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
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
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:
Consumer Products. A summary of our sensor-based consumer products as of March 31, 2004 is presented in the following table:
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:
- 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.
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.
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
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
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.
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.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers as of March 31, 2004 were as follows:
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.
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.
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.
ITEM 7.
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:
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
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.
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
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
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 - ---------------------------------------------
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
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 - ---------------------------------------------
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
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
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
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.
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.
ITEM 8.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
(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
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.
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
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.
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.
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.
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:
COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) consists of net earnings or loss for the period and the impact of unrealized foreign currency translation adjustments.
STOCK BASED COMPENSATION:
The Company has two stock-based employee compensation plans, which are described more fully in Note 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.
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
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:
Inventory reserves were $4,206 and $4,996 as of March 31, 2004 and 2003, respectively.
4. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
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:
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
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.
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.
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
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, ---------- Service cost $ 285 Interest cost 171 Expected return on plan assets (428) ---------- Net periodic pension cost $ 28 ==========
10. RELATED PARTY TRANSACTIONS:
Restructuring Services
In May 2002, the Company retained Corporate Revitalization Partners ("CRP") to conduct its ongoing operational/financial restructuring efforts. In June 2002, Frank Guidone, a Managing Director of CRP, became the Company's Chief Executive Officer (See "Executive Services and Non-Cash Equity Based Compensation" below for a discussion of the current agreement relating to Mr. Guidone's services as Chief Executive Officer of the Company). 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.
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.
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:
12. INCOME TAXES:
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:
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:
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.
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:
Summarized information about stock options outstanding at March 31, 2004 follows:
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:
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:
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.
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:
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:
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.
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.