Public Accountants, are listed below in
Item 16: Exhibits, Financial Statement Schedules and Reports on Form 8-K and are
filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As more fully set forth in our Current Report on Form 8-K filed with the
SEC on June 14, 2002, we terminated the engagement of Arthur Andersen LLP as our
independent auditor, effective June 7, 2002 and engaged Grant Thornton LLP as
our new independent auditor, effective June 11, 2002. Grant Thornton LLP
previously served as our independent auditor from 1992 until September 18, 2000.
ITEM 9A. 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 March 31, 2004. Based
on this evaluation, the company's Chief Executive Officer and Chief Financial
Officerconcluded 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 March 31, 2004 that
has materially affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Apart from certain information concerning our executive officers which is
set forth in Part I of this report, other information required by this Item is
incorporated herein by reference to the applicable information in the proxy
statement for our annual meeting of shareholders to be held on August 31, 2004,
including the information set forth under the caption "Election of Directors."
We have a Code of Conduct that applies to all of our directors, officers
and employees, including our principal executive officer, principal financial
officer and principal accounting officer. You can find our Code of Conduct on
our website by going to the following address: www.msiusa.com. We will post any
amendments to the Code of Conduct, as well as any waivers that are required to
be disclosed by the rules of either the Securities and Exchange Commission or
The American Stock Exchange, on our website.
The Audit Committee of our Board of Directors is an"Audit Committee" for
the purposes of Section 3(a) (58) of the Securities Exchange Act of 1934. The
members of that Committee are: Mr. John D. Arnold, The Honorable Dan J. Samuel
and Mr. R. Barry Uber.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the applicable information in the proxy statement for our annual meeting of
shareholders to be held on August 31 2004, including the information set forth
under the captions "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides information with respect to the equity
securities that are authorized for issuance under our compensation plans as of
March 31, 2004:
31
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF
SECURITIES
REMAINING
AVAILABLE
FORFUTURE
ISSUANCE
UNDER
NUMBER OF EQUITY
SECURITIES TO BE WEIGHTED-AVERAGE COMPENSATION
ISSUED UPON EXERCISE PRICE PLANS
EXERCISE OF OF OUTSTANDING (EXCLUDING
OUTSTANDING OPTIONS, SECURITIES
OPTIONS,WARRANTS WARRANTS AND REFLECTED
AND RIGHTS RIGHTS INCOLUMN(a))
----------------- ------------------ -------------
(a) (b) (c)
----------------- ------------------
EQUITY COMPENSATION PLANS 1,331,244 $ 6.00 1,028,330
APPROVED BY SECURITY HOLDERS
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY
HOLDERS - - -
================= ================== =============
TOTAL 1,331,244 $ 6.00 1,028,330
The other information required by this Item is incorporated by reference to
the applicable information in the proxy statement for our annual meeting of
shareholders to be held on August 31, 2004, including the information set forth
under the caption "Beneficial Ownership of Measurement Specialties Common
Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
applicable information in the proxy statement for our annual meeting of
shareholders to be held on August 31, 2004, including the information set forth
under the caption "Executive Agreements and Related Transactions."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
applicable information in the proxy statement for our annual meeting of
shareholders to be held on August 31, 2004, including the information set forth
under the caption"Fees Paid to Our Independent Auditors."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements and schedules are
filed at the end of this report, beginning on page F-l. Other
schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Document Pages
Report of Independent Registered Public Accounting Firm F-1
Consolidated Statements of Operations for the Years Ended
March 31, 2004, 2003 and 2002 F-2
Consolidated Balance Sheets as of March 31, 2004 and 2003 F-3 to F-4
Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Cash Flows for the Years Ended F-6 to F-7
March 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements F-8 to F-34
Schedule II - Valuation and Qualifying Accounts, for the Years
Ended March 31, 2004, 2003 and 2002 S-1
(b) Reports on Form 8-K
1. On February 10, 2004, the Company furnished a Current Report on Form 8-K
attaching a press release reporting the company's third quarter results.
2. On February 13, 2004, the Company furnished a Current Report on Form 8-K
attaching a press release announcing the sale of its branded consumer scale
business to Conair.
(c) See Exhibit Index
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEASUREMENT SPECIALTIES, INC.
By: /s/ FRANK GUIDONE
- ------------------------------
Frank Guidone
Chief Executive Officer
Date: May 26, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- -------------------------- --------------------------------------------- ------------
/s/ Frank Guidone President, Chief Executive Officer and May 26, 2004
- -------------------------- Director (Principal Executive Officer)
Frank Guidone
/s/ John P. Hopkins Chief Financial Officer (Principal Financial May 26, 2004
- -------------------------- Officer and Principal Accounting Officer)
John P. Hopkins
/s/ Morton L. Topfer Chairman of the Board May 26, 2004
- --------------------------
Morton L. Topfer
/s/ John D. Arnold Director May 26, 2004
- --------------------------
John D. Arnold
/s/ The Hon. Dan J. Samuel Director May 26, 2004
- --------------------------
The Hon. Dan J. Samuel
/s/ Barry R. Uber Director May 26, 2004
- --------------------------
Barry R. Uber
33
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
- ------------ --------------------------------------------------------------------------------
3.1# Second Restated Certificate of Incorporation of Measurement
Specialties, Inc.
3.2++ Bylaws of Measurement Specialties, Inc.
4.1+ Specimen Certificate for shares of common stock of Measurement
Specialties, Inc.
10.1# Supply and Distribution Agreement dated September 26, 1997
between Korona GmbH & Co. KG and Measurement Specialties, Inc.
10.2## Product Line Acquisition Agreement dated January 5, 2000 between
Exeter Technologies, Inc., Dr. Michael Yaron and Measurement
Specialties, Inc.
10.3### Stock Purchase Agreement dated February 11, 2000 between
Perkin-Elmer, Inc. and Measurement Specialties, Inc.
10.4* Purchase Agreement dated August 4, 2000 between TRW Sensors &
Components, Inc. and Measurement Specialties, Inc.
10.5** Asset Purchase Agreement dated August 14, 1998 between AMP
Incorporated, The Whitaker Corporation and Measurement
Specialties, Inc.
10.6+ Measurement Specialties, Inc. 1995 Stock Option Plan.
10.7*** Measurement Specialties, Inc. 1998 Stock Option Plan.
10.8+ Lease dated December 30, 1999 between Hollywood Place Company
Limited and Measurement Limited for property in Kowloon, Hong
Kong.
10.9+ Lease dated September 14, 1977 between Schaevitz E.M. Limited
and Slough Trading Estate Limited for property in Slough, England.
10.10+ Deed of Variation dated July 14, 1992 of Lease between Slough
Trading Estate Limited and Lucas Schaevitz Limited.
10.11+ Assignment of Lease, dated August 4, 2000, from Lucas Schaevitz
Limited to Measurement Specialties (England) Limited.
10.12+ License to Assign dated August 4, 2000 between Slough Trading
Estate Limited, Lucas Schaevitz Limited, Measurement Specialties
(England) Limited and Measurement Specialties, Inc. for property
in Slough, England.
10.13+ Lease dated May 5, 1994 between Transcube Associates and
Measurement Specialties, Inc. for property in Fairfield, New
Jersey.
10.14+ First Amendment dated February 24, 1997 to Lease between
Transcube Associates and Measurement Specialties, Inc.
10.15+ Second Amendment dated July 10, 2000 to Lease between Transcube
Associates and Measurement Specialties, Inc.
10.16+ First Amendment dated February 1, 2001 to Lease between
Kelsey-Hayes Company and Measurement Specialties, Inc. for
property in Hampton, Virginia.
10.17++ Lease Agreement dated May 20, 1986 between Semex, Inc. and
Pennwalt Corporation and all amendments for property in Valley
Forge, Pennsylvania.
34
10.18++ Lease Agreement dated January 10, 1986 between Creekside
Industrial Associates and I.C. Sensors and all amendments for
property in Milpitas, California.
10.19++ Lease Agreements for property in Shenzhen, China
10.20++ Lease dated August 4, 2000 between Kelsey-Hayes Company and
Measurement Specialties, Inc. for property in Hampton, Virginia.
10.21++ Amended and Restated Revolving Credit, Term Loan and Security
Agreement dated as of February 28, 2001 among Measurement
Specialties, Inc., Measurement Specialties UK Limited, Summit
Bank, The Chase Manhattan Bank and First Union National Bank as
agent and all amendments.
10.22++ Agreement for the Purchase of the Share Capital of Terraillon
Holdings Limited, dated 7 June 2001, among Hibernia Development
Capital Partners LLP, Hibernia Development Capital Partners II LLP,
Fergal Mulchrone and Chris Duggan and Andrew Gleeson and
Measurement Specialties, Inc.
10.23+ Supplemental Agreement, dated 11 July 2001, concerning the
amendment of the Agreement for the Purchase of the Share Capital
of Terraillon Holdings Limited, dated 7 June 2001.
10.24+++ Asset Purchase Agreement dated July 12, 2002 by and among Elmos
Semiconductor AG, Silicon Microstructures, Inc., Measurement
Specialties, Inc., and IC Sensors Inc.
10.25++++ Stock Purchase Agreement, dated as of September 18, 2002, by and
between FUKUDA (Luxembourg) S.a.r.l. and Measurement Specialties,
Inc.
10.26#### Forbearance Agreement, dated as of July 2, 2002, by and among
Wachovia Bank, National Association, for itself and as agent for
Fleet National Bank and JP Morgan Chase Bank, Measurement
Specialties, Inc., Measurement Specialties UK Limited, IC
Sensors, Inc., Measurement Limited, Jingliang Electronics
(Shenzhen) Co., Ltd. and Terraillon Holdings Limited.
10.27#### Agreement of Lease, commencing October 1, 2002, between Liberty
Property Limited Partnership and Measurement Specialties, Inc.
10.28#### Sublease Agreement, dated August 1, 2002, between Quicksil, Inc.
and Measurement Specialties, Inc.
10.29**** Senior Secured Note and Warrant Purchase Agreement, dated as of October 31,
2002, by and among Castletop Capital, L.P. and Measurement Specialties, Inc.
(including first amendment thereto)
10.30**** Loan and Security Agreement, dated January 31, 2003, by and among Fleet
Capital Corporation, Measurement Specialties, Inc. and IC Sensors, Inc.
10.31+++++ Second Amendment to Loan and Security Agreement, effective as of the 11th day
of April 2003, by and among Measurement Specialties, Inc., IC Sensors, Inc. and
Fleet Capital Corporation.
10.32+++++ Second Amendment to Senior Secured Note and Warrant Purchase Agreement,
dated April 11, 2003, among Castletop Capital, L.P. Measurement Specialties,
Inc. and IC Sensor, Inc.
10.33 Agreement of Purchase and Sale of Assets, dated January 30, 2004, between
Measurement Specialties, Inc. and Conair Corporation.
35
10.34 Third Amendment to Loan and Security Agreement, effective as of the 6th day of
May 2004, by and among Meaurement Specialties, Inc. IC Sensors, Inc. and Fleet
Capital Corporation.
21.1 Subsidiaries.
23.1 Consent of Grant Thornton LLP.
31.1 Certification of Frank D. Guidone required by Rule 13a-14(a) or Rule 15d-14(a)
Certification of John P. Hopkins required by Rule 13a-14(a) or Rule 15d-14(a)
31.2
32.1 Certification of Frank D. Guidone and John P. Hopkins required by Rule 13a-
14(b) or Rule 15d-14(b) andSection 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350
# Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-Q filed on February 3, 1998 and
incorporated herein by reference.
## Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-Q filed on February 14, 2000 and
incorporated herein by reference.
### Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on March 1, 2000 and incorporated
herein by reference.
#### Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on October 29, 2002 and
incorporated herein by reference.
* Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on August 22, 2000 and incorporated
herein by reference.
** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K/A filed on August 27, 1998 and
incorporated herein by reference.
*** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Proxy Statement for the Annual Meeting of Shareholders filed on
August 18, 1998 and incorporated herein by reference.
**** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-Q filed on February 12, 2003.
+ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form S-1 (File No. 333-57928) and
incorporated herein by reference.
++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on July 5, 2001 and incorporated
herein by reference.
+++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on August 14, 2002 and incorporated
herein by reference.
++++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on May 28, 2003 and incorporated
herein by reference.
36
REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Measurement Specialties, Inc.
We have audited the accompanying consolidated balance sheets of Measurement
Specialties, Inc. and Subsidiaries (a Delaware corporation) as of March 31, 2004
and 2003, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
2004. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Measurement
Specialties, Inc. and Subsidiaries as of March 31, 2004 and 2003, and the
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
We have also audited Schedule II for each of the three years in the period ended
March 31, 2004. In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.
GRANT THORNTON LLP
New York, New York
May 21, 2004
F-1
MEASUREMENT SPECIALTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31,
-------------------------------
($IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2004 2003 2002
-------------------------------
Net sales $112,813 $107,676 $ 97,273
Cost of goods sold 62,513 69,680 69,516
-------------------------------
Gross profit 50,300 37,996 27,757
-------------------------------
Operating expenses (income):
Selling, general and administrative 30,448 34,245 35,681
Litigation Settlement expense 1,500 3,550 -
Research and development 3,468 3,594 7,596
Customer funded development (4) (367) (1,784)
Non-Cash Equity Based Compensation 6,483 - -
Goodwill and other impairments - - 4,417
Restructuring costs 506 1,219 955
-------------------------------
Total operating expenses 42,401 42,241 46,865
-------------------------------
Operating income (loss) 7,899 (4,245) (19,108)
Interest expense, net 323 2,057 2,371
Gain on Sale of Assets (1,424) (159) -
Other expense (income) (112) (303) 243
-------------------------------
Income (loss) from continuing operations before income
taxes and cumulative effect of accounting change 9,112 (5,840) (21,722)
Income tax (12,262) 483 2,512
-------------------------------
Income (loss) from continuing operations before cumulative
effect of accounting change 21,374 (6,323) (24,234)
Discontinued operations:
Income (loss) from operations of discontinued units (net of income tax benefit) 212 (3,910) (4,565)
Gain on disposition of discontinued units (net of income tax benefit) - 1,136 -
-------------------------------
Income (loss) from discontinued units 212 (2,774) (4,565)
-------------------------------
Income (loss) before cumulative effect of accounting change 21,586 (9,097) (28,799)
Cumulative effect of accounting change, net of taxes - - (248)
-------------------------------
Net income (loss) $ 21,586 $ (9,097) $(29,047)
===============================
Income (loss) per common share - Basic
Income (loss) from continuing operations $ 1.73 $ (0.53) $ (2.30)
Income (loss) from discontinued units 0.02 (0.23) (0.43)
Cumulative effect of accounting change - - (0.03)
-------------------------------
Net income (loss) $ 1.75 $ (0.76) $ (2.76)
===============================
Income (loss) per common share - Diluted
Income (loss) from continuing operations $ 1.53 $ (0.53) $ (2.30)
Income (loss) from discontinued units 0.01 (0.23) (0.43)
Cumulative effect of accounting change - - (0.03)
-------------------------------
Net income (loss) $ 1.54 $ (0.76) $ (2.76)
===============================
Weighted average shares outstanding - Basic 12,333 11,911 10,531
===============================
Weighted average shares outstanding - Diluted 13,997 11,911 10,531
===============================
The accompanying notes are an integral part of these
consolidated financial statements
F-2
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
($IN THOUSANDS) 2004 2003
- ------------------------------------------------------------ ---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,274 $ 2,694
Accounts receivable, trade, net of allowance for doubtful
accounts of $327 and $1,038, respectively 14,010 10,549
Inventories 10,170 14,275
Prepaid expenses and other current assets 15,856 1,885
---------- ----------
Total current assets 59,310 29,403
---------- ----------
PROPERTY AND EQUIPMENT, NET 10,628 11,818
---------- ----------
OTHER ASSETS:
Goodwill 4,191 4,191
Deferred income taxes 2,214 -
Other assets 657 756
---------- ----------
Total other assets 7,062 4,947
---------- ----------
TOTAL ASSETS $ 77,000 $ 46,168
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
($IN THOUSANDS) 2004 2003
- ---------------------------------------------------------------------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt $ - $ 3,260
Accounts payable 7,919 9,846
Accrued compensation 3,224 1,207
Accrued expenses and other current liabilities 4,686 5,744
Accrued litigation expenses 2,100 3,550
----------- -----------
Total current liabilities 17,929 23,607
OTHER LIABILITIES:
Long term debt - 2,000
Deferred gain on sale of assets 6,744
Other liabilities 1,487 1,615
----------- -----------
Total liabilities 26,160 27,222
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Serial preferred stock; 221,756 shares authorized; none outstanding - -
Common stock, no par; 20,000,000 shares authorized; 13,257,084 and
11,922,958 shares issued and outstanding, respectively 5,502 5,502
Additional paid-in capital 53,509 43,197
Accumulated deficit (8,097) (29,683)
Accumulated other comprehensive loss (74) (70)
----------- -----------
Total shareholders' equity 50,840 18,946
----------- -----------
$ 77,000 $ 46,168
=========== ===========
F-4
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2004, 2003, AND 2002
Accumulated
Additional Retained Other
Common paid-in Earnings Comprehensive Comprehensive
($IN THOUSANDS EXCEPT PER SHARE AMOUNTS) stock capital (Deficit) Loss Total Income (Loss)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 2001 $ 5,502 $ 3,769 $ 8,461 $ (15) $ 17,717
Comprehensive loss, March 31, 2002:
Net loss - - (29,047) - (29,047) $ (29,047)
Currency translation adjustment - - - (420) (420) (420)
- - - - - -
---------------
Comprehensive loss $ (29,467)
===============
Reversal of tax benefit on
exercise of options - (1,534) - - (1,534)
2,530,000 common shares
issued in secondary
offering, net of expenses - 30,874 - - 30,874
503,692 common shares issued
upon acquisition - 6,800 - - 6,800
182,434 common shares issued
upon exercise of options - 429 - - 429
315,492 common shares issued
in private placement - 2,008 - - 2,008
BALANCE, MARCH 31, 2002 $ 5,502 $ 42,346 $ (20,586) $ (435) $ 26,827
----------------------------------------------------------------
Comprehensive income (loss):
Net (loss) (9,097) (9,097) $ (9,097)
Currency translation
adjustment - effect of
- -
disposal of Terraillon 365 365 365
---------------
Comprehensive (loss) - $ (8,732)
===============
Proceeds from exercise of
stock options 134 134
Warrants issued for
professional service 265 265
Warrants issued for debt 452 452
BALANCE, MARCH 31, 2003 $ 5,502 $ 43,197 $ (29,683) $ (70) $ 18,946
----------------------------------------------------------------
Comprehensive income (loss):
Net income 21,586 21,586 $ 21,586
Currency translation adjustment (4) (4) (4)
---------------
Comprehensive income (loss) $ 21,582
===============
Warrants issued for non-cash
equity based compensation 6,483 6,483
Proceeds from exercise of
stock options 1,014 1,014
Tax benefit from stock options 367 367
Acceleration of options for
Conair transaction 523 523
Tax benefit from warrant exercise 1,162 1,162
Proceeds from exercise of
stock warrants 763 763
BALANCE, MARCH 31, 2004 $ 5,502 $ 53,509 $ (8,097) $ (74) $ 50,840
================================================================
F-5
MEASUREMENT SPECIALTIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) MARCH 31,
-------------------------------
2004 2003 2002
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 21,586 $ (9,097) $(29,047)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
(Gain)Loss from discontinued operations (212) 3,910 4,565
Depreciation and amortization 2,824 3,331 4,549
Deferred rent 28 17 126
Warrants issued for professional services - 265 -
Amortization of debt discount - 452 -
Goodwill and other impairments - - 4,062
Gain on sale of Assets (1,424) (159) -
Amortization of Deferred Gain (398)
Gain on sale of Discontinued Units - (1,136) -
Provision for writedown of assets 310 656 188
Provision for doubtful accounts 245 842 809
Provision for warranty 333 641 614
Reversal of tax benefit on exercise of options - - (1,534)
Non-Cash equity compensation 6,483 - -
Deferred income taxes - - 2,650
Tax benefit on exercise of stock options and warrants 1,529 - -
Acceleration of option for Conair transaction 523
Net changes in operating assets and liabilities: - - -
Accounts receivable, trade (3,706) 829 (251)
Inventories 1,252 1,751 6,230
Prepaid expenses and other current assets (13,946) 203 (1,106)
Other assets (2,168) (57) 1,587
Accounts payable, trade (1,928) (3,386) 1,822
Accrued expenses and other liabilities 524 435 (1,341)
Accrued litigation expenses (1,450) 3,550 -
--------- --------- ---------
Net cash provided by (used in) operating activities 10,405 3,047 (6,077)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,943) (1,518) (2,366)
Proceeds from sale of Wafer Fab - 3,370 -
Proceeds from sale of Terraillon - 18,197 -
Cash received from receiver 212 1,064 -
Proceeds from Conair transaction 11,418
Acquisition of business, net of cash acquired - (9,704)
--------- --------- ---------
Net cash provided by (used in) investing activities 9,687 21,113 (12,070)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under secured note 3,000 9,300 -
Repayment under secured note (5,000) (7,300) -
Borrowing under bank line of credit agreement - 20,568 23,632
Repayments under bank line of credit agreement (3,260) (46,371) (14,935)
Repayments under capital lease obligations - (218) (597)
Repayment of long term debt - - (13,836)
Payment of deferred financing costs (net) (25) (291) (231)
Proceeds from exercise of options and warrants 1,777 134 429
Proceeds from issuance of common stock - - 32,882
--------- --------- ---------
Net cash provided by (used in) financing activities (3,508) (24,178) 27,344
--------- --------- ---------
F-6
Effect of exchange rates (4) 365 (420)
--------- --------- ---------
Net change in cash and cash equivalents 16,580 347 8,777
Cash used in discontinued operations - (1,413) (5,483)
Cash and cash equivalents, beginning of year 2,694 3,760 466
--------- --------- ---------
Cash and cash equivalents, end of period $ 19,274 $ 2,694 $ 3,760
========= ========= =========
Supplemental Cash Flow Information:
Cash paid (refunded) during the period for:
Interest $ 334 $ 2,582 $ 2,818
Taxes 1,193 - 621
Taxes refunded - (588) -
Noncash investing and financing transactions
Common stock issued in connection with acquisition - - 6,800
Common stock subscription receivable - - 2,007
Interest expense 323 2,076
Accrued - 3/31/02 19 526
Accrued - 3/31/03 (8) (19)
--------- ---------
334 2,583
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
MEASUREMENT SPECIALTIES INC.
Notes to Consolidated Financial Statements
MARCH 31, 2004
($ IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND LIQUIDITY:
DESCRIPTION OF BUSINESS:
Measurement Specialties, Inc. ("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, tilt/angle, flow and distance. The Company has two businesses, a
Sensor business and a Consumer Products business.
The Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. The Company's sensor products
include pressure and electromagnetic displacement sensors, Piezoelectric polymer
film sensors, custom microstructures, load cells and accelerometers.
The Consumer Products segment designs and manufacturers sensor-based
consumer products that we sell to retailers and distributors in both the United
States and Europe. Consumer products include bathroom and kitchen scales, tire
pressure gauges and distance estimators.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of MSI and its
wholly-owned subsidiaries (the "Subsidiaries"): Measurement Limited, organized
in Hong Kong ("ML"); Jingliang Electronics (Shenzhen) Co. Ltd. ("JL"), organized
in the People's Republic of China ("China"); IC Sensors Inc., a California
corporation ("IC Sensors"); Measurement Specialties, U.K. Limited ("Schaevitz
UK"), organized in the United Kingdom; and Terraillon Holdings Limited,
organized in Ireland, and its wholly-owned subsidiaries ("Terraillon"); all
collectively referred to as the "Company." As discussed in Note 6, the Company
placed Schaevitz UK in receivership in June 2002 and sold Terraillon in
September 2002. Accordingly, the results from these operations until June 2002
and September 2002, respectively, are reflected as discontinued operations from
their respective dates of acquisition for all periods presented. All
significant intercompany balances and transactions have been eliminated.
USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions which affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers highly liquid investments with original maturities of
up to three months, when purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash equivalents and short-term debt are carried at cost, which
approximates fair value due to the short-term nature of such instruments.
Long-term debt is carried at cost, which management believes approximates fair
value because the interest rate on such instruments approximated market yields
at March 31, 2003. There is no long-term debt at March 31, 2004.
F-8
INVENTORIES:
Inventories are stated at the lower of cost or estimated market value. The
FIFO (first-in, first-out) method is utilized to determine cost for the
Company's inventories.
The Company makes purchasing decisions principally based upon firm sales
orders from customers, the availability and pricing of raw materials and
projected customer requirements. Future events that could adversely affect these
decisions and result in significant charges to its operations include slowdown
in customer demand, customer delay in the issuance of sales orders,
miscalculation of customer requirements, technology changes that render raw
materials and finished goods obsolete, loss of customers and/or cancellation of
sales orders. The Company establishes reserves for inventories to recognize
estimated obsolescence and unusable items on a continual basis. Market
conditions surrounding products are also considered periodically to determine if
there are any net realizable valuation matters, which would require a write down
of any related inventories. If market or technological conditions change, it may
result in additional inventory reserves and write-downs, which would be
accounted for in the period of change.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets, generally three to ten years. Leasehold improvements are
amortized over the shorter of the lease terms or the estimated useful lives of
the assets. Normal maintenance and repairs of property and equipment are
expensed as incurred. Renewals, betterments and major repairs that materially
extend the useful life of property and equipment are capitalized.
INCOME TAXES:
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of existing assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse
Realization of a deferred tax asset is dependent on generating future
taxable income. During the fiscal year ended March 31, 2002 the Company
provided a valuation allowance against deferred tax assets since we believed at
the time that enough uncertainty existed regarding the realizability of our
deferred tax assets. However, because of the current and expected future
results of the Company, which factors in the current status of the litigation
(See Note 15 to the consolidated financial statements included in this Annual
Report on Form 10-K for a discussion of the status of the Company's litigation),
the Company has concluded that this valuation allowance against the deferred tax
assets is no longer necessary, and has accordingly reversed the allowance
against the provision for taxes in the fiscal year ended March 31, 2004. See
Note 12 to the consolidated financial statements included in this Annual Report
on Form 10-K.
Tax benefits from early disposition of the stock acquired by employees from
the exercise of incentive stock options or non-qualified stock options are
credited to additional paid-in capital.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
The functional currency of the Company's foreign operations is the
applicable local currency. The foreign subsidiaries' assets and liabilities are
translated into United States dollars using exchange rates in effect at the
balance sheet date and their operations are translated using the average
exchange rates prevailing during the year. The resulting translation adjustments
are recorded as a component of other comprehensive income (loss).
Realized foreign currency transaction gains and losses are included in
operations.
GOODWILL:
Prior to adoption of SFAS 142 on April 1, 2001, the Company amortized
goodwill over its estimated useful life and evaluated goodwill for impairment in
conjunction with its other long-lived assets. See "Long-lived assets" below for
further information.
The Company adopted SFAS No. 142 as of April 1, 2001 and ceased amortizing
goodwill. In connection with its restructuring program (See Note 11), the
Company performed additional impairment tests during the year ended March 31,
2002 that resulted in an impairment charge of $7,479 in the fourth quarter of
such fiscal year of which $4,417 related to continuing operations and $3,062
related to discontinued operations. As of March 31, 2004, the Company has
reevaluated the impact of SFAS No. 142 on its goodwill, and no additional
impairment charges were deemed necessary. See Note 5 for further discussion of
the impact of SFAS No. 142 on the Company's financial position and results of
operations.
F-9
Management assesses goodwill for impairment at the reporting unit level on
an annual basis or more frequently under certain circumstances. Such
circumstances include (i) significant adverse change in legal factors or in the
business climate, (ii) an adverse action or assessment by a regulator, (iii)
unanticipated competition, (iv) a loss of key personnel, (v) a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of, and (vi) recognition
of an impairment loss in a subsidiary that is a component of a reporting unit.
Management must make assumptions regarding estimating the fair value of the
company reporting units. If these estimates or related assumptions change in the
future, the Company may be required to record an impairment charge. Impairment
charges would be included in general and administrative expenses in the
Company's statements of operations, and would result in reduced carrying amounts
of the goodwill.
LONG-LIVED ASSETS:
The Company adopted SFAS 144 as of April 1, 2002. Adoption of this
statement did not have a material affect on the financial position or results of
operations. Management assesses the recoverability of its long-lived assets,
which consist primarily of fixed assets and intangible assets with finite useful
lives, whenever events or changes in circumstance indicate that the carrying
value may not be recoverable. The following factors, if present, may trigger an
impairment review: (i) significant underperformance relative to expected
historical or projected future operating results; (ii) significant negative
industry or economic trends; (iii) significant decline in the Company's stock
price for a sustained period; and (iv) a change in the Company's market
capitalization relative to net book value. If the recoverability of these assets
is unlikely because of the existence of one or more of the above-mentioned
factors, an impairment analysis is performed using a projected discounted cash
flow method. Management must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of these respective assets.
If these estimates or related assumptions change in the future, the Company may
be required to record an impairment charge. Impairment charges would be included
in general and administrative expenses in the Company's statements of
operations, and would result in reduced carrying amounts of the related assets
on the Company's balance sheets.
REVENUE RECOGNITION:
Revenue is recorded when products are shipped, at which time title
generally passes to the customer. Certain consumer products may be sold with a
provision allowing the customer to return a portion of products. Upon shipment,
the Company provides for allowances for returns and warranties based upon
historical and estimated return rates. The amount of actual returns could
differ from Company estimates. Changes in estimated returns would be accounted
for in the period of change.
The Company utilizes manufacturing representatives as sales agents for
certain of its products. Such representatives do not receive orders directly
from customers, take title to or physical possession of products, or invoice
customers. Accordingly, revenue is recognized upon shipment to the customer.
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. The Company is not responsible for the ultimate sale to third
party customers and therefore records revenue upon shipment to the distributor.
Promotional rebates and other consideration provided to customers are reflected
as a reduction in revenue.
On January 30, 2004, Conair Corporation purchased certain assets of the
Company's Thinner branded bathroom and kitchen scale business, including
worldwide rights to the Thinner brand name and exclusive rights to the Thinner
designs in North America. The Company has accounted for the sale of this
business under the guidance of EITF 00-21. As a significant portion of the
proceeds from the sale was in fact an up-front payment for future lost margins,
the majority of the gain on sale has been deferred and will be amortized into
revenues in future periods over the estimated remaining lives for those products
sold to Conair. (See Note 6 for a discussion of the sale of the business to
Conair).
ACCOUNTS RECEIVABLE:
The majority of the Company's accounts receivable are due from retailers
and manufacturers of electronic, automotive, military and industrial products.
Credit is extended based on an evaluation of a customers' financial condition
and, generally, collateral is not required. Accounts receivable are generally
due within 30 to 90 days and are stated at amounts due from customers net of
allowances for doubtful accounts and other sales allowances. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
F-10
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers deteriorates, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Actual uncollectible accounts could exceed the Company's estimates and
changes to its estimates will be accounted for in the period of change.
SHIPPING AND HANDLING:
The Company generally does not bill shipping and handling fees to its
customers. Shipping and handling costs are recorded in cost of sales.
ADVERTISING COSTS:
Advertising costs are included in selling, general and administrative
expenses and are expensed when the advertising or promotion is published.
Advertising expenses for the years ended March 31, 2004, 2003 and 2002 were
approximately $322, $539 and $831, respectively.
ACQUISITIONS:
The Company acquired Terraillon in August 2001, Schaevitz Sensors in August
2000 and IC Sensors in February 2000. These business combinations were accounted
for using the purchase method of accounting. Effective July 1, 2001, the Company
adopted the provisions of SFAS No. 141 (which is effective for all business
combinations completed after June 30, 2001). In June 2002, the Company placed
"Schaevitz UK", previously a component of the Company's Sensor segment, into
receivership; in July 2002, the Company sold the assets related to its silicon
wafer fab manufacturing operation in Milpitas, CA; and in September 2002, the
Company sold all of the outstanding stock of Terraillon. See Note 6.
In all acquisitions, the purchase price of the acquired business was
allocated to the assets acquired and liabilities assumed at their fair values on
the date of the acquisition. The fair values of these items were based upon
management's estimates and, in certain cases, with the assistance of an
independent professional valuation firm. Certain of the acquired assets were
intangible in nature, including trademarks. Management employed an independent
valuation firm to assist in determining the fair value of these intangible
assets. The excess purchase price over the amounts allocated to the assets was
recorded as goodwill.
All such valuation methodologies, including the determination of subsequent
amortization periods, involve significant judgments and estimates. Different
assumptions and subsequent actual events could yield materially different
results.
RESEARCH AND DEVELOPMENT:
Research and development expenditures are expensed as incurred. Customer
funding is recognized as a reduction in research and development expense when
earned.
WARRANTY RESERVE:
The Company's sensor and consumer products generally are marketed under
warranties to end users of up to ten years. Factors affecting the Company's
warranty liability include the number of products sold and historical and
anticipated rates of claims and cost per claim. The Company provides for
estimated product warranty obligations at the time of sale, based on its
historical warranty claims experience and assumptions about future warranty
claims. This estimate is susceptible to changes in the near term based on
introductions of new products, product quality improvements and changes in end
user application and/or behavior.
The following table summarizes the warranty reserve:
YEAR ENDED MARCH 31,
----------------------
2004 2003 2002
------ ------ ------
Total Warranty Reserve (Beginning) $(762) $(685) $(619)
Expense for Warranties issued during the period (333) (641) (614)
Costs to repair products 151 154 111
Costs to replace products 275 410 437
------ ------ ------
Total Warranty Reserve (Ending) $(669) $(762) $(685)
====== ====== ======
COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) consists of net earnings or loss for the period
and the impact of unrealized foreign currency translation adjustments.
F-11
STOCK BASED COMPENSATION:
The Company has two stock-based employee compensation plans, which are
described more fully in Note 14. 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 2004, 2003 and 2002
as a result of options issued with an exercise price below the underlying
stock's market price. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement 123, "Accounting for Stock-Based Compensation",
using the assumptions described in Note 14, to its stock-based employee plans.
YEAR ENDED MARCH 31,
----------------------------
2004 2003 2002
Net income (loss), as reported $21,586 $(9,097) $(29,047)
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects - - -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for awards granted, modified, or
settled, net of related tax effects 290 640 139
------- -------- ---------
Pro forma net income (loss) $21,296 $(9,737) $(29,186)
======= ======== =========
Earnings net income (loss) per share:
Basic - as reported $ 1.73 $ (0.76) $ (2.76)
Basic - pro forma 1.73 (0.82) (2.77)
Diluted - as reported 1.53 (0.76) (2.76)
Diluted - pro forma 1.52 (0.82) (2.77)
LEASES:
The Company follows SFAS No. 13, "Accounting for leases" to account for its
operating leases. In accordance with SFAS No. 13, lease costs, including
escalations, are provided for using the straight-line basis over the lease
period. The Company did not have any capital lease obligations at March 31,
2004 and 2003.
DERIVATIVE INSTRUMENTS:
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," on April 1, 2001. SFAS No. 133, as amended by SFAS No.
138 and SFAS No. 149, establishes accounting and reporting standards for
derivative instruments and hedging activities and requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial condition and measures those instruments at fair value. Changes in the
fair value of those instruments will be reported in earnings or other
comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses associated
with changes in the fair value of the derivative and the effect on the
consolidated financial statements will depend on its hedge designation and
whether the hedge is highly effective in achieving offsetting changes in the
fair value of cash flows of the asset or liability hedged. The Company did not
qualify for hedge accounting for its interest rate swap. During the year ended
March 31, 2002, an aggregate of $871 was reflected in the income statement
related to an interest rate swap. Of such amount, $623 was reflected as
interest expense and $248 was recorded as the cumulative effect of the adoption
of the accounting principle. The fair value of the swap at March 31, 2002 was
included in accrued expenses.
As part of the Company's refinancing plan, in October 2002 all derivative
financial instruments were satisfied. The cost of these financial instruments
for the fiscal year ended March 31, 2003 was $154 and has been included in
interest expense.
Terraillon had certain foreign currency derivatives which effects are
included in discontinued operations in 2002 and 2003.
RECLASSIFICATIONS:
Certain reclassifications have been made to conform to prior years'
financial statements to the current year's presentation.
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 mandatory
F-12
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. We do not believe that this statement will
have a material effect on our consolidated financial position on results of
operations.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), and
amended April 2004, FIN46 (R)-4"Consolidation of Variable Interest Entities".
FIN 46 (R)-4 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements", for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 (R)-4 will be required to be consolidated by their primary beneficiary.
The primary beneficiary of a variable interest entity is determined to be the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected returns, or both. FIN 46 (R)-4 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the
process of determining what impact, if any, the adoption of the provisions of
FIN 46 (R)-4 will have upon its financial condition or results of operations.
The Company does not believe that the adoption of FIN46(R)-4 will have a
material effect on its financial position or results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. On January 30, 2004, Conair Corporation purchased certain
assets of the Company's Thinner branded bathroom and kitchen scale business. We
have accounted for the sale of this business under the guidance of EITF 00-21.
(See Note 6 for a discussion of the sale of the sale of the business to Conair).
Except for the Conair transaction, the Company does not believe that the
adoption of EITF 00-21 will have a material effect on its financial position or
results of operations.
3. INVENTORIES
INVENTORIES ARE SUMMARIZED AS FOLLOWS:
MARCH 31,
2004 2003
------- -------
RAW MATERIALS $ 6,777 $ 6,930
WORK-IN-PROCESS 1,210 2,630
FINISHED GOODS 2,183 4,715
------- -------
$10,170 $14,275
======= =======
Inventory reserves were $4,206 and $4,996 as of March 31, 2004 and 2003,
respectively.
F-13
4. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
MARCH 31,
-------------------------------------------------
2004 2003 USEFUL LIFE
-------------------------------------------------
Production machinery and equipment $ 14,616 $ 13,800 5-7 years
Tooling costs 3,846 3,579 5-7 years
Furniture and equipment 4,138 4,922 3-10 years
Leasehold improvements 1,780 1,721 Remaining term of the lease
Construction in progress 296 283 -
--------------------
Total 24,676 24,305
Less: accumulated depreciation and amortization (14,048) (12,487)
--------------------
$ 10,628 $ 11,818
====================
Depreciation expense was $2,824, $3,002 and $3,608 for the years ended March 31,
2004, 2003, and 2002, respectively.
5. GOODWILL AND INTANGIBLES
The Company adopted SFAS 142 effective April 1, 2001 and discontinued
amortizing goodwill. The changes in the carrying value of goodwill for the years
ended March 31, 2004, 2003, 2002 and 2001 are as follows:
SENSORS CONSUMER TOTAL
BALANCE AS OF MARCH 31, 2001 $ 7,571 $ 779 $ 8,350
Purchase business combination - - -
Impairment loss (3,353) (779) (4,132)
Other (27) (27)
-------------------------------
BALANCE AS OF MARCH 31, 2002 4,191 - 4,191
Impairment loss - - -
-------------------------------
BALANCE AS OF MARCH 31, 2003 4,191 - 4,191
Impairment loss - - -
-------------------------------
BALANCE AS OF MARCH 31, 2004 $ 4,191 $ - $ 4,191
===============================
During the fiscal quarter ended March 2002, management and the Company's
Board of Directors, after considering ongoing operating losses, approved a
restructuring program. As a result of the Company's evaluation of its businesses
and its restructuring plan, management, with the assistance of valuation
experts, performed impairment tests for the Company's reporting units and
concluded that impairment charges were required for certain reporting units. The
impairments related primarily to the Company's Schaevitz and Schaevitz UK
reporting units. Fair value of the Company's reporting units was determined
using the implied fair value approach. Impairment losses of $4,417, which
includes $285 relating to sensor division patents, are included on a separate
line item in continuing operations and impairment losses related to discontinued
operations of $3,062 are reflected in discontinued operations (See Note 6).
This process was completed in the fiscal quarters ended March 31, 2004 and 2003
for asset values as of March 31, 2004 and 2003. According to the guidelines
established under SFAS 142, there was no impairment issue for its reporting
units. At March 31, 2004 and 2003, fair value of the Company's reporting units
was determined using the implied fair value approach.
Other identifiable intangible assets with finite lives, which are included
in other assets, consisting of patents with gross value of $192 and accumulated
amortization of $129, with a net book value of $63, are amortized over a range
of 6-15 years. Amortization expense for the years ended March 31, 2004, 2003 and
2002 was $30, $30 and $62, respectively. Amortization expense is expected to be
$30, $25, and $5 thereafter. The accumulated amortization was $129 as of March
31, 2004 and $99 as of March 31, 2003.
6. DISCONTINUED OPERATIONS, AND GAIN ON SALE OF ASSETS:
BACKGROUND: The Company adopted FAS 144 on April 1, 2002 (See Note 2). As more
fully discussed below, the Company sold all of the outstanding stock of
Terraillon, previously a component of the Company's Consumer Products segment,
in September 2002, and placed Schaevitz UK previously a component of the
Company's Sensor segment, into receivership in June 2002. The Company sold the
assets, principally property and equipment, related to its IC Sensors silicon
wafer fab manufacturing operations, previously a
F-14
component of the Company's Sensor segment, in July 2002. The amounts for
Schaevitz UK on the consolidated statements of operations for the fiscal years
ended March 31, 2004, 2003 and 2002 and the amounts for Terraillion for the
fiscal years ended March 31, 2003 and 2002, have been reclassified as
discontinued operations to reflect the disposal of these operating units.
SCHAEVITZ UK: In August 2000, the Company acquired Schaevitz Sensors
("Schaevitz") from TRW Components, Inc. Schaevitz designs and manufacturers a
variety of tilt, displacement, and pressure transducers and transmitters in the
United States that are sold worldwide. The acquisition was accounted for as a
purchase. The aggregate cash paid was $17,860 (including payment to TRW
Components Inc. of $16,775 and closing costs of $1,085).
The Company placed Schaevitz UK into receivership on June 5, 2002 pursuant to
the terms of a Mortgage Debenture dated February 28, 2001, as the Company was no
longer in a position to support its losses. Schaevitz UK's landlord has a
potential dilapidations claim of up to 350 Pounds Sterling (approximately $620
based on market exchange rates as of May 13, 2004) 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 amounts for Schaevitz UK on
the consolidated statements of operations for the fiscal years ended March 31,
2004, 2003 and 2002 have been reclassified as discontinued operations to reflect
the disposal of this operating unit. During the fiscal year ended March 31,
2003, the Company incurred $3,511 of costs and expenses in connection with the
liquidation of Schaevitz UK, which consisted of 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 $1,064, of which $439 is reflected as
gain on disposal of discontinued units. In the fiscal year ended March 31, 2004,
the Company recovered an additional $212 from the final liquidation. This
amount is reflected as income from discontinued operations.
IC SENSORS: On February 14, 2000, the Company acquired IC Sensors, Inc. from
Perkin-Elmer, Inc. IC Sensor's designs, manufactures and markets micromachined
silicon pressure sensors, accelerometers and microstructures. The acquisition
was accounted for as a purchase. The aggregate cash paid was $12,368 (including
payment to Perkin-Elmer of $12,000 and closing costs of $368).
In July 2002, the Company sold the assets, principally property and equipment,
related to its silicon wafer fab manufacturing operation in Milpitas, CA to
Silicon Microstructures, Inc. (SMI), a wholly-owned subsidiary of Elmos
Semiconductor AG. The wafer fab operation was formerly part of the Company's IC
Sensors division. The price paid by SMI for the assets was approximately
$5,250, consisting of approximately $3,370 in cash and $1,880 in prepaid credit
for products and services, subject to reduction under certain circumstances.
Approximately $900 of the cash purchase price was used to satisfy an outstanding
equipment lease obligation. The prepaid credit for products and services, as
utilized, have been accounted as a component of wafer costs. The gain on this
sale was approximately $159, net of tax, and has been reflected as "Gain on Sale
of Assets" for the fiscal year ended March 31, 2003.
TERRAILLON: In August 2001, the Company acquired all of the outstanding shares
of Terraillon, a European manufacturer of branded consumer bathroom and kitchen
scales. The acquisition was accounted for as a purchase. The aggregate purchase
price was $17,468 and included $10,320 in cash, the issuance of 503,692 shares
of restricted Company common stock valued at $6,800 based on the closing market
price on the date of acquisition of $13.50 per share, and closing costs of $348.
In September 2002, the Company sold all of the outstanding stock of Terraillon
to Fukuda S.a.r.l, an investment holding company incorporated in Luxembourg, for
$22,819. On January 24, 2003 and February 19, 2003, the Company received $1,384
and $152, respectively, of the funds that had been placed in escrow at the time
of closing to secure certain of the Company's indemnification obligations. The
estimated gain at the time of sale was approximately $340, net of tax, and
subject to further adjustments. As a result of final settlement of escrowed
amounts, the Company recorded an additional gain of $357, as certain amounts
previously provided for are no longer required, which is included in gain on
sale of discontinued units.
CONSUMER PRODUCTS THINNER BRAND: On January 30, 2004, Conair Corporation
(Conair) purchased certain assets of the Company's Thinner branded bathroom and
kitchen scale business. The Company previously sold its Thinner branded scales
directly to retailers, predominately in the U.S. and Canada. On a going-forward
basis, the Company expects to supply these scales directly to Conair.
The Company has accounted for the sale of this business under the guidance of
EITF 00-21. As part of the asset purchase agreement with Conair, the Company
has agreed to supply Conair existing models of bathroom and kitchen scales at
prices that approximate cost to manufacture the product. Accordingly, a
significant portion of the $12,418 proceeds from the sale of the business was in
fact an up-front payment for future lost margins. Of the $12,418 proceeds,
$11,418 was received in February 2004, and additional $1,000 was released from
escrow in April 2004. The estimated total gain ("total gain"), prior to any
deferral, was approximately $8,565, and is subject to further adjustments. In
order to arrive at the amount of the total gain on sale that should be deferred
and amortized into future periods, the Company analyzed the estimated lost
margins on an OEM basis for the Thinner branded bathroom and kitchen scale
models sold to Conair. The basis of the calculation was to determine the
estimated remaining product lives for those Thinner branded bathroom and kitchen
scale models sold to Conair. Based upon this analysis, barring any new product
introduction or material change to the competitive landscape, it is estimated
that the Company would have been able to continue to sell these Thinner branded
bathroom and kitchen scale models into the marketplace for approximately an
additional 4.25 years. Applying these factors, it was determined that $7,142 of
the total gain should be deferred and amortized over the remaining life cycle of
the Thinner branded bathroom and kitchen scale models sold to Conair.
Accordingly, the Company recorded a gain on the sale of the assets of $1,424
(reflected as "Gain on Sale of Assets"), and included $398 in "net sales" for
the amortization of the deferred gain in the fourth quarter of the fiscal year
ended March 31, 2004. The balance of the deferred gain recorded on the balance
sheet at March 31, 2004 is $6,744.
F-15
7. LONG-TERM DEBT:
CURRENT REVOLVING CREDIT FACILITY
On January 31, 2003, the Company entered into a $15,000 revolving credit
facility with Bank of America Business Capital (formerly Fleet Capital
Corporation) ("BOA"). The revolving credit facility is secured by a lien on
substantially all of the Company's assets. Interest accrues on the principal
amount of borrowings under this facility at a fluctuating rate per year equal to
the lesser of BOA's prime rate for commercial loans plus one percent (subject to
a two percent increase upon the occurrence of an event of default under the loan
agreement) or the maximum rate permitted by applicable law. As of March 31,
2004, 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 March 31, 2004, there were no outstanding
borrowings and the Company had the right to borrow an additional $5,595 under
the revolving credit facility. Commitment fees on the unused balance are equal
to .375% per annum of the average monthly amount by which $15,000 exceeds the
sum of the outstanding principal balance of the revolving credit loans.
Commitment fees paid during the year ended March 31, 2004 were $60.
Cash receipts are applied from the Company's lockbox accounts directly
against the bank line of credit, and checks clearing the bank are funded from
the line of credit. The resulting overdraft balance, consisting of outstanding
checks is $778 at March 31, 2004.
The Company's revolving credit agreement requires it to meet certain
financial covenants during the term of the revolving credit facility. In
addition to certain affirmative and negative covenants, which include a
restriction on the payment of dividends, the Company 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, beginning in the fiscal quarter ended
June 30, 2003, 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 cash taxes paid and minus capital
expenditures, divided by the sum of scheduled principal payments and interest
expense during that period. The Company is currently in compliance with all
covenants in the agreement.
The Company is prohibited from making any cash payment in settlement of the
securities class action lawsuit, the DeWelt litigation or the Hibernia
litigation without the prior written consent of the lender under its revolving
credit facility. The Company settled the Hibernia lawsuit in November 2003, and
made payment after receiving approval from BOA. On April 1, 2004, the Company
reached an agreement in principle to settle the class action lawsuit, and made
payment after receiving approval from BOA. On May 18, 2004, the Company reached
an agreement in principle with the SEC which would resolve the commission's
investigation of the Company. See Note 15 for a detailed discussion of the
terms and conditions related to the Hibernia lawsuit settlement and the pending
securities class action lawsuit and SEC investigation settlements.
As of March 31, 2004, the weighted average short-term interest rate on
the revolving credit facility was 5.06%. The average amount outstanding under
this agreement for the period from April 1, 2003 through March 31, 2004 was
$264. The Company maintains a letter of credit for $34 to guarantee the lease
of its facility in Fairfield, NJ.
BRIDGE LOAN
On October 31, 2002, the Company received a $9,300 bridge loan from
Castletop Capital, L.P., a limited partnership controlled by Morton Topfer,
Chairman of the Company's Board of Directors. The proceeds from this loan were
used to repay all the Company's obligations under its previous term loan and
revolving credit facility. The loan was evidenced by a Senior Secured Note
originally due January 31, 2003. Interest on the note initially accrued at a
rate of 7% per annum (subject to a 2% increase upon the occurrence of an event
of default under the note). Castletop Capital also received a warrant to
purchase up to 297,228 shares of the Company's common stock for an exercise
price equal to the average closing price of the Company's common stock on the
American Stock Exchange for the first five trading days after October 31, 2002
($1.64 per share). The warrant had a term of five years. On June 26, 2003,
Castletop Capital exercised its warrants to purchase 297,228 shares of stock at
an exercise price of $1.64.
The relative estimated fair value of the warrant of $452 was recorded as a
debt discount, and was charged to interest expense in the fiscal year ended
March 31, 2003, over the original term of the debt, which was originally due on
January 31, 2003.
F-16
AMENDMENT TO BRIDGE LOAN
In January 2003, the Company used a portion of the proceeds from the BOA
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 BOA; and
- The non-default interest rate under the bridge loan was increased to
11%.
- .
There were no amendments to the warrant issued as part of the bridge loan
transaction.
SECOND AMENDMENT TO BRIDGE LOAN
On April 11, 2003, the Company entered into a second amendment to the
bridge loan to increase the aggregate principal amount of the Subordinated Note
in favor of Castletop Capital, L.P. from $2,000 to $5,000. No other changes
were made to the note. See Note 15 "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 represented a combination of the
market premium for D&O coverage for the period from April 7, 2003 through April
7, 2004 plus the Company's contribution toward a potential settlement in the
class action lawsuit). (Note 15). The revolving credit agreement prohibited
the Company from prepaying the bridge loan before September 30, 2003. In
September 2003, with authorization from BOA, the Company retired this facility
by repaying $5,000 in borrowings to Castletop.
INTEREST RATE SWAPS
As a hedge of its interest rate risk associated with the Company's former
credit agreement, the Company entered into two Interest Rate Swap Agreements
(the "Swaps"). As of March 31, 2002, the Swaps had an initial notional amount of
$14,000 and matured June 2004. The Swaps required the Company to pay a fixed
rate of 6.98% (an effective rate of 10.23%) and receive a floating rate of 6.75%
(an effective weighted-average floating rate of 10.0%). In conjunction with the
repayment of the Company's former term loan, the interest rate swap agreements
were eliminated in October 2002. The cost of these financial instruments for the
fiscal year ended March 31, 2003 was $ 154 and has been reflected in interest
expense.
8. SHAREHOLDERS' EQUITY:
The Company is authorized to issue 21,200,000 shares of capital stock, of
which 221,756 shares have been designated as serial preferred stock and
20,000,000 shares have been designated as common stock. Each share of common
stock has one vote. The Board of Directors has not designated 978,244 authorized
shares of preferred stock.
In August 2001, the Company completed an underwritten offering of 2,530,000
shares of its common stock, including the exercise of the over allotment option.
The stock was priced at $13.50 per share resulting in proceeds of $30,874, net
of underwriting discount of $2,201 and expenses of $1,080. Of the proceeds,
$10,669 was used to fund the Terraillon acquisition (see Note 2), and $9,169 was
used to repay then outstanding principal on the former term loan.
In December 2001, the Company issued 314,081 shares of common stock in a
private placement to a member of the Board of Directors. The purchase price was
$2,008 or $6.37 per share, which was an eight percent discount from the average
closing price for the twenty trading days preceding December 24, 2001, the
effective date of the purchase. These monies that were received in January 2002
were used to fund operations and repay debt. The Company is required to file a
registration statement on Form S-3 to register the resale of these shares
following the first anniversary from the effective date or as soon as it shall
become eligible to use such form. As of March 31, 2004 such form has not yet
been filed.
On October 31, 2002, Castletop Capital, LP was issued warrants to purchase
297,228 shares of the Company's common stock in conjunction with the $9,300 loan
made to the Company on that date. The warrants had an exercise price of $1.64
per share, and had an exercise period of five years. The Company valued these
warrants using a Black-Scholes model at $452, recorded such value as debt
discount and charged the discount to interest expense over the life of the debt,
which was originally due on January 31, 2003. See Note 7. On June 26, 2003,
Castletop exercised its warrant to purchase 297,228 shares of stock at an
exercise price of $1.64.
On various dates, warrants were issued to Corporate Revitalization
Partners, (CRP) for successfully achieving objectives outlined by the Company's
Board of Directors and Compensation Committee. In November 2002, warrants to
purchase 87,720 shares of the Company's common stock were issued to CRP for the
successful negotiation and execution of a long-term forbearance
F-17
agreement, and for the Company being in compliance with the forbearance
agreement as of September 30, 2002. On January 31, 2003, warrants to purchase
an additional 32,895 shares of the Company's common stock were issued to CRP for
the successful refinancing of the Company's lines of credit. Expense related to
these warrants for the fiscal year ended March 31, 2003 was calculated at $234
using a Black-Scholes model. All warrants issued to CRP had an exercise period
of three years and exercise prices equal to $2.28. On June 12 and 13, and July
14, 2003, CRP exercised its warrant to purchase all 120,615 shares of stock at
an exercise price of $2.28.
Effective April 21, 2003, the Company entered into an agreement with Four
Corners Capital Partners LP ("Four Corners") to provide for the services of
Frank Guidone as Chief Executive Officer of the Company. 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. As a result of the performance of the Company's common stock, the
35%, 30%, 20% and 15% of the warrant shares became vested on September 18, 2003,
October 24, 2003, and November 28, 2003, and January 22, 2004 respectively. The
Company recorded a non-cash equity based compensation charge of $6,484 ($0.46
per share diluted) during the fiscal year ended March 31, 2004, representing the
estimated fair value of the portion of the warrant that vested. For the three
months ended March 31, 2004, the warrant was valued using the Black-Scholes
option pricing model, using a risk free rate of 0.95%, volatility of 0.27, and
warrant life of two months. On March 29, 2004, Four Corners has exercised the
warrant to purchase an aggregate of 600,000 shares of common stock and elected
to pay the exercise price of the warrant by having the Company withhold a number
of shares having a fair market value to the exercise price. Based on the closing
price of $19.11 on March 29, 2004, Four Corners received 500,785 shares of
common stock from this transaction. See Note 13 for impact on diluted earnings
per share of the 600,000 warrant shares issued to Four Corners. See Note 10 for
related party discussion.
JL is subject to certain Chinese government regulations, including currency
exchange controls, which limit cash dividends and loans to ML and MSI. At March
31, 2004 and 2003, JL's restricted net assets approximated $7,330, and $13,742,
respectively.
9. BENEFIT PLANS:
DEFINED CONTRIBUTION PLANS:
The Company has a defined contribution plan qualified under Section 401(k)
of the Internal Revenue Code. Substantially all of its U.S. employees are
eligible to participate after completing three months of service. Participants
may elect to contribute a portion of their compensation to the plan. Under the
plan, the Company has the discretion to match a portion of participants'
contributions. The Company intends to match $362 to the plan for the fiscal year
ended March 31, 2004. For the fiscal year ended March 31, 2003 there were no
matching contributions to the plan. For the fiscal year ended March 31,
2002,the Company's matching contribution was $598.
At the discretion of the Board, the Company may make profit sharing
contributions. No profit sharing contributions were made for fiscal 2003 and
2002.
DEFINED BENEFIT PLANS:
The Company had provided a contributory defined benefit retirement plan for
certain Schaevitz UK employees. As a result of the Company's decision to
liquidate its Schaevitz UK in the fiscal quarter ended June 30, 2002, the
Company wrote-off the Schaevitz UK net prepaid pension asset of $2,309 in that
quarter. The Company has received a letter from the plan's actuary stating that
he has determined that there is no further statutory liability for the Company
in accordance with current UK legislation.
The following table set forth reflects the amounts included in discontinued
operations related to the defined benefit plan.
The net periodic pension cost which is included in discontinued operations,
included the following components:
YEAR ENDED
MARCH 31,
2002
----------
Service cost $ 285
Interest cost 171
Expected return on plan assets (428)
----------
Net periodic pension cost $ 28
==========
10. RELATED PARTY TRANSACTIONS:
Restructuring Services
F-18
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). The Company no longer utilizes the
services of CRP as of the end of March 2004. As of March 31, 2004, on a
cumulative basis, the Company has incurred $3,613 in consulting fees and
expenses to CRP (excluding the success fees described in this paragraph). For
the fiscal years ended March 31, 2004 and 2003, the Company incurred $1,011 and
$2,602, respectively, in fees to CRP.
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. During the
fiscal year ended March 31, 2003, the Company expensed $234 relating to the CRP
warrants (See Note 8).
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 March 31, 2004, the Company
paid an aggregate of $333 and $78 for compensation and for the reimbursement of
travel costs, respectively, 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. As a result of the performance of the
Company's common stock, all warrant shares became vested during the fiscal year
ended March 31, 2004. As a result of the performance of the Company's common
stock, the 35%, 30%, 20% and 15% of the warrant shares became vested on
September 18, 2003, October 24, 2003, and November 28, 2003, and January 22,
2004, respectively. The Company recorded a non-cash equity based compensation
charge of $6,484 ($.46 per share diluted) during the fiscal year ended March
31, 2004, representing the estimated fair value of the portion of the warrant
that vested. For the each of the quarters in the fiscal year ended March 31,
2004 , the warrant was valued using the Black-Scholes option pricing model,
using a risk free rate, volatility factor, and warrant life as detailed in the
chart below.
WARRANT VALUATION
Q1 Q2 Q3 Q4
------- --------- -------------- --------
Shares Vested - 210,000 300,000 90,000
Option Value $ 5.28 $ 10.36 $ 9.17-$17.28 $ 18.43
Volatility 62.79% 45.84% 25.07%-43.82% 27.23%
Risk-Free Interest Rate 1.08% 1.01% 0.95%-1.04% 0.95%
On March 29, 2004, Four Corners exercised the warrant to purchase an aggregate
of 600,000 shares of common stock and elected to pay the exercise price of the
warrant by having the Company withhold a number of shares having a fair market
value to the exercise price. Based on the closing price of $19.11 on March 29,
2004, Four Corners received 500,785 shares of common stock from this
transaction. See Note 13 for impact on diluted earnings per share of the
600,000 warrant shares issued to Four Corners. See Note 8 for impact on
Shareholder's equity.
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 7 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.
In September 2001, the Company loaned $125 to Steven Petrucelli, a former
member of its Board of Directors. The loan, which was subsequently memorialized
by a Promissory Note dated August 1, 2002, accrues interest at a rate of 6% per
year. Bimonthly payments of principal and interest in the amount of $1,000 are
payable until September 15, 2006. Under the terms of the Promissory Note, Mr.
Petrucelli was able to reduce the outstanding balance of the loan by the amount
of any un-submitted business expenses. In April 2003, Mr. Petrucelli submitted
prior business expenses totaling $49, which were used to reduce the balance of
the loan.
F-19
Accordingly, at March 31, 2004 and 2003, there was $43, and $61, respectively,
outstanding under the loan. The entire unpaid balance of principal and accrued
interest under the note is due and payable on September 15, 2006. The loan is
included in other assets.
In connection with the resignation of the former Chief Executive Officer of
the Company, Joseph R. Mallon, Jr., effective February 4, 2003, the Company
agreed to make a severance payment of $225 (one year's salary) to Mr. Mallon and
to provide continued medical insurance coverage under its group plan for one
year following the date of his termination. The Company also agreed to extend
the exercise period for certain options held by Mr. Mallon until January 31,
2004, and to reimburse for up to $25 in tuition for continuing business
education. An aggregate of $286 was included in selling, general and
administrative expenses during the year ended, March 31, 2003 relating to such
severance. As of March 31, 2004, an accrual for such costs of $25 is included
in accrued expenses.
11. RESTRUCTURING AND OTHER COSTS:
During the fiscal quarter ended March 31, 2002, management and the Board of
Directors approved a plan of reduction of workforce and a reduction of operating
capacity at certain locations. The reduction in workforce consisted of 106
employees in the fiscal quarter ended March 31, 2002 and 49 additional employees
in the fiscal quarter ended June 30, 2002 in the consumer and sensor segments,
in addition to the corporate offices. The following table summarizes the
restructuring charges:
RESTRUCTURING PAYMENTS RESTRUCTURING
COST FOR THE MADE DURING COST FOR THE PAYMENT MADE
BALANCE AS OF YEAR ENDED THE YEAR BALANCE AS OF YEAR ENDED DURING THE YEAR BALANCE AS OF
MARCH 31, MARCH 31, ENDED MARCH MARCH 31, MARCH 31, ENDED MARCH MARCH 31,
2002 2003 31, 2003 2003 2004 31, 2004 2004
Severance (106
employees) $ 85 $ - $ (85) $ - $ - $ - $ -
Severance (49
employees) $ - 150 (150) - - - -
Lease
termination 522 839 (2) 1,359 506 (1,425) 440
----------------------------------------------------------------------------------------------------------------
$ 607 989 $ (237) $ 1,359 506 $ (1,425) $ 440
================================================================================================================
Write down of
fixed assets 230 -
-------------- --------------
TOTAL $ 1,219 $ 506
============== ==============
12. INCOME TAXES:
Income (loss) before income taxes and the cumulative effect of
accounting change consists of the following:
2004 2003 2002
---------------------------------------
Domestic $ 2,533 $(10,534) $(19,156)
Foreign 6,579 4,694 (2,566)
---------------------------------------
$ 9,112 $ (5,840) $(21,722)
=======================================
The income tax provision (benefit) consists of the following:
2004 2003 2002
---------------------------------------
Current
Federal $ 1,087 $ - $ (132)
Foreign 1,009 345 59
State 310 138 (55)
---------------------------------------
Total $ 2,406 $ 483 $ (128)
---------------------------------------
F-20
Deferred
Federal (12,468) - 1,689
Foreign - - 110
State (2,200) - 841
---------------------------------------
Total (14,668) - 2,640
---------------------------------------
$ (12,262) $ 483 $ 2,512
=======================================
Differences between the federal statutory income tax rate
and the effective tax rates are as follows:
2004 2003 2002
---------------------------------------
U.S. Federal Statutory tax rate 34.0% -34.0% -34.0%
Fine 3.7% - -
Options 1.9% - -
Effect of foreign taxes -13.2% -1.4% 3.1%
State taxes and other 2.2% 1.0% -0.1%
Over Under -3.0% 0.0% 0.0%
Valuation allowance -157.3% 39.9% 40.6%
M & E 0.2% - -
---------------------------------------
-131.5% 5.5% 9.6%
=======================================
The Company's share of cumulative undistributed earnings of its foreign
subsidiaries was approximately $ 12,100 and $7,100 at March 31, 2004 and 2003
(as restated), respectively. The difference between the Federal Statutory Rate
and the above relate to the utilization of the Federal Net Operating Loss and
the application of the alternative minimum tax. No provision has been made for
U.S. or additional foreign taxes on the undistributed earnings of foreign
subsidiaries because such earnings are expected to be reinvested indefinitely in
the subsidiaries' operations. It is not practical to estimate the amount of
additional tax that might be payable on these foreign earnings in the event of
distribution or sale. However, under existing law, foreign tax credits would be
available to substantially reduce, or in some cases, eliminate U.S. taxes
payable.
Pursuant to current Chinese tax policies, JL qualifies for a special
corporate tax rate of 15 percent. Additionally, because JL has agreed to operate
in China for a minimum of ten years, a tax holiday (which expired on March 31,
1998) was available for two years, and a 50 percent tax rate reduction to 7.5
percent (which expired on March 31, 2001) was available for the three years
thereafter. In July 2001, JL was granted and treated as an advanced technology
enterprise. As a result, JL is entitled to a 50 percent tax rate reduction to
7.5 percent for the following three years. The Hong Kong corporate tax rate, at
which ML's earnings are taxed, is 16 percent.
The significant components of the net deferred tax assets consist of the
following:
YEAR ENDED MARCH 31,
--------------------
DEFERRED TAX ASSET 2004 2003
- ------------------ ------- ---------
CURRENT DEF TAX ASSETS
NET OPERATING LOSS 10,673 11,652
ACCOUNTS RECEIVABLE ALLOW 163 702
INVENTORY 657 1,232
ACCRUED EXPENSES 802 1,673
OTHER 169 155
------- ---------
TOTAL $12,464 $ 15,414
CURRENT DEF TAX LIABILITY - -
VALUATION ALLOWANCE - (15,414)
------- ---------
NET CURRENT DEFERRED TAX ASSET 12,464 -
======= =========
LONG-TERM DEFERRED TAX ASSETS
DEFERRED GAIN 2,697 -
WARRANTY 75 52
------- ---------
TOTAL LONG TERM ASSET 2,772 52
LONG-TERM DEFERRED TAX LIABILITY
BASIS DIFFERENCE IN FIXED ASSETS -568 -653
------- ---------
TOTAL LONG TERM LIABILITY -568 -653
VALUATION ALLOWANCE 0 601
------- ---------
NET LONG TERM DEFERRED TAX LIABILITY 2,204 -
------- ---------
TOTAL NET DEFERRED TAX ASSET 14,668 -
======= =========
F-21
In 2003, the Company had a pretax loss for financial reporting purposes.
Recognition of deferred tax assets required generation of future taxable income.
Since there was no assurance that the Company would generate profits at the end
of March 2003, a valuation allowance was established for $15,414. The Company
has reversed this valuation allowance for the year ended March 31, 2004.
The Company has federal net operating loss carry forwards of approximately
$22,180, which expire beginning in fiscal year 2022. The utilization of these
net operating loss carry forwards may be significantly limited under the
Internal Revenue Code as a result of ownership changes due to sales of the
Company's stock and other equity offerings.
The Company also has net operating loss carry forwards for state tax
purposes, which expire beginning in the fiscal year ending March 31, 2010.
13. PER SHARE INFORMATION:
Basic per share information is computed based on the weighted-average
common shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or conversion
of stock options, less the shares that may be repurchased with the funds
received from their exercise. Potentially dilutive securities are not included
in earnings per share for the years ended March 31, 2004 and 2003 as their
inclusion would be antidilutive.
The following is a reconciliation of the numerators and denominators of
basic and diluted EPS computations for the year ended March 31, 2001:
Income (Loss)
from
continuing Weighted Average
operations Shares (000) Per-Share
(Numerator) (Denominator) Amount
---------------------------------------------
March 31, 2004
Basic per share information $ 21,586 12,333 $ 1.75
Effect of dilutive securities 1,664 $ 0.21
-------------------------------
$ 21,586 13,997 $ 1.54
===============================
March 31, 2003
Basic per share information $ (9,097) 11,911 $ (0.76)
Effect of dilutive securities -
-------------------------------
Diluted per-share information $ (9,097) 11,911 $ (0.76)
===============================
March 31, 2002
Basic per share information $ (29,047) 10,531 $ (2.76)
Effect of dilutive securities -
-------------------------------
Diluted per-share information $ (29,047) 10,531 $ (2.76)
===============================
For the years ended March 31, 2004 and 2003, an aggregate of 1,217,000 and
665,000 options and warrants respectively, were excluded from the earnings per
share calculation because the effect would be antidilutive. No dilutive
securities were excluded in the year ended March 31, 2001.
14. STOCK OPTION PLANS:
Options to purchase up to 1,828,000 common shares were eligible to be
granted under MSI's 1995 Stock Option Plan and its predecessor plan (together
the "1995 Plan"), until its expiration on September 8, 2005. Shares issueable
under 1995 Plan grants which expire or otherwise terminate without being
exercised become available for later issuance. All shares eligible for grant
were issued prior to April 1, 1999.
F-22
Options to purchase up to 1,500,000 shares may be granted under the
Company's 1998 Stock Option Plan, (the "1998 Plan") until its expiration on
October 19, 2008. Shares issuable under 1998 Plan grants which expire or
otherwise terminate without being exercised become available for later issuance.
A total of 1,246,694, 1,411,070 and 728,438 options to purchase shares were
outstanding at March 31, 2004, 2003 and 2002, respectively under the 1998 plan.
On July 28, 2003, the Board of Directors adopted the Measurement
Specialties, Inc. 2003 Stock Option Plan , which was approved by shareholders at
the 2003 Annual Meeting on September 23, 2003. Options to purchase up to
1,000,000 common shares were eligible to be granted under the 2003 stock option
plan, and as of March 31, 2004, no stock options were issued under the 2003
stock option plan.
Options under all Plans generally vest over service periods of up to five
years, and expire no later than ten years from the date of grant. Options may,
but need not, qualify as "incentive stock options" under section 422 of the
Internal Revenue Code. Tax benefits are recognized upon nonqualified exercises
and disqualifying dispositions of shares acquired by qualified exercises. There
were no changes in the exercise prices of outstanding options, through
cancellation and reissuance or otherwise, for 2004, 2003, or 2002.
A summary of the status of stock options as of March 31, 2004, 2003, and
2002 and changes during the years ended on those dates is presented below:
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
------------------------- ------------------------
OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE
------------ ----------- ----------- -----------
MARCH 31, 2001 1,199,884 458,044 7.60 2.71
Granted at market 222,300 15.10
Forfeited (190,080) 11.53
Exercised (182,434) 2.35
------------ -----------
MARCH 31, 2002 1,049,670 514,660 9.39 4.55
Granted at market 971,400 2.32
Forfeited (252,100) 16.40
Exercised (58,000) 2.30
------------ -----------
MARCH 31, 2003 1,710,970 539,530 4.59 5.70
============
Granted at market 153,000 12.92
Forfeited (112,700) 6.38
Exercised (420,026) 2.59
------------ ----------- ----------- -----------
MARCH 31, 2004 1,331,244 560,760 6.00 6.03
Summarized information about stock options outstanding at March 31, 2004
follows:
WEIGHTED-
NUMBER OF WEIGHTED-AVERAGE AVERAGE
UNDERLYING SHARES EXERCISE EXERCISE PRICE REMAINING
- ------------------------ -------------------------- ---------------------- -----------------
OUTSTANDING EXERCISABLE PRICE RANGE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
- ----------- ----------- -------------------------- ------------ ----------- -----------------
872,614 360,960 $ 1.38 $ 3.81 $ 1.79 $ 1.80 7.79
112,230 61,400 $ 5.25 $ 9.50 $ 7.22 $ 8.23 7.35
267,400 99,000 $ 13.39 $ 18.80 $ 14.90 $ 14.19 7.12
79,000 39,400 $ 19.38 $ 24.88 $ 20.67 $ 20.79 6.38
- ------------------------ --------------------------------------------
1,331,244 560,760 $ 6.00 $ 6.03 7.60
======================== ============================================
Based on calculations using the Black-Scholes option pricing model, the
weighted-average fair value of options granted in 2004, 2003, and 2002 at the
date of grant was $12.74, $2.29, and $9.03 per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model (single grant assumption with straight-line
amortization) with the following weighted-average assumptions:
2004 2003 2002
------ ------ -----
Expected volatility 205.8% 205.7 90.0%
Risk-free interest rate 1.8% 2.8% 4.9%
Dividend yield. -- -- --
Expected life in years. 5.0 5.0 5.0
15. COMMITMENTS AND CONTINGENCIES:
LEASES. The Company leases certain property and equipment under noncancelable
operating leases expiring on various dates through July 2011. Company leases
that include escalated lease payments are straight-lined over that base lease
period, in accordance with SFAS 13. Rent expense, including real estate taxes,
insurance and maintenance expenses associate with net operating leases
approximate $2,138 for 2004, $969 for 2003, and $3,032 for 2002. At March 31,
2004, total minimum rent payments under leases with initial or remaining
noncancelable lease terms of more than one year were:
F-23
YEAR ENDING MARCH 31,
----------------------------
2005 $ 1,906
2006 983
2007 918
2008 938
2009 958
Thereafter $ 3,269
LITIGATION:
PENDING MATTERS
U.S Attorney Investigation
The Company has learned that the Office of the United States Attorney for
the District of New Jersey is conducting an inquiry into the matters that are
being investigated by the SEC. The Company cannot predict how long this
investigation will continue or its ultimate outcome.
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 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 is engaged in the discovery process. This litigation is ongoing
and the Company cannot predict its outcome at this time.
In re Service Merchandise Company, Inc. (Service Merchandise Company, Inc.
v. Measurement Specialties, Inc.), United States Bankruptcy Court for the
Middle District of Tennessee, Nashville Division, Case No. 399-02649, Adv.
Pro. No. 301-0462A. The Company is currently the defendant in a lawsuit filed
in March 2001 by Service Merchandise Company, Inc. ("SMC") and its related
debtors (collectively, the "Debtors") in the context of the Debtors' Chapter 11
bankruptcy proceedings. The Bankruptcy Court entered a stay of the action in
May 2001, which was lifted in February 2002. The action alleges that the
Company received approximately $645 from one or more of the Debtors during the
ninety (90) day period before the Debtors filed their bankruptcy petitions, that
the transfers were to the Company's benefit, were for or on account of an
antecedent debt owed by one or more of the Debtors, made when one or more of the
Debtors were insolvent, and that the transfers allowed the Company to receive
more than the Company would have received if the cases were cases under Chapter
7 of the United States Bankruptcy Code. The action seeks to disgorge the sum of
approximately $645 from the Company. It is not possible at this time to predict
the outcome of the litigation or estimate the extent of any damages that could
be awarded in the event that the Company is found liable to the estates of SMC
or the other Debtors.
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.
PENDING SETTLEMENTS
In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No. 1071
(D.N.J.). On March 20, 2002, a class action lawsuit was filed on behalf of
purchasers of the Company's common stock in the United States District Court for
the District of New Jersey against the Company and certain of the Company's
present and former officers and directors. The complaint was subsequently
amended to include the underwriters of the Company's August 2001 public offering
as well as the Company's former auditors. The lawsuit alleged violations of the
federal securities laws. The lawsuit sought an unspecified award of money
damages. After March 20, 2002, nine additional similar class actions were filed
in the same court. The ten lawsuits were 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 made a claim for indemnification under the
underwriting agreement.
On April 1, 2004, the Company reached an agreement in principle to settle
this class action lawsuit. Pursuant to the agreement, the case will be settled
as to all defendants in exchange for payments of $7,500 from the Company and
$590 from Arthur Andersen, the Company's former auditors. Both the Company's
primary and excess D&O insurance carriers initially denied coverage for this
matter. After discussion, the Company's primary D&O insurance carrier agreed to
contribute $5,000 and its excess insurance carrier agreed to contribute $1,400
to the settlement of this case. As part of the arrangement with its primary
carrier, the Company agreed to renew its D&O coverage for the period from April
7, 2003 through April 7, 2004. The $3,200 renewal premium represented a
combination of the market premium for an aggregate of $6,000 in coverage for
this period plus a portion of the Company's contribution toward the settlement.
The settlement agreement is subject to court approval and can be terminated by
plaintiffs or defendants, under certain circumstances.
F-24
SEC Investigation
In February 2002, the Company contacted the staff of the SEC after
discovering that its former chief financial officer had made the
misrepresentation to senior management, the board of directors and its auditors
that a waiver of a covenant default under its credit agreement had been obtained
when, in fact, its lenders had refused to grant such a waiver. Since February
2002, the Company and a special committee formed by its 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.
On May 18, 2004, the Company reached an agreement in principle with the SEC
which would resolve the commission's investigation of the Company. Pursuant to
the agreement, the Company will pay $1,000 in disgorgement and civil penalties.
The settlement agreement is subject to court approval.
As of March 31, 2004, the Company has provided an accrual of $2,100
associated with certain of the legal matters discussed above. However, there
can be no assurance that additional amounts may not be required to dispose of
such matters.
SETTLEMENT
.Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration). Exeter Technologies, Inc. ("Exeter") and Michael Yaron
alleged underpayments of approximately $322 relating to a January 5, 2000
Product Line Acquisition Agreement. The Company maintained the claim failed to
recognize the Company's rights to certain contractual allowances and offsets.
In March 2004, the parties settled this matter for a $300 payment by the
Company.
16. SEGMENT INFORMATION:
The Company's reportable segments are strategic business units that operate
in different industries and are managed separately. Management has organized the
business based on the nature of their respective products and services. For a
description of the products and services included in each segment, see Note 1.
The accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies.
The Company has no material intersegment sales.
At March 31, 2004, the foreign subsidiaries' total assets aggregated
$24.1million of which, $8.8 million was in Hong Kong and $15.3 million was in
China. At March 31, 2003 the foreign subsidiaries' total assets aggregated $20.5
million of which, $4.9 million was in Hong Kong and $15.6 million in China. The
Company is potentially subject to the risks of foreign currency transaction and
translation losses, which might result from fluctuations in the values of the
Hong Kong dollar and the Chinese renminbi. The foreign subsidiaries' operations
reflect intercompany transfers of costs and expenses, including interest on
intercompany trade receivables, at amounts established by the Company.
The following is information related to industry segments:
FOR THE YEAR ENDED MARCH 31,
2004 2003 2002
Net sales
Consumer Products $ 52,566 $ 55,350 $ 48,362
Sensors 60,247 52,326 48,911
-------------------------------
Total $112,813 $107,676 $ 97,273
-------------------------------
Operating income (loss)
Consumer Products 9,715 8,334 3,887
Sensors 16,459 6,931 (12,991)
-------------------------------
Total segment operating income (loss) 26,174 15,265 (9,104)
Corporate expenses (18,275) (19,510) (10,004)
-------------------------------
Total operating income (loss) 7,899 (4,245) (19,108)
Interest expense, net of interest income 323 2,057 2,371
Gain on wafer fab sales (1,424) (159)
Other expense (income) (112) (303) 243
-------------------------------
Income (loss) from continuing operations before
income taxes and cumulative effect of accounting change 9,112 (5,840) (21,722)
Income tax (12,262) 483 2,512
-------------------------------
F-25
Income (loss) from continuing operations before
cumulatvie effect of accounting change 21,373 (6,323) (24,234)
-------------------------------
Discontinued Operations:
Income (loss) from operations of discontinued units (net
of income tax benefit) 212 (3,910) (4,565)
Gain on disposition of discontinued units (net
of income tax benefit) - 1,136 -
-------------------------------
Loss from discontinued units 212 (2,774) (4,565)
-------------------------------
Income (loss) before cumulative effect of accounting change 21,586 (9,097) (28,799)
Cumulative effect of accounting change, net of taxes - (248)
-------------------------------
Net income (loss) $ 21,586 $ (9,097) $(29,047)
===============================
Depreciation and amortization:
Consumer Products $ 829 $ 887 $ 866
Sensors 1,995 2,444 3,683
-------------------------------
Total $ 2,824 $ 3,331 $ 4,549
===============================
MARCH 31,
-------------------------
2004 2003 2002
------- ------- -------
Segment Assets
Consumer products $11,518 $11,478 $17,118
Sensors 31,474 34,391 33,668
Corporate 34,008 299 2,194
Assets held for sale - Consumer - - 27,984
Assets held for sale - Sensors - - 8,648
------- ------- ------
Total $77,000 $46,168 $89,612
======= ======= =======
Capital Expenditures:
Consumer products 523 817 687
Sensors 1,176 701 1,679
Corporate 244 - -
------- ------- ------
Total $ 1,943 $ 1,518 $ 2,366
======= ======= =======
Geographic information for revenues, based on country of origin, and
long-lived assets, which included property, plant and equipment, goodwill and
other intangibles, net of related depreciation and amortization follows:
2004 2003 2002
-------- -------- -------
Net sales:
United States $ 77,537 $ 81,795 $70,278
Germany 5,268 5,754 7,580
France 2,337 1,634 863
Other Europe 14,854 11,870 5,181
Other 12,817 6,623 13,371
-------- -------- -------
Total: $112,813 $107,676 $97,273
======== ======== =======
Long-lived assets:
2004 2003 2002
-------- -------- -------
United States $ 7,315 $ 8,117 $ 9,422
China 8,136 8,649 9,464
-------- -------- -------
Total: $ 15,451 $ 16,766 $18,886
======== ======== =======
F-26
17. CONCENTRATIONS:
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, are principally cash, long-term debt and trade
accounts receivable.
The Company generally maintains its cash equivalents at major financial
institutions in the United States, Canada, Hong Kong and China. Cash held in
foreign institutions amounted to $3,255 and $1,709 at March 31, 2004 and 2003,
respectively. The Company periodically evaluates the relative credit standing of
financial institutions considered in its cash investment strategy.
Accounts receivable are concentrated in United States and European
distributors and retailers of consumer products. To limit credit risk, the
Company evaluates the financial condition and trade payment experience of
customers to whom credit is extended. The Company generally does not require
customers to furnish collateral, though certain foreign customers furnish
letters of credit.
The Company manufactures the substantial majority of its sensor products,
and most of its sensor subassemblies used in its consumer products, in leased
premises located in Shenzhen, China. Sensors are also manufactured at the
Company's United States facilities located in Virginia, and California.
Additionally, certain key management, sales and support activities are conducted
at leased premises in Hong Kong. Substantially all of the Company's consumer
products are assembled in China, primarily by a single supplier, River Display,
Ltd. ("RDL"), although the Company is utilizing alternative Chinese assemblers.
There are no agreements, which would require the Company to make minimum
payments to RDL, nor is RDL obligated to maintain capacity available for the
Company's benefit, though the Company accounts for a significant portion of
RDL's revenues. Additionally, most of the Company's products contain key
components, which are obtained from a limited number of sources. These
concentrations in external and foreign sources of supply present risks of
interruption for reasons beyond the Company's control, including, political,
economic and legal uncertainties resulting from the Company's operations in
China.
A United States manufacturer and distributor of electric housewares
accounted for 14.7%, 7.1%, and 8.1% of net sales for the fiscal years ended
March 31, 2004, 2003 and 2002, respectively. A German distributor of diversified
house wares accounted for 7.6%, 8.3%, and 7.3% of net sales for the fiscal years
ended March 31, 2004, 2003 and 2002, respectively. Both customers are in the
Company's Consumer Products segment.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Presented below is a schedule of selected quarterly operating results.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
ENDED JUNE ENDED SEPT. ENDED DEC. ENDED MARCH
30 30 31 31
YEAR ENDED MARCH 31, 2004
As Reported
Net sales $ 26,041 $ 28,559 $ 31,869 $ 26,344
Gross profit $ 12,589 $ 12,307 $ 14,046 $ 11,358
Net income $ 3,783 $ 1,715 $ 888 $ 15,200
Income
Income per share, basic 0.32 0.14 0.07 1.20
Income per share, diluted 0.30 0.12 0.06 1.08
YEAR ENDED MARCH 31, 2003
As Reported
Net sales $ 23,725 $ 32,300 $ 28,351 $ 23,300
Gross profit $ 7,917 $ 10,676 $ 11,140 $ 8,263
Net income (loss) $ (5,703) $ (1,041) $ 1,608 $ (3,961)
Income (loss)
Income (loss) per share, basic and diluted (0.48) (0.09) 0.13 (0.33)
Earnings per share are computed independently for each of the quarters
presented, on the basis described in 13. The sum of the quarters may not be
equal to the full year earnings per share amounts.
F-27
SCHEDULE II
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Year Ended March 31, 2004, 2003, and 2002
Col. A Col. B Col. C Col. D Col. E
- -------------------------------------------- ------------- ------------------------ ------------- ------------------
Additions
------------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts Deductions- Balance at End of
Description Period Expenses Describe Describe Period
- -------------------------------------------- ------------- ----------- ----------- ------------- ------------------
Year ended March 31, 2004
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,038 $ 245 $ (956) (a) $ 327
Sales reserve $ 515 $ 1,409 $ (1,756) (b) 168
Inventory allowance $ 4,996 $ 358 $ (1,148) (c) 4,206
Valuation allowance for deferred taxes $ 15,414 $ (15,414) (d) -
Warranty Reserve $ 762 $ 333 $ (426) (e) 669
Year ended March 31, 2003
Deducted from asset accounts:
Allowance for doubtful accounts $ 658 $ 842 $ (462) (a) $ 1,038
Sales reserve $ 389 $ 1,703 $ (1,577) (b) 515
Inventory allowance $ 5,106 $ 1,285 $ (1,395) (c) 4,996
Valuation allowance for deferred taxes $ 13,014 $ 2,400 (d) 15,414
Warranty Reserve $ 685 $ 641 $ (564) (e) 762
Year ended March 31, 2002*
Deducted from asset accounts:
Allowance for doubtful accounts $ 914 $ 809 $ (1,065) (a) $ 658
Sales reserve $ 337 $ 876 $ (824) (b) 389
Inventory allowance $ 2,074 $ 3,577 $ (545) (c) 5,106
Valuation allowance for deferred taxes $ 500 $ 12,514 13,014
Warranty Reserve $ 619 $ 614 $ (548) (c) 685
(a) Bad debts written off, net of recoveries
(b) Actual returns received
(c) Inventory sold or destroyed
(d) Increase (Decrease) valuation allowance
F-28