UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended March 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 1-11906
MEASUREMENT SPECIALTIES, INC.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2378738
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 LITTLE FALLS ROAD, 07004
FAIRFIELD, NEW JERSEY (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (973) 808-1819
Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
Securities registered under Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
At July 12, 2002, the average market value of the voting stock held by
non-affiliates was approximately $25.1 million based on the closing price of the
registrant's common stock on July 12, 2002. Trading of the registrant's common
stock on the American Stock Exchange has been suspended since July 15, 2002.
At October 8, 2002, 11,912,958 shares of common stock were outstanding.
MEASUREMENT SPECIALTIES, INC.
FORM 10-K
TABLE OF CONTENTS
MARCH 31, 2002
PART I
ITEM 1. BUSINESS....................................................................... 3
ITEM 2. PROPERTIES..................................................................... 31
ITEM 3. LEGAL PROCEEDINGS.............................................................. 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 34
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ......... 35
ITEM 6. SELECTED FINANCIAL DATA........................................................ 37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ......................................................... 38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................... 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................... 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE... ....................................................... 53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................. 54
ITEM 11. EXECUTIVE COMPENSATION......................................................... 57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................. 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................. 63
PART IV
Item 14. CONTROLS AND PROCEDURES........................................................ 65
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............... 67
SIGNATURES ................................................................................... 71
2
PART I
Item 1. Business
INTRODUCTION
WE ARE ENGAGED IN AN ONGOING RESTRUCTURING PROGRAM PURSUANT TO WHICH WE
HAVE DISCONTINUED CERTAIN OPERATIONS AND SOLD CERTAIN OF OUR BUSINESSES AND MAY,
IN THE FUTURE, ENGAGE IN ADDITIONAL SALES OF ASSETS OR STOCK, OR OBTAIN OTHER
TYPES OF FINANCING. SOME OF THESE RESTRUCTURING ACTIVITIES HAVE OCCURRED SINCE
THE END OF OUR MARCH 31, 2002 FISCAL YEAR. SEE "BUSINESS-RECENT DEVELOPMENTS."
UNLESS SPECIFICALLY INDICATED OTHERWISE, INFORMATION IN THIS FILING IS AS OF
MARCH 31, 2002 AND DOES NOT TAKE INTO ACCOUNT THE RESTRUCTURING PROGRAM AND
OTHER EVENTS DESCRIBED IN "RECENT DEVELOPMENTS;" HOWEVER, READERS ARE ADVISED
THAT CERTAIN OF THESE EVENTS THAT OCCURRED AFTER MARCH 31, 2002 AND THAT ARE
CONTEMPLATED FOR THE FUTURE WILL HAVE A SIGNIFICANT IMPACT ON OUR BUSINESS AND
WILL CAUSE OUR BUSINESS TO CHANGE FROM THE DESCRIPTION SET FORTH BELOW.
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics, including pressure, motion,
force, displacement, angle, flow, and distance. We have two businesses, a Sensor
business and a Consumer Products business. We are a New Jersey corporation
organized in 1981.
Our Sensor business designs, manufactures, and markets sensors for
original equipment manufacturer applications. These products include pressure
sensors, custom microstructures, accelerometers, tilt/angle sensors, and
displacement sensors for electronic, automotive, military, and industrial
applications. Our Sensor business customers include leading manufacturers such
as Alaris Medical, Texas Instruments, Allison Transmission, Althen GmbH and
Graco.
Our Consumer Products business manufactures and markets sensor-based
consumer products. These products include bathroom and kitchen scales, tire
pressure gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive, and ultrasonic
technologies. Our Consumer Products customers include leading retailers such as
Bed Bath & Beyond, Linens 'n Things, Sears, Costco and Target, and European
resellers such as Laica, Ole Bodtcher Hanson and Babyliss.
Each of our businesses benefits from the same core technology base. Our
advanced technologies include piezoresistive applications, application-specific
integrated circuits, micro-electromechanical systems (MEMS), piezopolymers,
strain gauges, force balance systems, fluid capacitive applications, linear
variable differential transformers, and ultrasonics. These technologies allow
our sensors to operate precisely and cost effectively. Over the past years we
have built a global operation with advanced facilities located in North America,
Europe and Asia. By functioning globally we have been able to enhance our
engineering capabilities and increase our geographic proximity to our customers.
Our strategy is to utilize our expertise in sensor technologies to
develop new products and applications thereby increasing demand for our sensors
and sensor-based consumer products. Our design teams support our production
facility and engineering resources in China. By combining our manufacturing
expertise with our core technology, we strive to provide our global customer
base with an advantageous price-value relationship.
3
THE ELECTRO-MECHANICAL SENSOR INDUSTRY
All of our sensors are devices that convert mechanical information into
an 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.
MARKETS
Sensor manufacturers are moving toward smart sensors that use digital
intelligence to enhance measurement and control signals. The shift toward modern
technologies has enhanced applications in the automotive, medical, military, and
consumer industries. Examples of sensor applications include:
- automotive uses for such diverse applications as braking,
transmission, fuel pressure, diesel common rail pressure monitoring,
security sensing, and on board tire pressure monitoring;
- medical applications including blood pressure measurement, flow
monitoring, ultrasonic imaging, and body activity feedback in
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 and collision
avoidance systems; and
- consumer products applications including the measurement of weight,
distance, and movement, digitizing information for white boards and
laptops, and vibration and humidity sensors for major appliances.
In recent years, advances in microprocessor technology have fueled the
demand for sensors. As microprocessors become more powerful, yet smaller and
less expensive, they are incorporated into a greater number of products and
applications. The growth of sensors parallels the growth in microprocessors,
which require sensors to deliver critical information. A number of factors
affecting the growth in the sensor market include:
- a strong increase in customer demand for low-cost, highly accurate
measurement solutions;
- a proliferation of silicon micromachining technology in
micro-electromechanical systems (MEMS) devices as a low-cost
alternative to traditional technologies;
- manufacturers' increased use of modern technology to customize
products with various features to meet customer demands; and
- investment in research and development spending in order to
introduce new products and expand applications for existing
products.
TECHNOLOGY
4
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 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.
Piezopolymer 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. Piezoelectric polymer films offer unique sensor design
and performance because they are flexible, inert, and relatively inexpensive.
This technology is ideal for applications where the use of rigid sensors would
not be possible or cost-effective.
Strain Gauge Technology. A strain gauge consists of metallic foil that
is impregnated into an insulating material and bonded to a sensing element. The
foil is etched to produce a grid pattern that is sensitive to changes in
geometry, usually length, along the sensitive axis producing a change in
resistance. The gauge operates through a direct conversion of strain to a change
in gauge resistance. This technology is useful for the construction of
inexpensive, reliable pressure sensors.
Force Balance Technology. A force balanced accelerometer is a mass
referenced device that under the application of tilt or linear acceleration,
detects the resulting change in position of the internal mass by a position
sensor and an error signal is produced. This error signal is passed to the servo
amplifier and a current developed that is fed back into the 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
5
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. A linear variable
differential transformer is an electromechanical sensor that produces an
electrical signal proportional to the displacement of a separate movable core.
Linear variable differential transformers are widely used as measurement and
control sensors wherever displacements of a few microinches to several feet can
be measured directly, or where mechanical input, such as force or pressure, can
be converted into linear displacement. Linear variable differential transformer
sensors are capable of extremely accurate and repeatable measurements in severe
environments.
Ultrasonic Technology. Ultrasonic sensors measure distance by
calculating the time it takes to send and receive 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, 2002, 2001 and 2000 are presented in Note 17 to the consolidated
financial statements included in this Annual Report on Form 10-K.
PRODUCTS
Sensors. We produce a wide variety of sensors that use advanced
technologies to measure precise ranges of physical characteristics, including
pressure, motion, force, displacement, angle, flow, and distance. Our sensors
are mainly sold for original equipment manufacturer applications. A summary of
our Sensor business product offerings as of March 31, 2002 is presented in the
following table:
Product Technology Brand Name Applications
-----------------------------------------------------------------------------------------------------------------
Pressure Sensors Micro-Electromechanical IC Sensors Disposable catheter blood pressure,
Systems (MEMS) altimeter, dive tank pressure, process
instrumentation, and intravenous drug
administration monitoring
-----------------------------------------------------------------------------------------------------------------
Piezoresistive Microfused Fertilizer and paint spraying, diesel
engine control, hydraulics, and
automotive powertrain
-----------------------------------------------------------------------------------------------------------------
Strain Gauge Schaevitz Instrumentation grade aerospace and
weapon control systems, deep-sea
well-head pressure, ship cargo level, and
steel mills
-----------------------------------------------------------------------------------------------------------------
Accelerometers Piezopolymer PiezoSensors Transportation, shipment monitoring,
audio speaker feedback, and consumer
exercise monitoring
-----------------------------------------------------------------------------------------------------------------
Micro-Electromechanical IC Sensors Traffic alert and collision avoidance
Systems (MEMS) systems, railroad, tilt, and
instrumentation
6
-----------------------------------------------------------------------------------------------------------------
Force Balance Schaevitz Aerospace, weapon fire control, inertial
navigation, angle, and tilt
-----------------------------------------------------------------------------------------------------------------
Rotary Displacement Linear Variable Schaevitz Aerospace, machine control systems,
Sensors Displacement knitting machines, industrial process
Transducer control, and hydraulic actuators
-----------------------------------------------------------------------------------------------------------------
Tilt/Angle Sensors Fluid Capacitive Schaevitz Tire balancing, heavy equipment level
measurement, and consumer electronic
level measurement
-----------------------------------------------------------------------------------------------------------------
Traffic Sensors Piezopolymer PiezoSensors Traffic survey, speed and red light
enforcement, toll, and in-motion vehicle
weight measurement
-----------------------------------------------------------------------------------------------------------------
Custom Piezofilm Piezopolymer PiezoSensors Medical imaging, ultrasound, consumer
Sensors electronic, electronic stethoscope, and
sonar
-----------------------------------------------------------------------------------------------------------------
Custom Micro-Electromechanical IC Sensors Atomic force microscopes, flow
Microstructures Systems (MEMS) measurement, hydrogen and humidity sensors
Consumer Products. We design, manufacture, and market sensor-based
consumer products such as bathroom and kitchen scales, tire pressure gauges, and
distance estimators. Our consumer products feature sleek, contemporary designs,
high-contrast liquid crystal displays, and factory-installed lithium batteries
that last for the life of the product. We sell to both retailers and
manufacturers of consumer products. A summary of our sensor-based consumer
products as of March 31, 2002 is presented in the following table:
PRODUCT TECHNOLOGY BRAND NAMES* TYPES OF PRODUCTS PRICE RANGE
------------------------------------------------------------------------------------------------------------
Scales Piezoresistive, Thinner, Bathroom Scales $5.00-45.00
Application Specific Health-o-meter, Laica,
Integrated Circuits Salter, and Korona
------------------------------------------------------------------------------------------------------------
Thinner, Laica, Kitchen Scales $3.00-25.00
Salter, and Korona
--------------------------------------------------------------
Royal Postal Scales $8.00-11.00
------------------------------------------------------------------------------------------------------------
Tire Pressure Piezoresistive Accutire Digital and $0.50-15.00
Gauges Mechanical Tire
Pressure Gauges
------------------------------------------------------------------------------------------------------------
Distance Ultrasonic Accutape Interior Distance $13.00-22.00
Measurement Estimator
Products --------------------------------------------------------------
Park-Zone Distance Estimator $10.00-25.00
for Parking
* Health-o-Meter, Laica, Korona, Salter, and Royal are trademarks, trade
names, or service marks of our customers and are not owned by us.
See "Recent Developments - Our Restructuring Program" for a discussion of
the effect of certain of our asset sales on our product lines.
CUSTOMERS
7
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 the manufacturers of
electronic, automotive, military, and industrial products. None of our Sensor
business customers accounted for more than 10% of our total net sales during the
last three years. Our key Sensor customers include:
- Alaris Medical - Allison Transmission - Althen GmbH
- Argon Medical - Badger Meter - Component Distributor
- Graco - St. Jude Medical, Inc. - Texas Instruments
Our Consumer Products business customers are primarily retailers,
resellers, or manufacturers of consumer products in the United States and
Europe. No Consumer Products customer accounted for more than 10% of net sales
in the fiscal year ended March 31, 2002. Previously, we had two Consumer
Products customers who accounted for more than 10% of net sales, Korona
Haushaltswaren GmbH (Korona), a German distributor of diversified housewares,
and Sunbeam Corp. (Health and Safety Division), a United States manufacturer and
distributor of electric housewares.
Korona was acquired in August 2000 by an Asian manufacturer of scales
and other electronic products, and a competitor of ours. Korona accounted for
5.3%, 10.0%, and 14.0% of total net sales, or $7.0 million, $10.2 million, and
$8.4 million, for the fiscal years ended March 31, 2002, 2001 and 2000,
respectively.
Sunbeam filed for bankruptcy protection in February 2001. Sales to
Sunbeam accounted for 5.7%, 10.0%, and 19.9% of total net sales, or $7.6
million, $10.2 million and $11.9 million, for the fiscal years ended March 31,
2002, 2001 and 2000, respectively.
Other key Consumer Products customers include:
- Bed Bath & Beyond - Brookstone - Costco
- Lacia - Linens 'n Things - Ole Bodtcher Hanson
- Sam's Club - Sears - Target
SALES AND DISTRIBUTION
We sell our products through a combination of an experienced in-house
technical sales force 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 the specific application
requirements of our customers.
Our sensor-based consumer products are sold and marketed under our own
brand names as well as brand names of our original equipment manufacturer
customers and private labels. We have the flexibility of selling our
sensor-based consumer products directly to retailers, to resellers, and to
manufacturers of consumer products.
We sell our products primarily in North America and Western Europe.
International sales accounted for 47.4% of net sales for the fiscal year ended
March 31, 2002, 35.2% of our net sales for the fiscal year ended March 31, 2001,
and 28.4% of our net sales for the fiscal year ended March 31, 2000.
8
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 assemblers 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 client applications. Our gross research
and development expenses, including customer funded projects, were $6.6 million,
or 5.0% of net sales, for the fiscal year ended March 31, 2002, $5.1 million, or
5.0% of net sales, for the fiscal year ended March 31, 2001, and $3.4 million,
or 5.7% of net sales, for the fiscal year ended March 31, 2000. Research and
development expenses for our Sensor business were $5.9 million, or 10.5% of net
sales of our Sensor business, for the fiscal year ended March 31, 2002, $4.4
million, or 9.0% of net sales of our Sensor business, for the fiscal year ended
March 31, 2001, and $2.2 million, or 13.9% net sales of our Sensor business, for
the fiscal year ended March 31, 2000. Research and development expenses in the
Consumer Products business, which are historically lower than Sensor business
research and development expenses, were $0.7 million, or 0.9% of net sales of
our Consumer Products business, for the fiscal year ended March 31, 2002, $0.7
million, or 1.3% of net sales of our Consumer Products business, for the fiscal
year ended March 31, 2001, and $1.2 million, or 2.7% net sales of our Consumer
Products business, for the fiscal year ended March 31, 2000.
To maintain and improve our competitive position, our research, design,
and engineering teams work directly with customers to design custom sensors for
specific applications. We receive funding from customers for new product
development including $1.8 million for the fiscal year ended March 31, 2002,
$4.1 million for the fiscal year ended March 31, 2001, and $1.6 million for the
fiscal year ended March 31, 2000.
See "Recent Developments - Our Restructuring Program," for a discussion
of reductions in research and development expenditures.
COMPETITION
The market for sensors includes many diverse products and technologies
and is highly fragmented and increasingly subject to pricing pressures. Most of
our competitors are small companies or divisions of large corporations such as
Emerson, Motorola, Siemens, General Electric, and Honeywell. The principal
elements of competition in the sensor market are production capabilities, price,
quality, 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. Some of
our largest Consumer Products customers are also our competitors, such as
Sunbeam and Bonso Electronics International (which acquired Korona). The
principal elements of competition in the
9
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
73 United States utility patents, 33 United States design patents, and numerous
foreign patents to protect our rights in certain applications of our core
technology. We have 35 United States patent applications pending, including
provisionals. These patent applications may never result in issued patents. Even
if these applications issue as patents, taken together with our existing
patents, they may not be sufficiently broad to protect our proprietary rights,
or they may prove unenforceable. We have not, however, obtained patents for all
of our innovations, nor do we plan to do so.
We also rely on a combination of copyrights, trademarks, service marks,
trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect our proprietary rights. In addition, we seek to protect
our proprietary information by using confidentiality agreements with certain
employees, consultants, advisors, 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, or
others will maintain the confidentiality of such proprietary information, or
that our competitors will not otherwise learn about or independently develop
such proprietary information.
Despite our efforts to protect our intellectual property, unauthorized
third parties may copy aspects of our products, violate our patents, or use our
proprietary information. In addition, the laws of some foreign countries do not
protect our intellectual property to the same extent as the laws of the United
States. The loss of any material trademark, trade name, trade secret, patent
right, or copyright could hurt our business, results of operations, and
financial condition.
We believe that our products do not infringe on the rights of third
parties. However, we cannot be certain that third parties will not assert
infringement claims against us in the future or that any such assertion will not
result in costly litigation or require us to obtain a license to third party
intellectual property. In addition, we cannot be certain that such licenses will
be available on reasonable terms or at all, which could hurt our business,
results of operations, and financial condition.
FOREIGN OPERATIONS
We manufacture the majority of our sensor products, and most of our
sensor subassemblies used in our consumer products, in leased premises located
in Shenzhen, China. Sensors are also manufactured at our U.S. facilities.
Additionally, certain key management, sales and support activities are conducted
at leased premises in Hong Kong. Substantially all our consumer products are
assembled in China, primarily by a single supplier, River Display, Ltd. ("RDL"),
although we are utilizing alternative Chinese assemblers. There are no
agreements which would require us to make minimum payments to RDL, nor is RDL
obligated to maintain capacity available for our benefit, though we account for
a significant portion of RDL's revenues. Additionally, most of our products
10
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. The
United States has considered revoking China's most favored nation ("MFN") tariff
status in connection with controversies over the protection of human rights and
intellectual property rights, among other things. The loss of MFN could
adversely affect the cost of goods imported into the United States.
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 federal securities 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 and Euros. Our
costs and expenses are priced in United States dollars, Hong Kong dollars,
British pounds, Chinese renminbi and Euros. Accordingly, the competitiveness of
our products relative to products produced locally may be affected by the
performance of the United States dollar compared with that of our foreign
customers' currencies. United States sales were $69.8 million, $66.1 million and
$43.0 million for the years ended March 31, 2002, 2001, and 2000, respectively.
Foreign sales were $62.8 million, $35.9 million and $17.0 million, or 47.4%,
35.2%, and 28.3% of revenues, for the years ended March 31, 2002, 2001, and
2000, respectively. Additionally, we are exposed to foreign currency transaction
and translation losses which might result from adverse fluctuations in the
values of the Hong Kong dollar, the British pound, the Chinese renminbi and the
Euro.
At March 31, 2002, we had net assets of $1.6 million in the United
States. At March 31, 2002, we had net liabilities of $3.7 million subject to
fluctuations in the value of the Hong Kong dollar, net assets of $0.5 million
subject to fluctuations in the value of the British pound, net assets of $10.9
million subject to fluctuations in the value of the Chinese renminbi and net
assets of $17.5 million subject to fluctuations in the value of the Euro.
There can be no assurance that these currencies will remain stable or
will fluctuate to our benefit. To manage our exposure to foreign currency and
translation risks, we may purchase currency exchange forward contracts, currency
options, or other derivative instruments, provided such instruments may be
obtained at suitable prices. However, (other than for Terraillon) to date we
have not done so.
We acquired Terraillon Holdings Limited in August 2001. Terraillon is
a European distributor of bathroom and kitchen scales. Terraillon sells scales
under the brandnames "Terraillon" and "Hanson." Terraillon's customers include
many large retailers in France, Western Europe and the United States.
Since we closed our manufacturing facility in Sligo, Ireland in
October 2001, Terraillon has acquired all of its products from a third party
contract manufacturer in China. There are no long-term purchase commitments
from this manufacturer. Purchases from this manufacturer are denominated in
United States dollars. We use foreign exchange currency contracts (typically
with a maturity of three months or less) to manage our currency risk.
See "Recent Developments - Our Restructuring Program," for a discussion
of the elimination of certain of our foreign operations.
EMPLOYEES
11
As of March 31, 2002, we employed 1,551 persons, including 236
employees in the United States, 56 employees in the United Kingdom, 1,199
employees in Shenzhen, China, 53 employees in France and 7 employees in Hong
Kong, China.
As of March 31, 2002, 886 employees were engaged in manufacturing, 477
were engaged in administration, 84 were engaged in sales and marketing and 104
were engaged in research and development.
Our employees are not covered by collective bargaining agreements.
See "Recent Developments - Our Restructuring Program," for a discussion
of our reductions in workforce.
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 September 24, 2002, our backlog of unfilled orders was approximately
$33.8 million (excluding Terraillon orders). At September 24, 2001, our backlog
of unfilled orders was approximately $28.6 million (excluding Terraillon
orders). We include in backlog orders that have been accepted from customers
that have not been filled or shipped and have a scheduled release date. All
orders are subject to modification or cancellation by the customer with limited
charges. We believe that backlog may not be indicative of actual sales for the
current fiscal year or any succeeding period.
SEASONALITY
Our sales of consumer products are seasonal, with highest sales during
the second and third fiscal quarters.
12
RECENT DEVELOPMENTS
Restatement
Background - Examination of Inventory Valuation; Capitalized
Overhead Calculations
In August 2001, we determined that the implementation of a more
comprehensive and standardized cost accounting system was necessary as a result
of the expansion of our company through recent acquisitions, and we hired an
experienced cost accountant, Robert DeWelt, to, among other things, implement
this system. This process included updating standard inventory costs at two of
our locations. After review and analysis, management, in November 2001,
completed the update of standard costs for these two locations and revised the
estimated capitalized overhead calculations used in valuing the inventory
located there, but concluded that a more complete analysis, including an
examination of inventory valuation at our other locations, was necessary. The
review process also raised questions regarding the appropriateness of our
inventory costing methodology.
After the termination of our Chief Financial Officer in February 2002,
we briefly retained PricewaterhouseCoopers (PWC) as a consultant with regard to
the appropriateness of our inventory costing methodology, including specifically
the methodology used in allocating fixed manufacturing expenses to inventory and
cost of sales. PWC was not engaged to, nor did they, reach a conclusion or
render any type of opinion regarding this matter. Additionally, because of PWC's
limited role, they were not involved in our final resolution of this issue.
In February 2002, our Board formed a Special Committee consisting of
all of our outside directors as more fully discussed below under "Formation of
Special Committee of the Board of Directors." The Special Committee performed a
limited review of the appropriateness of our inventory valuation methodology,
including whether a misapplication of accounting principles would require a
restatement of previously reported financial statements. The Special Committee
retained independent counsel to assist in its investigation and, through its
independent counsel, retained RosenfarbWinters, LLC as special accounting
advisors to the Special Committee.
Initial Decision Not to Restate Financial Statements for Periods
Prior to December 31, 2001
In March 2002, management initially determined that the calculation of
capitalized overhead was in compliance with applicable accounting principles and
concluded that the increase in cost of sales and attendant reduction in
inventory value during the quarter ended December 31, 2001 was largely
attributable to changes in accounting estimates relating to the general
absorbtion of direct labor and overhead costs and therefore no restatement of
previously reported financial results was necessary. This determination was
based on management's belief that the calculation was appropriately capturing
direct labor and overhead costs. Robert DeWelt (who had been temporarily given
the title of "Acting CFO" after the termination of our former Chief Financial
Officer, Kirk Dischino) and Edward McCausland, our Controller, resigned in
disagreement with management's conclusion not to restate prior period financial
statements.
We subsequently retained Amper, Politziner and Mattia, PC (APM) in
April 2002 to assist and work under the direction of management in our analysis
and quantification of inventory calculations and to consult as to whether or not
any errors in the application of accounting principles or in the preparation of
our financial statements required restatement of previously reported financial
statements.
13
In May 2002, management again determined that the calculation of
capitalized overhead was in compliance with applicable accounting principles
and concluded that the increase in cost of sales and attendant reduction in
inventory value during the quarter ended December 31, 2001 was largely
attributable to changes in accounting estimates and therefore no restatement
of previously reported financial results was necessary. Our Board of Directors
concurred in the decision not to restate prior periods. In its limited review,
the Special Committee concluded that no information had been brought to its
attention that would render management's decision inappropriate. APM,
RosenfarbWinters, and our independent auditors, Arthur Andersen, LLP, concurred
in this conclusion. PWC's engagement ended prior to the completion of our
analysis and the Board's determination.
Decision to Restate
On June 11, 2002, we retained Grant Thornton LLP to replace Arthur
Andersen LLP as our independent auditor. We appointed a new Chief Executive
Officer in June 2002 and appointed a new Chief Financial Officer in July 2002.
Based upon the advice of our new auditor and after consultation with the United
States Securities and Exchange Commission, our new senior management team
determined that it was necessary to conduct a thorough re-examination of our
historical determination of inventory values and costs of goods sold. Beginning
in July 2002, we concurred with our auditor's recommendation to expand the scope
of their audit work to include an extended analysis of our inventory valuation
calculations. As part of our auditor's procedures, they obtained detailed
operating and production data for our operating units, validated the underlying
data and applied the resulting data to assist new senior management in the
accurate determination of inventories valued at the lower of cost or estimated
market value. As a result of these procedures, our auditors discovered a number
of errors in our inventory valuation calculations. Each of the Company's
business units experienced various types of calculation and application errors.
These errors varied by quarter, type and cause. The errors and causes thereof
are included in the following general categories:
- Failure to analyze and account for standard cost variances properly and on
a timely basis;
- Failure to use readily available accounting and costing records to
determine manufacturing costs;
- Inclusion of inappropriate expenses in inventory cost pools;
- Apparent mathematical errors (including amounts used in calculations that
could not be reconciled to our underlying accounting records);
- Failure to adjust inventories to the lower of cost or market; and
- Use of inconsistent parameters to determine cost pools that relate to
inventory at each reporting period.
We have determined that these errors in our valuation of inventory were
of a sufficient magnitude to require restatement. Accordingly, we have restated
our previously issued financial statements for the fiscal year ended March 31,
2001 and our previously issued selected financial information for each of the
quarterly periods in the fiscal year ended March 31, 2001 and the first three
quarters in the fiscal year ended March 31, 2002. See Notes 3 and 19 to our
consolidated financial statements that accompany this Annual Report on Form 10-K
for further discussion regarding the restatement. The effect of the restatement
was an increase in cost of goods sold of $8.2 million for the fiscal year ended
March 31, 2001. During the course of our review, we did not identify errors of a
significant magnitude to require restatement of periods ending prior to April 1,
2000.
In connection with the restatement of our inventory and cost of sales
values and due in part to the cessation of operations of Arthur Andersen LLP,
the previous auditors of our financial statements for the fiscal year ended
March 31, 2001, we instructed our current auditors to conduct a reaudit of
14
our financial statements for the fiscal year ended March 31, 2001. The reaudit
resulted in the following additional adjustments:
- Reclassification of certain promotional costs from selling, general
and administrative to a reduction in revenue of $1.0 million;
- Acceleration of amortization of deferred financing costs relating to
our bank loan in the amount of $0.7 million;
- Expensing of unallocated acquisition costs of $0.4 million;
- Straight-lining of lease expense in accordance with SFAS 13 in the
amount of $0.2 million; and
- Certain other adjustments.
As a result of the restated items described above, including the
inventory valuation issue, we recomputed our tax provision, resulting in a
reduction of our previously reported tax provision by $1.8 million.
We also identified certain errors within the quarterly results
previously reported for each of the quarters in the fiscal year ended March 31,
2001. These errors were corrected and are included in the summary of quarterly
financial information contained in Note 19 to the consolidated financial
statements included in this Annual Report on Form 10-K.
Summary of Effects of Restatement. The following is a summary
of the significant effects of the restatement discussed above:
FISCAL YEAR ENDED
MARCH 31, 2001
AS
PREVIOUSLY AS
REPORTED RESTATED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated statements of operations data:
Sales $ 103,095 $ 101,975
Cost of goods sold 58,782 66,938
--------- ---------
Gross Profit 44,313 35,037
Selling, general and administrative expenses 29,232 29,541
Income before provision
for income taxes 11,790 2,205
Provision for income taxes 2,829 1,008
Net income 8,961 1,197
Earnings per common share
Basic $ 1.10 $ 0.15
Diluted 0.99 0.13
Consolidated balance sheet data:
Accounts receivable, net $ 14,935 $ 14,902
Inventories 31,868 24,362
Deferred income taxes, current 2,180 2,129
Goodwill 12,606 11,412
15
Other assets 3,894 3,820
Accrued compensation 2,579 2,529
Accrued expenses and other current liabilities 6,221 4,999
Other liabilities 1,003 1,181
Accumulated retained earnings 16,225 8,461
Stockholders' equity 25,481 17,717
As a result of this restatement, you should not rely on our previously
issued financial statements for the fiscal year ended March 31, 2001 and our
previously issued financial results for each of the quarterly periods in the
fiscal year ended March 31, 2001 and the first three quarters in the fiscal year
ended March 31, 2002. See "Results of Operations - Special Note Regarding
Restatement of Our Previously Issued Financial Statements."
See Note 19 to the consolidated financial statements, Quarterly
Financial Information (Unaudited), for selected restated quarterly information
for the quarterly periods in the fiscal year ended March 31, 2001 and the first
three quarters in the fiscal year ended March 31, 2002.
See "Item 14. Controls and Procedures" for a discussion of the actions
that we have taken to strengthen our internal controls.
Our Restructuring Program
As a result of significant losses for the last four quarters in the
fiscal year ended March 31, 2002 and for the quarter ended June 30, 2002 and our
inability to make required payments under our loan agreement, we have
implemented a restructuring program with the aim of reducing costs, streamlining
operations and generating cash to repay our lenders. The actions we have taken
in connection with this restructuring program include the following:
- Liquidation of our UK Subsidiary. We have 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, as we were no longer in a position to support
its losses. The receiver's function was to dispose of Schaevitz UK's business
and assets for the best price possible. The book debt recoveries and sale
proceeds were applied in settlement of the receiver's remuneration, costs and
expenses, the preferential creditors' claims (i.e., the claims of the Inland
Revenue, Customs & Excise and employee claims up to certain statutory limits)
and then to (i) the claims by our lenders in accordance with the U.K. insolvency
legislation (the Insolvency Act 1986), and (ii) priority arrangements. The
landlord has a potential dilapidations claim of up to Pounds Sterling 350,000
(approximately $549,000 United States dollars based on market exchange rates as
of October 8, 2002) 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. Measurement Specialties is responsible for this claim as a result of
our guarantee of Schaevitz UK's obligations under the lease. We are currently in
negotiations with the landlord regarding this matter. As of March 31, 2002, we
have recorded an impairment charge with respect to the Schaevitz UK long-term
assets. During the quarter ended June 30, 2002, we incurred approximately $3.6
million of costs and expenses in connection with the liquidation of Schaevitz
UK.
With the divestiture of Schaevitz UK in June 2002, the strain gauge
based products and force balanced accelerometers which were part of this
operation will no longer be manufactured by us, although we continue to supply
strain gauge subassemblies to Polaron (who acquired a portion of the assets of
Schaevitz UK), and we continue to distribute products incorporating these
technologies.
16
- Reduction of work force. As of March 31, 2002, excluding the effects
of Terraillon and Schaevitz UK, we have reduced our workforce by 138 employees
as compared to our workforce as of June 30, 2001. Additionally, as of September
30, 2002, we have reduced our workforce by an additional 49 employees as
compared to our workforce as of March 31, 2002. We expect this workforce
reduction to result in a cost savings of approximately $5.0 million for the
fiscal year ending March 31, 2003.
- Sale of IC Sensors wafer fab. 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. The price paid by SMI for the assets
was approximately $5.25 million, consisting of approximately $3.37 million in
cash and $1.88 million in prepaid credit for products and services, subject to
reduction under certain circumstances. Approximately, $1.0 million of the cash
purchase price was used to satisfy an outstanding equipment lease obligation.
The prepaid credit for products and services, if utilized, will be accounted as
a component of our wafer costs. The estimated gain on this sale is approximately
$0.15 million, net of tax.
IC Sensors continues to design and sell all, and manufacture most, of
its current product lines, 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. As part of this
transaction, we entered into a long-term supply agreement for the purchase of
wafers from SMI. In July 2002, SMI assumed the lease of our Milpitas, CA
facility in connection with this sale. SMI's assumption of this lease and
related operating expenses has resulted in an annualized cost savings to us of
over $3.0 million. We have entered into a lease for an approximately 4,800
square foot property in San Jose, CA for our IC Sensors sales, research and
development, manufacturing, and engineering personnel.
IC Sensors generated approximately $1.0 million in customer funded
research and development in the fiscal year ended March 31, 2002. As a result of
the sale of the ICS wafer fab, we will not receive these amounts during the
fiscal year ending March 31, 2003 and expect customer funded research and
development to decrease.
- Shutdown of Valley Forge operations. The operations of the Valley
Forge, PA facility will be consolidated into the Hampton, VA and Shenzhen, China
facilities. The lease term for the Valley Forge, PA facility, originally assumed
as part of the purchase of PiezoSensors from AMP, Inc. in 1998, expires January
30, 2003 and will not be renewed. As a result of this action, 10 full-time
positions will be eliminated. We expect PiezoSensors to continue to design,
manufacture, and sell all of its current product lines. The shutdown of our
Valley Forge operations has resulted in an annualized cost savings to us of
approximately $0.9 million. We entered into a lease for an approximately 2,500
square foot property in Wayne, PA for our sales personnel formerly located at
our Valley Forge facility.
- Sale of Terraillon. In September 2002, we sold all of the outstanding
stock of Terraillon Holdings Limited, a European manufacturer of branded
consumer bathroom and kitchen scales, to Fukuda (Luxembourg) S.a.r.l., an
investment holding company incorporated in Luxembourg, for $22.3 million.
Approximately $2.3 million of the purchase price will be held in escrow until
January 24, 2003 to secure payment of certain purchase price adjustments, if
any, or any right of Fukuda to set off as a result of breaches of our
representations and warranties in the stock purchase agreement. Fukuda also
assumed approximately $4.8 million in debt in connection with the acquisition
of Terraillon. The estimated gain on this sale is approximately $1.5 million,
net of tax.
17
We acquired Terraillon in August 2001 for $17.5 million; including
$10.3 million in cash, the issuance of 503,692 in shares of our restricted
common stock valued at $6.8 million and closing costs of $0.3 million. We also
assumed approximately $4.0 million in debt in connection with this acquisition.
As a result of the sale of Terraillon, we no longer have operations in
France or Ireland. Moreover, as a result of the sale of Terraillon and the
liquidation of Schaevitz UK, we no longer have operations in Europe. We expect
to continue to sell products in Europe through our distributors, but at much
lower levels.
- Examination of fund raising alternatives. In connection with the
restructuring effort, we are examining ways to raise additional funds. We are
currently in negotiations with an asset based lender regarding the refinancing
of our bank debt. In addition to pursuing asset based financing, we are
examining other alternatives, including, without limitation, the private sale of
our common stock and sales of other portions of our business or product lines.
Formation of Special Committee of the Board of Directors
In February 2002, our Board formed a Special Committee consisting of
all of our outside directors to (i) investigate the conduct of the former Chief
Financial Officer in connection with the defaults under the credit agreement and
any related matters, (ii) perform a limited review of the appropriateness of our
inventory valuation methodology, including whether a misapplication of
accounting principles would require a restatement of previously reported
financial statements, and (iii) consider sales of our common stock made by
senior management in December 2001. The Special Committee retained independent
counsel to assist in its investigation and, through its independent counsel,
retained RosenfarbWinters, LLC as special accounting advisors to the Special
Committee. The Board also directed company counsel to advise the Division of
Enforcement of the Securities and Exchange Commission of these matters and has
been cooperating with the resulting inquiry. The Special Committee directed its
counsel to cooperate with the Division.
The Special Committee concluded that our former Chief Financial Officer
made the misrepresentation to senior management, the Board and our auditors that
a waiver of our covenant default under our credit agreement had been obtained
when the lenders had, in fact, refused to grant such a waiver. Accordingly, the
former Chief Financial Officer was terminated.
In its limited review, the Special Committee concluded that no
information had been brought to its attention that would render management's
decision not to restate financial statements prior to December 31, 2001
inappropriate. As noted in "Recent Developments - Restatement," however, our
recent examination of these calculations did, in part, result in the restatement
of previously issued financial statements.
The Special Committee examined year-end sales of common stock made by
our former Chief Financial Officer and our former Chief Executive Officer. As
the result of its examination, the Special Committee recommended, and the Board
adopted, more formal and stringent standards applicable to purchases and sales
of our stock by our directors, officers and employees.
SEC Investigation/Class Action Lawsuits
In June 2002, the staff of the Division of Enforcement of the SEC
informed Measurement Specialties that it is conducting a formal investigation
relating to matters reported in our quarterly report on Form 10-Q for the
quarter ended December 31, 2001. We cannot predict how long the SEC
investigation will continue or its outcome.
18
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 Measurement Specialties 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 and our
former auditors. The lawsuit alleges violations of the federal securities laws
including, among other things, that the registration statement related to our
August 2001 public offering and our periodic SEC filings misrepresented or
omitted material facts and that certain of the our officers made false or
misleading statements of material fact. The lawsuit seeks an unspecified award
of money damages. After March 20, 2002, nine additional similar class actions
were filed in the same court. The ten lawsuits have been consolidated into one
case under the caption In re: Measurement Specialties, Inc. Securities
Litigation, 02 Civ. No. 1071 (D.N.J.).
The SEC investigation and the class action lawsuit are discussed more
fully below under "Item 3. Legal Proceedings."
Management and Board Changes
On January 11, 2002, Morton Topfer accepted his appointment to our
Board of Directors. Mr. Topfer was appointed Vice Chairman of our Board of
Directors in June 2002.
On January 30, 2002, David Morton resigned from our Board of Directors.
On February 15, 2002, the employment of Kirk Dischino, our former Chief
Financial Officer, was terminated.
On February 21, 2002, Theodore Coburn resigned from our Board of
Directors.
On March 26, 2002, Robert DeWelt, our acting Chief Financial Officer
and General Manager of our Schaevitz Division, resigned. See "Recent
Developments - Restatement" for a discussion of Mr. DeWelt's resignation.
In May 2002, we engaged Corporate Revitalization Partners ("CRP") to
conduct our ongoing operational/financial restructuring efforts. CRP has focused
on the development and execution of our restructuring program.
In June 2002, Frank Guidone of CRP was appointed Chief Executive
Officer. Joseph R. Mallon, Jr., our former Chief Executive Officer, continues to
be Chairman of our Board of Directors.
In June 2002, Damon Germanton, the former president and chief operating
officer of our company, was appointed Managing Director of our Asian Operations.
In June 2002, Vic Chatigny was appointed a Vice President of our
company and General Manager of our Sensors division.
In June 2002, Mark Cappiello, a Vice President of our company, was
appointed General Manager of our Consumer Products division.
19
In July 2002, John P. Hopkins was appointed Chief Financial Officer.
20
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, including statements relating to
our continued operation, our ability to raise additional funds, our ability to
successfully implement our restructuring program, our ability to consummate
future asset or stock sales, negotiations with our lenders and continued
compliance with our forbearance agreement, 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:
- Our ability to complete our ongoing restructuring program;
- Conditions in the general economy and in the markets served by us;
- Competitive factors, such as price pressures and the potential emergence
of rival technologies;
- Interruptions of suppliers' operations or the refusal of our suppliers to
provide us with component materials;
- Timely development and market acceptance, and warranty performance of new
products;
- Changes in product mix, costs, yields and fluctuations in foreign currency
exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the United States consumer products market;
- The possible de-listing of our common stock from the American Stock
Exchange;
- The numerous class action lawsuits filed against us and the pending SEC
investigation;
- Our ability to raise additional funds;
- Our ability to comply with the provisions of the forbearance agreement
with our lenders; and
- The risk factors contained herein along with those listed from time to
time in our SEC reports.
This list is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the filing of this Form 10-K, whether as a result of new information, future
events, changes in assumptions, or otherwise.
RISK FACTORS
RISKS RELATED TO OUR COMPANY
An investment in our common stock is speculative in nature and involves
a high degree of risk. No investment in our common stock should be made by any
person who is not in a position to lose the entire amount of such investment.
21
In addition to being subject to the risks described elsewhere in this
Form 10-K, including those risks described below under "Liquidity and Capital
Resources," an investment in our common stock is subject to the following risks
and uncertainties:
IF WE DO NOT RAISE ADDITIONAL FUNDS, WE WILL LIKELY BE UNABLE TO
CONTINUE OPERATIONS OR WE WILL BE COMPELLED TO RESTRUCTURE OUR OBLIGATIONS IN A
BANKRUPTCY PROCEEDING UNDER TITLE 11 OF THE UNITED STATES CODE. OUR AUDITORS
HAVE EXPRESSED UNCERTAINTY REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Under the forbearance agreement with our lenders, we are obligated to
repay the entire amount outstanding under our term loan and line of credit
(approximately $9.2 million as of October 8, 2002) on or before November 1,
2002. We may also incur significant liabilities as a result of the several class
action lawsuits and the SEC investigation more fully described in "Item 3- Legal
Proceedings." We currently do not have sufficient funds to meet these future and
potential obligations. In an effort to obtain additional funds, we are currently
in negotiations with an asset based lender regarding the refinancing of our bank
debt. In addition to pursuing asset based financing, we are exploring the sale
of additional assets or the sale of equity securities. No assurance, however,
can be given that we will be able to refinance our debt, or successfully sell
assets or stock, or, even if such transactions are possible, that they will be
on terms reasonable to us, that they will enable us to continue to satisfy our
cash requirements, or that such actions will be permitted under our credit
agreement. Additionally, any sale of securities will dilute existing
shareholders and may be at prices that are substantially lower than current
market prices. If we do not obtain additional funds, we will likely be unable to
continue operations, or we will be compelled to restructure our obligations in a
bankruptcy proceeding under Title 11 of the United States Code.
As a result of our losses and the matters described in the preceding
paragraph, the Report of Independent Certified Public Accountants on our
consolidated financial statements includes a paragraph indicating that these
factors raise substantial doubt about our ability to continue as a going
concern. The financial statements that accompany this report do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.
WE HAVE INCURRED SIGNIFICANT LOSSES AND ANTICIPATE LOSSES FOR THE NEXT SEVERAL
QUARTERS.
We incurred a net loss of approximately $29.0 million for the fiscal
year ended March 31, 2002. We anticipate incurring additional losses for the
next several quarters. There can be no assurance that we will be able to operate
profitably in the future.
IF OUR COMMON STOCK IS DELISTED FROM TRADING ON THE AMERICAN STOCK EXCHANGE, OUR
SHAREHOLDERS MAY FIND IT MORE DIFFICULT TO DISPOSE OF OUR COMMON STOCK AND
OBTAIN ACCURATE PRICING INFORMATION FOR OUR COMMON STOCK.
As a result of our failure to timely file this Annual Report on Form
10-K for the fiscal year ended March 31, 2002, the trading of our common stock
on the American Stock Exchange (AMEX) has been suspended since July 15, 2002. On
August 21, 2002, we received a letter from the AMEX indicating that we no longer
comply with AMEX listing guidelines due to our failure to furnish certain
reports and information to shareholders and that our securities are, therefore,
subject to being delisted from the AMEX. We have appealed this determination.
There can be
22
no assurance that our request for continued listing will be granted or that we
will be able to comply with AMEX listing requirements in the future. In the
event that our common stock becomes ineligible for trading on the AMEX, it will
be more difficult to dispose of our common stock and to obtain accurate pricing
information for our common stock.
IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, WE MAY NOT
BE ABLE TO MEET THE NEEDS OF OUR CUSTOMERS AND OUR NET SALES MAY DECLINE.
Our success depends upon our ability to develop and introduce new
sensor products, sensor-based consumer products, and product line extensions. If
we are unable to develop or acquire new products in a timely manner, our net
sales will suffer. The development of our new products involves highly complex
processes, and at times we have experienced delays in the introduction of new
products. Since many of our sensor products are designed for specific
applications, we must frequently develop new products jointly with our
customers. We are dependent on the ability of our customers to successfully
develop, manufacture, and market products that include our sensors. Successful
product development and introduction of new products depends on a number of
factors, including the following:
- accurate product specification;
- timely completion of design;
- achievement of manufacturing yields;
- timely and cost-effective production; and
- effective marketing.
WE HAVE SUBSTANTIAL NET SALES AND OPERATIONS OUTSIDE OF THE UNITED STATES,
INCLUDING SIGNIFICANT OPERATIONS IN CHINA, THAT EXPOSE US TO INTERNATIONAL
RISKS.
Our international operations accounted for approximately 47.4% of our
net sales in the fiscal year ended March 31, 2002 and 35.2% of our net sales in
the fiscal year ended March 31, 2001. At March 31, 2002, our foreign
subsidiaries' total assets aggregated $53.1 million, of which $5.4 million was
in the United Kingdom, an aggregate of $28.0 million was in France and Ireland,
$5.2 million was in Hong Kong and $14.5 million was in China. At March 31, 2001,
our foreign subsidiaries' total assets aggregated $24.9 million, of which $9.8
million was in the United Kingdom, $4.8 million was in Hong Kong and $10.4
million was in China. We are subject to the risks of foreign currency
transaction and translation losses which might result from fluctuations in the
values of the Hong Kong dollar and the Chinese renminbi. At March 31, 2002, we
had net liabilities of $3.7 million subject to fluctuations in the value of the
Hong Kong dollar and net assets of $10.9 million subject to fluctuations in the
value of the Chinese renminbi, and net assets of $17.5 million subject to
fluctuations in the value of the Euro. Our foreign subsidiaries' operations
reflect intercompany transfers of costs and expenses, including interest on
intercompany trade receivables, at amounts established by us.
We manufacture or source nearly all of our sensor-based consumer
products and the majority of our sensors in China. Our China subsidiary is
subject to certain government regulations, including currency exchange controls,
which limit the subsidiary's ability to pay cash dividends or lend funds to us.
The inability to operate in China or the imposition of significant restrictions,
taxes, or tariffs on our operations in China would impair our ability to
manufacture products in a cost-effective manner and could significantly reduce
our profitability.
23
Risks specific to our international operations include:
- political conflict and instability in the relationships among
Hong Kong, Taiwan, China, and the United States, and in our
target international markets;
- political instability and economic turbulence in Asian
markets;
- changes in United States and foreign regulatory requirements
resulting in burdensome controls, tariffs, and import and
export restrictions;
- difficulties in staffing and managing international
operations;
- changes in foreign currency exchange rates, which could make
our products more expensive as stated in local currency, as
compared to competitive products priced in the local currency;
- enforceability of contracts and other rights or collectability
of accounts receivable in foreign countries due to distance
and different legal systems; and
- delays or cancellation of production and delivery of our
products due to the logistics of international shipping, which
could damage our relationships with our customers.
COMPETITION IN THE MARKETS WE SERVE IS INTENSE AND COULD REDUCE OUR NET SALES
AND HARM OUR BUSINESS.
Both our Sensor business and Consumer Products business are
characterized by highly fragmented markets and high levels of competition.
Competitors in our Consumer Products business include some customers for whom we
manufacture products. We cannot assure you that our original equipment
manufacturer customers, who are also competitors, will not develop their own
production capability or locate alternative sources of supply, and discontinue
purchasing products from us. Some of our competitors and potential competitors
may have a number of significant advantages over us, including:
- greater financial, technical, marketing, and manufacturing
resources;
- preferred vendor status with our existing and potential
customer base;
- more extensive distribution channels and a broader geographic
scope;
- larger customer bases; and
- a faster response time to new or emerging technologies and
changes in customer requirements.
A SUBSTANTIAL PORTION OF OUR NET SALES IS GENERATED BY A SMALL NUMBER OF LARGE
CUSTOMERS. IF ANY OF THESE CUSTOMERS REDUCES OR POSTPONES ORDERS, OUR NET SALES
AND EARNINGS WILL SUFFER.
Historically, a relatively small number of customers have accounted for
a significant portion of our net sales. For the fiscal year ended March 31,
2002, the five largest customers of our Consumer Products business represented
19.7% of net sales for that business and 11.4% of total net sales, and the five
largest customers of our Sensor business represented 20.9% of net sales for that
business and 8.8% of total net sales. Because we have no long-term volume
purchase commitments from any of our significant customers, we cannot be certain
that our current order volume can be sustained or increased. The loss of or
decrease in orders from any major customer could significantly reduce our net
sales and profitability.
24
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO DELIVER KEY COMPONENTS AND
FINISHED PRODUCTS WHICH MAY AFFECT OUR ABILITY TO MEET THE NEEDS OF OUR
CUSTOMERS, RESULTING IN THE LOSS OF SALES AND CUSTOMERS.
We rely on contract manufacturers for a significant portion of our
consumer finished products. Our principal supplier is located in China and
assembles the majority of our consumer products, using proprietary subassemblies
provided by us and other components purchased from third parties. We procure
components and finished products, as needed, through purchase orders. We do not
have a guaranteed level of production capacity or any long-term contracts with
any of our suppliers, who could choose to allocate production capacity toward
their other customers. If delivery delays or supply shortages of certain key
components develop, we may experience an interruption in production or we may be
forced to adjust our product designs and production schedules until we locate
alternative sources of supply. If we lose one or more of our sources of supply
and/or assembly, and we are not able to replace that source in a timely manner,
we may be unable to meet the needs of our customers, resulting in a loss of net
sales and jeopardizing our customer relationships.
OUR EXCLUSIVE ARRANGEMENTS WITH SOME CUSTOMERS MAY RESTRICT OUR ABILITY TO
PURSUE MARKET OPPORTUNITIES AND MAY RESULT IN LOSS OF NET SALES.
We have granted some of our customers exclusivity on specific products,
which precludes us from selling those products to other potential customers. We
expect that in some cases our existing customers and new customers may require
us to give them exclusivity on certain products, which may force us to forego
opportunities to supply these products to other prospective customers. In
addition, if we enter into exclusive relationships with customers who are
unsuccessful, our net sales will be negatively affected.
WE DEPEND ON SALES REPRESENTATIVES FOR A SIGNIFICANT PORTION OF OUR NET SALES.
ANY LOSS OF SALES REPRESENTATIVES MAY REDUCE OUR NET SALES.
A significant portion of our net sales were made through independent,
third party sales representatives. We generally do not have long-term
arrangements with these sales representatives. While there are restrictions on
the ability of some of our sales representatives to sell competing products
during the period that they sell our products, we cannot assure you that a sales
representative would not stop selling our products and begin selling those of a
competitor. The loss of one or more significant sales representatives without
successfully replacing them would reduce our net sales and damage our customer
relationships.
OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO RETAIN THEM.
Our success will depend to a significant extent on the continued
service of our executive officers and other key employees, including key sales,
technical, and marketing personnel. If we lose the services of one or more of
our executives or key employees, our business and ability to implement our
business objectives successfully could be harmed, particularly if one or more of
our executives or key employees decided to join a competitor or otherwise
compete directly or indirectly with us. We do not have key person life insurance
on, or non-compete agreements with, any of our executives.
FOREIGN EXCHANGE FLUCTUATIONS COULD LOWER OUR RESULTS OF OPERATIONS.
25
The majority of our net sales are priced in United States dollars. Our
costs and expenses are priced in United States dollars, Chinese renminbi and
Hong Kong dollars. A strengthening in the United States dollar relative to the
currencies of those countries where we do business would increase the prices of
our products as stated in those currencies and hurt our sales in those
countries. If we lower our prices to reflect a change in exchange rates, our
profitability in those markets will decrease. We have not historically tried to
reduce our exposure to exchange rate fluctuations by using hedging transactions.
However, we may choose to do so in the future. We may not be able to do so
successfully. Accordingly, we may experience economic loss and a negative impact
on our earnings as a result of foreign currency exchange rate fluctuations.
OUR TRANSFER PRICING PROCEDURES MAY BE CHALLENGED, WHICH MAY SUBJECT US TO
HIGHER TAXES AND ADVERSELY AFFECT OUR EARNINGS.
Transfer pricing refers to the prices that one member of a group of
related companies charges to another member of the group for goods, services, or
the use of intellectual property. If two or more affiliated companies are
located in different countries, the laws or regulations of each country
generally will require that transfer prices be the same as those charged by
unrelated companies dealing with each other at arm's length. If one or more of
the countries in which our affiliated companies are located believes that
transfer prices were manipulated by our affiliate companies in a way that
distorts the true taxable income of the companies, the laws of countries where
our affiliated companies are located could require us to redetermine transfer
prices and thereby reallocate the income of our affiliate companies in order to
reflect these transfer prices. Any reallocation of income from one of our
companies in a lower tax jurisdiction to an affiliated company in a higher tax
jurisdiction would result in a higher overall tax liability to us. Moreover, if
the country from which the income is being reallocated does not agree to the
reallocation, the same income could be subject to taxation by both countries.
We have adopted transfer pricing agreements with our subsidiaries
located in the United States, Hong Kong and China to regulate intercompany
transfers. A transfer pricing agreement is a contract for the transfer of goods,
services, or intellectual property from one company to a related company that
sets forth the prices that the related parties believe are arm's length. We have
entered into these types of agreements due to the fact that some of our assets,
such as intellectual property developed in the United States, are transferred
among our affiliated companies. In such agreements, we have determined transfer
prices that we believe are the same as the prices that would be charged by
unrelated parties dealing with each other at arm's length. If the United States
Internal Revenue Service or the taxing authorities of any other jurisdiction
were to successfully challenge these agreements or require changes to our
transfer pricing practices, we could become subject to higher taxes and our
earnings would be adversely affected. We believe that we operate in compliance
with all applicable transfer pricing laws in these jurisdictions. However, there
can be no assurance that we will continue to be found to be operating in
compliance with transfer pricing laws, or that such laws will not be modified,
which, as a result, may require changes to our transfer pricing practices or
operating procedures. Any determination of income reallocation or modification
of transfer pricing laws can result in an income tax assessment of the portion
of income deemed to be derived from the United States or other taxing
jurisdiction.
DEFECTS IN OUR PRODUCTS COULD IMPAIR OUR ABILITY TO SELL OUR PRODUCTS OR COULD
RESULT IN LITIGATION AND OTHER SIGNIFICANT COSTS.
26
Detection of any significant defects in our products may result in,
among other things, delay in time-to-market, loss of market acceptance and sales
of our products, diversion of development resources, injury to our reputation,
or increased warranty costs. Because our products are complex, they may contain
defects that cannot be detected prior to shipment. These defects could harm our
reputation, which could result in significant costs to us and could impair our
ability to sell our products. The costs we may incur in correcting any product
defects may be substantial and could decrease our profit margins. Since our
products are used in applications that are integral to our customers'
businesses, errors, defects, or other performance problems could result in
financial or other damages to our customers. Product liability litigation, even
if it were unsuccessful, would be time consuming and costly to defend. Our
product liability insurance may not be adequate to cover claims.
RISKS RELATED TO OUR INDUSTRY
WE TYPICALLY HAVE FIXED-PRICE CONTRACTS WITH OUR CUSTOMERS AND ANY COST OVERRUNS
WILL ADVERSELY AFFECT PROFITABILITY.
Our customers set demanding specifications for product performance,
reliability, and cost. Most of our customer contracts include a predetermined
fixed price for the products we make, regardless of the costs we incur. We may
make pricing commitments to our customers based on our expectation that we will
achieve more cost effective product designs and automate more of our
manufacturing operations. The manufacture of our products requires a complex
integration of demanding processes involving unique technical skill sets. We
face risks of cost overruns or order cancellations if we fail to achieve
forecasted product design and manufacturing efficiencies or if products cost
more to produce than expected. The expense of producing products can rise due to
increased cost of materials, components, labor, capital equipment, or other
factors. We may have cost overruns or problems with the performance or
reliability of our products in the future.
OUR SALES THROUGH RETAIL MERCHANTS RESULT IN SEASONALITY AND SUSCEPTIBILITY TO A
DOWNTURN IN THE RETAIL ECONOMY.
Historically, a significant portion of our net sales have been sales of
consumer products to retail merchants such as Sears, Sam's Club, and Bed Bath &
Beyond. In addition, many of our other customers, such as Sunbeam, sell to
retail merchants. Accordingly, these portions of our customer base are
susceptible to a downturn in the retail economy. Our sales of consumer products
are seasonal, with highest sales during the second and third fiscal quarters. A
significant portion of our sales are attributable to the promotional programs of
our retail industry customers. These promotional programs result in significant
orders by customers who do not carry our products on a regular basis.
Promotional programs often involve special pricing terms or require us to spend
funds to have our products promoted. We cannot assure you that promotional
purchases by our retail industry customers will be repeated regularly, or at
all. Our promotional sales could cause our quarterly results to vary
significantly. Occasionally, our sales to retail merchants are made with a
provision allowing them to return unsold or returned products. Although we
record an estimate of the impact of the expected returns at the time of sale,
substantial returns in excess of estimated amounts from these customers could
harm our sales and results of operations.
CUSTOMER ORDER ESTIMATES MAY NOT BE INDICATIVE OF ACTUAL FUTURE SALES.
27
Some of our customers have provided us with forecasts of their
requirements for our products over a period of time. We make many management
decisions based on these customer estimates, including purchasing materials,
hiring personnel, and other matters that may increase our production capacity
and costs. If a customer reduces its orders from prior estimates after we have
increased our production capabilities and costs, this reduction may decrease our
net sales and we may not be able to reduce our costs to account for this
reduction in customer orders. Many customers do not provide us with forecasts of
their requirements for our products. If those customers place significant
orders, we may not be able to increase our production quickly enough to fulfill
the customers' orders. The inability to fulfill customer orders could damage our
relationships with customers and reduce our net sales.
PRESSURE BY OUR CUSTOMERS TO REDUCE PRICES AND AGREE TO LONG-TERM SUPPLY
ARRANGEMENTS MAY CAUSE OUR NET SALES OR PROFIT MARGINS TO DECLINE.
Our customers are under pressure to reduce prices of their products.
Therefore, we expect to experience pressure from our customers to reduce the
prices of our products. Our customers frequently negotiate supply arrangements
with us well in advance of delivery dates, thereby requiring us to commit to
price reductions before we can determine if we can achieve the assumed cost
reductions. We believe we must reduce our manufacturing costs and obtain larger
orders to offset declining average sales prices. If we are unable to offset
declining average sales prices, our gross profit margins will decline.
RAPID TECHNOLOGICAL CHANGE MAY MAKE OUR PRODUCTS OBSOLETE, RESULTING IN LOSS OF
SALES.
Technology changes rapidly in the markets we serve. Our success depends
on our ability to anticipate these changes, enhance our existing products, and
develop new products to meet customer requirements and achieve market
acceptance. We may not be able to respond correctly or soon enough. If we fail
in these efforts, our products will become obsolete, which will reduce our net
sales. We may also be required to write off inventory, tooling, or other assets
associated with obsolete products.
OUR INTELLECTUAL PROPERTY MAY NOT BE ADEQUATE TO PROTECT OUR BUSINESS.
We rely on our patent and trade secret rights to protect our
proprietary technology. Our patents may not provide us with meaningful
protection from competitors, including those who may pursue patents that may
block our use of our proprietary technology. In addition, we rely upon
unpatented trade secrets and seek to protect them, in part, through
confidentiality agreements with employees, consultants, customers, and potential
customers. If these agreements are breached, or if our trade secrets become
known to or are independently developed by competitors, we may not have adequate
remedies. If a competitor's products infringe upon our patents, we may sue to
enforce our rights in an infringement action. These suits may be costly and
could divert funds, management, and technical resources from our operations.
Currently, a significant portion of our net sales is derived from sales
in foreign countries. The laws of some foreign countries do not protect our
proprietary rights to as great an extent as do the laws of the United States.
Many United States companies have encountered substantial problems in protecting
their proprietary rights against infringement in foreign countries, including
some countries in which we sell products. Our means of protecting our
proprietary rights may not be adequate in these countries. For example, our
competitors in these countries may independently develop similar technology or
duplicate our systems. If we fail to protect our
28
intellectual property adequately in these countries, it would be easier for our
competitors to sell competing products in these countries.
SUCCESSFUL INFRINGEMENT CLAIMS BY THIRD PARTIES COULD RESULT IN SUBSTANTIAL
DAMAGES, LOST PRODUCT SALES, AND THE LOSS OF IMPORTANT PROPRIETARY RIGHTS.
There has been substantial litigation regarding patent and other
intellectual property in various high technology industries. In the future, we
may be notified of allegations that we may be infringing on intellectual
property rights possessed by others. Even if we are ultimately successful in our
defense, any litigation of this type could result in substantial costs and
diversion of time and effort by our management team. Other risks of infringement
claims include:
- the loss of certain proprietary rights;
- significant liabilities, including treble damages in some instances;
- the need to seek licenses from third parties, which may not be available
on reasonable terms, if at all; and
- barriers to product manufacturing.
Any of these outcomes could materially harm our business.
OUR RESULTS OF OPERATIONS AND REPUTATION COULD BE HARMED BY ENVIRONMENTAL
REGULATION AND ASSOCIATED COSTS.
We are required to comply with foreign, federal, state, and local laws
and regulations regarding health and safety and the protection of the
environment, including those governing the storage, use, handling, discharge,
and disposal of hazardous substances in the ordinary course of our manufacturing
processes. We are required to obtain and comply with various permits under
current environmental laws and regulations, and new laws and regulations may
require us to obtain and comply with additional permits. We may be unable to
obtain or comply with, and could be subject to revocation of, permits necessary
to conduct our business.
Environmental laws and regulations may be enacted or interpreted to
impose environmental liability on us with respect to our facilities or
operations. Under various foreign, federal, state, and local laws and
regulations relating to the protection of the environment, an owner or operator
of real property may be held liable for the costs of investigation or
remediation of certain substances located at, or emanating from, the property.
These laws often impose liability without regard to fault for the presence of
such substances. The costs of investigation or remediation of such substances
may be substantial, and the presence of such substances may adversely affect the
ability to sell or lease the property or borrow using such property as
collateral. The presence of such substances may also expose the owner or
operator to liability resulting from any release of, or exposure to, such
substances, including toxic tort claims. Persons who arrange for the disposal or
treatment of certain substances may also be liable for the costs of
investigation and remediation of such substances at the disposal facility,
whether or not such facility is owned or operated by such person. Third parties
may also seek recovery from owners or operators of real properties for personal
injury associated with the release of certain substances. In connection with our
ownership and operation of our current and former facilities, we may be liable
for other investigation or remediation costs, as well as certain related costs,
including fines and penalties and injuries to persons and property. Further, we
cannot assure you that additional environmental matters will not arise in the
future at our sites where no problem is
29
currently known to us or at sites that we may acquire in the future. More
stringent environmental laws, as well as more vigorous enforcement policies or
discovery of previously unknown conditions requiring remediation, could have a
material adverse effect on our business, financial condition, and results of
operations.
30
Item 2. Properties
As of March 31, 2002, we leased all of our properties under operating
leases as follows:
LOCATION PRIMARY USE BUSINESS SQ. FT. LEASE EXPIRATION
--------------------------------------------------------------------------------------------------------------
Fairfield, NJ USA Corporate headquarters Consumer and 6,500 *November 30, 2002
Corporate
Headquarters
Valley Forge, PA Manufacturing, research and Sensor 63,000 January 30, 2003
USA development, sales and
marketing
Milpitas, CA USA Manufacturing, research and Sensor 34,000 December 2005
development, sales and
marketing
Slough, United Manufacturing and research Sensor 35,000 June 2002
Kingdom and development
Shenzhen, China Principal manufacturing Consumer and 134,000 Between February 2003
facility, research and Sensor and September 2004
development, warehousing,
and distribution
Hampton, Virginia Manufacturing, research and Sensor and 120,000 July 2011
USA development, sales and Consumer
marketing
Hong Kong, China Manufacturing support Consumer 2,000 February 2004
Chatou, France Sales and marketing Consumer 5,920 January 1, 2007
Kings Langley, Sales and marketing Consumer 1,070 August 31, 2003
England
*As of October 2002, we are in negotiations to obtain a lease for a
similar sized property in Fairfield, New Jersey.
Our sensor manufacturing facilities located in China and Virginia are
ISO 9001 certified. We believe that these premises are suitable and adequate for
our present operations.
See "Recent Developments - Our Restructuring Program" for a discussion
of the changes in our properties since March 31, 2002.
31
Item 3. Legal Proceedings
CLASS ACTION LAWSUITS
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 Measurement Specialties and certain of our
present and former officers and directors. The complaint was subsequently
amended to include the underwriters in our August 2001 public offering and our
former auditors. The lawsuit alleges violations of the federal securities laws
including, among other things, that the registration statement related to our
August 2001 public offering and our periodic SEC filings misrepresented or
omitted material facts and that certain of the our officers made false or
misleading statements of material fact. The lawsuit seeks an unspecified award
of money damages. After March 20, 2002, nine additional similar class actions
were filed in the same court. The ten lawsuits have been consolidated into one
case under the caption In re: Measurement Specialties, Inc. Securities
Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs filed a Consolidated Amended
Complaint on September 12, 2002. We must file a responsive pleading by November
11, 2002.
We are currently in the process of responding to the claims made in the
class action lawsuit. We intend to defend the foregoing lawsuit vigorously, but
cannot predict the outcome and are not currently able to evaluate the likelihood
of success or the range of potential loss, if any. However, if we were to lose
this lawsuit, judgment would likely have a material adverse effect on our
consolidated financial position, results of operations and cash flows. We have
Directors and Officers insurance policies that provide an aggregate coverage of
$10 million for the period during which the claims were filed, but cannot
evaluate at this time whether such coverage will be available or adequate to
cover losses, if any, arising out of this litigation.
SEC INVESTIGATION
In February 2002, we, at our own initiative, contacted the staff of the
SEC after discovering that our former Chief Financial Officer had made the
misrepresentation to senior management, the Board and our auditors that a waiver
of the covenant default under our credit agreement had been obtained when, in
fact, the lenders refused to grant such a waiver. Since February 2002,
Measurement Specialties and a Special Committee formed by our Board of Directors
have been cooperating with the staff of the SEC. In June 2002, the staff of the
Division of Enforcement of the SEC informed us that it is conducting a formal
investigation relating to matters reported in our quarterly report on Form 10-Q
for the quarter ended December 31, 2001. We cannot predict how long the SEC
investigation will continue or its outcome.
UNITED STATES ATTORNEY INQUIRY
We have also learned that the Office of the United States Attorney for
the District of New Jersey is conducting an inquiry into the matters that are
being investigated by the SEC. We cannot predict how long the United States
Attorney's inquiry will continue or its outcome.
OTHER LITIGATION
In re Service Merchandise Company, Inc. (Service Merchandise Company,
Inc. v. Measurement Specialties, Inc.), United States Bankruptcy Court for the
Middle District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro.
No. 301-0462A
32
We are currently the defendant in a lawsuit filed in March 2001 by
Service Merchandise Company, Inc. ("SMC") and its related debtors (collectively,
the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
The Bankruptcy Court entered a stay of the action in May 2001, which was lifted
in February 2002. Citing 11 U.S.C. Section547(b), the action alleges that we
received $645,342 from one or more of the Debtors during the ninety (90) day
period before the Debtors filed their bankruptcy petitions, that the transfers
were to our benefit, were for or on account of an antecedent debt owed by one or
more of the Debtors, made when one or more of the Debtors were insolvent, and
that the transfers allowed us to receive more than we would have received if the
cases were cases under Chapter 7 of the United States Bankruptcy Code. The
action seeks to disgorge the sum of $645,342 from us. It is not possible at this
time to predict the outcome of the litigation or estimate the extent of any
damages that could be awarded in the event that we are found liable to the
estates of SMC or the other Debtors.
Robert L. DeWelt v. Measurement Specialties, Inc. et al., United States
District Court, District of New Jersey, Civil Action No. 02-CV-3431.
On July 17, 2002, Robert DeWelt, our former acting Chief Financial
Officer and general manager of our Schaevitz Division, filed a lawsuit against
Measurement Specialties, Inc. and certain of our officers and directors. Mr.
DeWelt resigned on March 26, 2002 in disagreement with management's decision not
to restate certain of our financial statements. See "Recent Developments -
Restatement" for a discussion of Mr. DeWelt's resignation. The lawsuit alleges a
claim for constructive wrongful discharge and violations of the New Jersey
Conscientious Employee Protection Act. Mr. DeWelt seeks an unspecified amount of
compensatory and punitive damages. We have filed a Motion to Dismiss for which a
hearing is scheduled on November 12, 2002. At this point in the litigation, we
cannot predict its outcome.
Hibernia Litigation
On or about July 23, 2002, Hibernia Capital Partners I, ilp and
Hibernia Capital Partners II, ilp filed a lawsuit against Measurement
Specialties in the High Court of Dublin. The Plenary Summons states that
plaintiffs seek a declaration that the plaintiffs entered into the share
purchase agreement on June 7, 2001 for the sale of their shares in Terraillon
Holdings Limited to Measurement Specialties as a result of an operative
misrepresentation and misstatement. Plaintiffs further seek damages for
misrepresentation and/or breach of contract and/or breach of warranty and costs
of the proceedings. On August 9, 2002, we entered an Appearance, which is the
equivalent of the acceptance of service of process. On August 22, 2002,
plaintiffs filed a Statement of Claim, which is the equivalent of a complaint.
We are still engaged in the initial pleadings process wherein plaintiffs' claims
and our defenses will be set forth in detail. We intend to defend the foregoing
lawsuit vigorously, but cannot predict the outcome and are not currently able to
evaluate the likelihood of success or the range of potential loss, if any.
In re: Clark Material Handling Company, et al. (Clark Material Handling
Company, et al. v. Lucas Control Systems, United States District Court for the
District of Delaware, Case No. 02-997.
We are currently the defendant (as successor to Lucas Control Systems)
in the lawsuit filed in April 2002 by Clark Material Handling Company and its
related debtors (the "Debtors") in the context of the Debtors' Chapter 11
bankruptcy proceedings. Plaintiffs assert that Lucas Control Systems ("Lucas")
received $34,413 from one or more of the Debtors during the ninety
33
(90) day period before the Debtors filed their bankruptcy petitions, that the
transfers were to Lucas' benefit, were for or on account of an antecedent debt
owed by one or more of the Debtors, made when one or more of the Debtors were
insolvent, and that the transfers allowed Lucas to receive more than it would
have received if the cases were cases under Chapter 7 of the United States
Bankruptcy Code. The action seeks to disgorge the sum of $34,413 from Lucas. 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 Clark Material Handling Company or the other
Debtors.
Other
From time to time, we are subject to other legal proceedings and claims
in the ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fiscal quarter ended March 31, 2002.
34
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(A) Market Price
Our common stock, no par value, is traded on the American Stock Exchange
(AMEX) under the symbol MSS. The following table presents the reported high and
low sales prices of our common stock as reported on the AMEX for the periods
indicated:
High Low
--------- ---------
YEAR ENDED MARCH 31, 2001
Quarter ended June 30, 2000 $ 19.19 $ 10.94
Quarter ended September 30, 2000 24.13 16.50
Quarter ended December 31, 2000 29.81 15.75
Quarter ended March 31, 2001 26.19 16.25
YEAR ENDED MARCH 31, 2002
Quarter ended June 30, 2001 $ 25.58 $ 14.96
Quarter ended September 30, 2001 16.25 9.10
Quarter ended December 31, 2001 12.00 5.61
Quarter ended March 31, 2002 10.40 6.56
YEAR ENDING MARCH 31, 2003
Quarter ended June 30, 2002 $ 3.25 $ 1.00
Quarter ended September 30, 2002
(through July 12, 2002) 2.91 2.06
The trading of our common stock was suspended by the American Stock
Exchange on February 15, 2002 because of delays in the filing of our quarterly
report on Form 10-Q for the period ended December 31, 2001. Trading of the stock
was resumed on June 5, 2002. Trading of the stock was subsequently suspended on
July 15, 2002 as a result of our failure to file our Annual Report on Form 10-K
for the fiscal year ended March 31, 2002. On August 21, 2002, we received a
letter from AMEX indicating that we no longer comply with AMEX listing
guidelines due to our failure to furnish certain reports and information to
shareholders and that our securities are, therefore, subject to being delisted
from the AMEX. We have appealed this determination.
(B) Approximate Number of Holders of Common Stock
At October 8, 2002, there were approximately 120 shareowners of record of
our common stock.
(C) Dividends
We have never declared cash dividends on our common equity. Additionally,
the payment of dividends is subject to the consent of our lenders. If permitted
under applicable law and our loan agreement, 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 or English subsidiary to transfer funds in the form of cash
dividends, loans, advances, or purchases of materials, products, or services.
The distribution and repatriation of dividends by our China subsidiary is
restricted by Chinese laws and regulations, including currency exchange
controls.
35
(D) Recent Sales of Unregistered Securities
We acquired Terraillon Holdings Limited in August 2001 for $17.5 million;
including $10.3 million in cash, the issuance of 503,692 in shares of our
restricted common stock valued at $6.8 million and closing costs of $0.3
million. We also assumed approximately $4.0 million in debt in connection with
this acquisition. The shares of common stock were sold in reliance upon the
exemption from registration contained in Regulation S promulgated under the
Securities Act of 1933, as a sale of securities outside the United States.
On July 19, 2002, in connection with the execution of the forbearance
agreement with our lenders (See "Liquidity and Capital Resources- Forbearance
Agreement"), we issued our lenders common stock purchase warrants to purchase up
to an aggregate of 594,454 shares of our common stock for an exercise price per
share equal to the lesser of (i) $2.28, or (ii) the average closing price of our
common stock on the American Stock Exchange for the five trading days prior to
November 10, 2002. Half of these warrants were cancelled on October 1, 2002 and
the remainder of the warrants will be cancelled if we repay all amounts owed to
our lenders by November 1, 2002. The warrants were sold in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
a transaction not involving a public offering.
In July 2002 and October 2002, we issued warrants to purchase up to an
aggregate of 87,720 shares of our common stock to Corporate Revitalization
Partners at an exercise price of $2.28 per share as more fully described under
"Item 13- Certain Relationships and Related Transactions." The warrants were
sold in reliance upon the exemption from registration under Section 4(2) of the
Securities Act of 1933, as a transaction not involving a public offering.
36
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
the consolidated financial statements of Measurement Specialties and the related
notes to the consolidated financial statements included in this Annual Report on
Form 10-K. As described above under "Business - Our Restructuring Program," we
are engaged in an ongoing restructuring program pursuant to which we have
discontinued certain operations and sold assets and may, in the future, engage
in additional sales of assets or stock or obtain other types of financing.
Accordingly, the historical results of operations presented herein are unlikely
to be indicative of future financial condition or results of operations.
YEARS ENDED MARCH 31,
---------------------------------------------------------------------
2002 2001 (1) 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Results of operations:
Net sales $ 132,619 $ 101,975 $ 59,997 $ 37,596 $ 29,278
Net income (loss) (29,047) 1,197 5,531 1,729 777
Net cash provided by (used in):
Operating activities (9,940) (5,727) 8,129 3,474 1,722
Investing activities (13,035) (23,101) (15,999) (4,993) (1,036)
Financing activities 27,344 27,539 7,041 3,927 (612)
Earnings (loss) per common share:
Basic (2.76) 0.15 0.73 0.24 0.11
Diluted (2.76) 0.13 0.64 0.23 0.11
Cash dividends declared
per common share None None None None None
As of March 31,
Total assets 89,612 77,479 39,647 18,535 10,217
Long-term debt,
net of current maturities(2) 249 -- 9,000 3,250 21
(1) Reflects the restatement of our financial statements for fiscal year
ended March 31, 2001. See "Recent Developments - Restatement" and Note 3 to our
consolidated financial statements included in this Annual Report on Form 10-K.
(2) Note that in 2002 and 2001, long-term debt was reclassified to current
as a result of our defaults under the credit agreement, as discussed in
"Liquidity and Capital Resources - Events of Default under the Credit
Agreement," below.
37
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our results of operations and financial
condition should be read together with the other financial information and
consolidated financial statements and related notes included in this Annual
Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of a variety of
factors.
OVERVIEW
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics, including pressure, motion,
force, displacement, angle, flow, and distance. We have two businesses, a Sensor
business and a Consumer Products business.
Our Sensor business designs, manufactures, and markets sensors for
original equipment manufacturer applications. These products include pressure
sensors, custom microstructures, accelerometers, tilt/angle sensors, and
displacement sensors for electronic, automotive, military, and industrial
applications. Our Sensor business customers include leading manufacturers such
as Alaris Medical, Texas Instruments, Allison Transmission, Althen GmbH, and
Graco.
Our Consumer Products business manufactures and markets sensor-based
consumer products. These products include bathroom and kitchen scales, tire
pressure gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive, and ultrasonic
technologies. Our Consumer Products customers include leading retailers such as
Bed Bath & Beyond, Linens 'n Things, Sears, Costco and Target, and European
resellers such as Laica, Ole Bodtcher Hanson, and Babyliss.
INITIAL ADOPTION OF ACCOUNTING PRONOUNCEMENTS
We utilize derivative financial instruments to reduce interest rate and
foreign currency risks. We do not hold or issue derivative financial instruments
for trading purposes. In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which was amended in June 2000 by SFAS No. 138. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments and hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
condition and measure those instruments at fair value. Changes in the fair value
of those instruments will be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative and the effect on the consolidated financial
statements will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged. We adopted SFAS 133, as amended, as of April 1, 2001.
The cumulative effect of the adoption of the accounting principle was $0.2
million. The fair value of the swap at March 31, 2002 was included in accrued
expenses.
We adopted Statement of Financial Accounting Standards No. 141, "Business
Combinations," effective July 1, 2001. SFAS 141 addresses the accounting and
reporting requirements for business combinations. This statement requires that
all business combinations be accounted for under the purchase method and
requires certain disclosures regarding business combinations. SFAS 141 is
effective for all business combinations completed after June 30, 2001.
38
We adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"), effective April 1, 2001. Under SFAS
142, goodwill is not amortized but is tested for impairment on an annual basis.
The impairment test is a two step process. The first step identifies potential
impairment by comparing an entity's fair value (including goodwill) to its
carrying amount. If the entity's carrying amount exceeds its fair value, a
second step is performed that compares the fair value of the entity's goodwill
to the carrying amount of that goodwill. If the carrying amount of goodwill
exceeds the fair value, an impairment loss is recognized. Upon adoption, any
impairment loss identified during the transition period is presented as a
change in accounting principle and recorded as of the beginning of the fiscal
year of adoption. After adoption, any impairment loss recognized is recorded as
a charge to income from operations. In connection with our restructuring
program, we performed additional impairment tests for the quarter ended March
31, 2002 that resulted in an impairment charge of $7.2 million. See Note 7,
Goodwill, in the notes to the consolidated financial statements that accompany
this Annual Report on Form 10-K for further discussions of the impact of SFAS
142 on our financial position and results of operations.
NEW ACCOUNTING STANDARDS
In June 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard addresses financial accounting and reporting for
obligations associated with retirement of tangible long-lived assets and the
retirement costs of the associated assets. We are required to implement SFAS No.
143 on April 1, 2003. We do not expect this standard to have a material impact
on our consolidated financial position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This standard supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The standard retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long lived-assets to be disposed of by sale to include
discontinued operations. It also expands on the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has been disposed of or is classified as held for sale. We were
required to implement SFAS No. 144 on April 1, 2002. We do not expect this
standard to have a material impact on our consolidated financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." The Statement rescinds SFAS No. 4 which required all gains and
losses from extinguishment of debt to be aggregated and, when material,
classified as an extraordinary item net of related income tax effect. SFAS No.
145 also amends Statement 13 to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for in
the same manner as sale-leaseback transactions. We are required to implement
this standard for transactions occurring after May 15, 2002 and do not expect
this Statement will have a material effect on our financial position or results
of operations. We will implement the provisions related to the rescission of
SFAS No. 4 in the second quarter of 2002.
39
On July 29, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred, rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operations, plant closing, or other exit or disposal activities.
Previous accounting guidance was provided by Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 replaces Issue 94-3 and is required to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
We are currently evaluating the impact of this standard on our consolidated
financial position.
Our current policy is to accrue restructuring and other costs at the
commitment date of an exit or disposal plan in accordance with the provisions of
EITF No. 94-3 and Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges." Accordingly, we have provided for certain restructuring
costs during the fiscal year ended March 31, 2002 and expect to provide for
additional costs during the first quarter of the fiscal year ended March 31,
2003.
In April 2001, we adopted EITF No. 00-09 "Consideration Given by a Vendor
to a Customer," which specified the accounting for and classification of coupons
and promotional items. Accordingly, volume rebates and co-operative advertising
costs are classified as reductions in revenue. Previously, these costs were
included in sales and marketing expense. The financial statements for the
applicable periods in the year ended March 31, 2001 have been reclassified to
conform to the current period's classifications.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate our estimates on an on-going basis, including those
estimates related to revenue recognition, allowance for doubtful accounts,
inventories, goodwill and intangible assets, acquisitions, income taxes,
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that we believe are reasonable under the
circumstances. The estimates form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results under different assumptions or conditions may
differ from these estimates.
The following critical accounting policies used in the preparation of our
consolidated financial statements involve significant judgments and estimates.
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 not sold to
third party customers. Upon shipment, we provide for allowances for returns and
warranties based upon historical and estimated return rates.
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.
40
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.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of our customers deteriorates, resulting in an impairment of
their ability to make payments, additional allowances may be required.
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.
Goodwill and Intangibles
We adopted SFAS No. 142 as of April 1, 2001. In connection with our
restructuring program, we performed additional impairment tests during the
quarter ended March 31, 2002 that resulted in an impairment charge of $7.5
million. See Note 7, Goodwill, in the notes to the consolidated financial
statements that accompany this Annual Report on Form 10-K for further discussion
of the impact of SFAS No. 142 on our financial position and results of
operations.
Management assesses the recoverability of our identifiable intangibles and
other long-lived 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 respective 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.
Acquisitions
41
We acquired Terraillon Holdings Limited 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,
we adopted the provisions of SFAS No. 141 (which is effective for all business
combinations completed after June 30, 2001). Accordingly, our consolidated
financial statements include the financial position and results of operations of
these acquisitions from the dates of their respective acquisition. See Note 4 in
the notes to the consolidated financial statements that accompany this Annual
Report on Form 10-K.
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, an independent professional
valuation. Certain of the acquired assets were intangible in nature, including
trademarks. Management employed an independent valuation firm in determining the
fair value of these intangible assets. The excess purchase price over the
amounts allocated to the assets is 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.
Income taxes
We file income tax returns in every jurisdiction in which we have reason
to believe that we are subject to tax. Historically, we have been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that our filing position regarding one or more of our transactions
is contrary to that jurisdiction's laws or regulations.
We have provided a valuation allowance against deferred tax assets. We
believe uncertainty exists regarding the realizability of our deferred tax
assets. Realization of a deferred tax asset is dependent on generating
future taxable income.
The income tax provision is based upon the proportion of pretax profit in
each jurisdiction in which we operate. The income tax rates in Hong Kong and
China are less than 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. Pursuant to current
tax policies in China, our Chinese operations qualify for a special state
corporate tax rate of 15%, or 10% provided that they export a minimum of 70% of
production. However, because we have agreed to operate in China for a minimum of
ten years, a full tax holiday (which expired on March 31, 1998) was available
for two years, and a 50% tax rate reduction to 7.5% was available through March
31, 2001. In July 2001, our subsidiary operating in Shenzhen, China was granted
tax treatment as an advanced technology enterprise. As a result, this subsidiary
is entitled to a 50% tax rate reduction to 7.5% for the three years following
July 2001. The current corporate tax rate in Hong Kong is 16%.
42
Contingencies and Litigation
We periodically assess the potential liabilities related to any lawsuits
or claims brought against us. See Note 16 and Note 20 in the notes to the
consolidated financial statements that accompany this Annual Report on Form 10-K
for a discussion of our current litigation matters, reserves recorded and our
position with respect to any related uncertainties. 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.
43
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING OUR RESTRUCTURING PROGRAM
AS DESCRIBED ABOVE UNDER "BUSINESS - RECENT DEVELOPMENTS," WE ARE ENGAGED
IN AN ONGOING RESTRUCTURING PROGRAM PURSUANT TO WHICH WE HAVE DISCONTINUED
CERTAIN OPERATIONS AND SOLD ASSETS SINCE MARCH 31, 2002 AND MAY, IN THE FUTURE,
ENGAGE IN ADDITIONAL SALES OF ASSETS OR STOCK OR OBTAIN OTHER TYPES OF
FINANCING. ACCORDINGLY, THE HISTORICAL RESULTS OF OPERATIONS PRESENTED HEREIN
ARE UNLIKELY TO BE INDICATIVE OF FUTURE PERFORMANCE.
SPECIAL NOTE REGARDING RESTATEMENT OF OUR PREVIOUSLY ISSUED FINANCIAL
STATEMENTS
WE HAVE RESTATED OUR PREVIOUSLY ISSUED FINANCIAL STATEMENTS FOR THE FISCAL
YEAR ENDED MARCH 31, 2001, AND OUR PREVIOUSLY ISSUED FINANCIAL RESULTS FOR EACH
OF THE QUARTERLY PERIODS IN THE FISCAL YEAR ENDED MARCH 31, 2001 AND THE FIRST
THREE QUARTERS IN THE FISCAL YEAR ENDED MARCH 31, 2002. SEE "BUSINESS- RECENT
DEVELOPMENTS." THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
MARCH 31, 2001 INCLUDED IN THIS REPORT AND THE DISCUSSION OF THE RESULTS OF
OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 2001 GIVE EFFECT TO THE
RESTATEMENT. THE RESTATED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THIS
REPORT SUPERSEDE THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED
MARCH 31, 2001 INCLUDED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED MARCH 31, 2001. NO ATTEMPT HAS BEEN MADE TO UPDATE OUR DISCLOSURES FOR
EVENTS SUBSEQUENT TO THE FILING DATE OF OUR ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED MARCH 31, 2001, EXCEPT AS OTHERWISE EXPLICITLY NOTED.
WE INTEND TO FILE A CURRENT REPORT ON FORM 8-K TO PROVIDE RESTATED
QUARTERLY FINANCIAL INFORMATION FOR EACH OF THE QUARTERLY PERIODS IN THE FISCAL
YEAR ENDED MARCH 31, 2001 AND THE FIRST THREE QUARTERS IN THE FISCAL YEAR ENDED
MARCH 31, 2002.
YOU SHOULD NOT RELY ON PREVIOUS DISCUSSIONS OF RESULTS OF OPERATIONS AND
TRENDS AFFECTING OUR BUSINESS
AS A RESULT OF THE RESTATEMENT, OUR HISTORICAL RESULTS OF OPERATIONS
DIFFER SIGNIFICANTLY FROM THOSE CONTAINED IN OUR PRIOR REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. ACCORDINGLY, YOU SHOULD NOT RELY ON PREVIOUS
DISCUSSIONS OF OUR RESULTS OF OPERATIONS AND TRENDS AFFECTING OUR BUSINESS,
SINCE SUCH DISCUSSIONS WERE BASED ON FINANCIAL RESULTS THAT HAVE NOW BEEN
RESTATED. WE DO NOT INTEND TO MAKE ADDITIONAL FILINGS TO CORRECT THE HISTORICAL
DISCUSSIONS OF RESULTS OF OPERATIONS AND TRENDS AFFECTING OUR BUSINESS. RATHER,
THE DISCUSSIONS OF RESULTS OF OPERATIONS AND TRENDS AFFECTING OUR BUSINESS
44
CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K, WHICH ARE BASED ON OUR RESTATED
FINANCIAL RESULTS, SUPERSEDE AND CORRECT THOSE HISTORICAL DISCUSSIONS.
The consolidated financial statements for the year ended March 31, 2002
include the results of the Schaevitz acquisition for the entire period and the
results of the Terraillon acquisition from the date of acquisition in August
2001. The consolidated financial statements for the year ended March 31, 2001
include the results of the Schaevitz acquisition from the date of acquisition in
August 2000.
The following table sets forth, for the periods indicated, certain items
in our consolidated statements of income as a percentage of net sales:
FISCAL YEAR ENDED MARCH 31,
---------------------------------
2002 2001 (1) 2000
---- -------- ----
Net Sales
Sensors 42.4% 48.0% 26.5%
Consumer products 57.6 52.0 73.5
----- ----- -----
Total net sales 100.0 100.0 100.0
Cost of Sales 73.6 65.6 57.5
----- ----- -----
Gross profit 26.4 34.4 42.5
Operating expenses (income)
Selling, general, and administrative 33.5 29.0 26.9
Research and development 5.0 5.0 5.7
Customer funded development (1.3) (4.1) (2.7)
Goodwill impairment 5.6 -- --
Restructuring and exiting costs 1.1
Interest expense, net 2.0 2.6 0.5
Other expenses (income) 0.3 (0.3) --
----- ----- -----
Income (loss) before income taxes
and cumulative effect of accounting
change (19.8) 2.2 12.1
Income tax expense (benefit) (1.9) 1.0 2.9
----- ----- -----
Income (loss) before cumulative effect
of accounting change (21.7) 1.2 9.2
Cumulative effect of accounting change (.2) -- --
----- ----- -----
Net Income (loss) (21.9)% 1.2% 9.2%
===== ===== =====
(1) Reflects the restatement of our financial statements for fiscal year
ended March 31, 2001. See "Recent Developments - Restatement" and Note 3 to our
consolidated financial statements included in this Annual Report on Form 10-K.
FISCAL YEAR ENDED MARCH 31, 2002 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2001
Net Sales. Net sales increased $30.6 million, or 30.0%, to $132.6
million for the fiscal year ended March 31, 2002 from $102.0 million for the
fiscal year ended March 31, 2001. Net sales for the fiscal year ended March 31,
2002 include the results of the Schaevitz acquisition for the entire twelve-
month period while net sales for the fiscal year ended March 31, 2001 include
45
results from the date of Schaevitz acquisition in August 2000. Sales for
Terraillon are included from the acquisition date in August 2001. Excluding the
Schaevitz and Terraillon acquisitions, net sales decreased 5.3% to $78.4 million
for the fiscal year ended March 31, 2002 from $83.7 million for the fiscal year
ended March 31, 2001.
Net sales of our Sensor business increased $7.3 million, or 14.9%, to
$56.2 million for the fiscal year ended March 31, 2002 from $48.9 million for
the fiscal year ended March 31, 2001. The increase is primarily due to the
Schaevitz acquisition. Sales of MicroFused pressure sensors and IC Sensors
products grew in the fiscal year ended March 31, 2002, but were largely offset
by weaker PiezoSensor sales. Excluding the impact of the Schaevitz acquisition,
net sales of our Sensor business for the fiscal year ended March 31, 2002 were
unchanged from net sales of our Sensor business for the fiscal year ended March
31, 2001.
For the fiscal year ended March 31, 2002, net sales of our Consumer
Products business increased $23.3 million, or 43.9%, to $76.4 million from $53.1
million for the fiscal year ended March 31, 2001. Excluding the Terraillon
acquisition, Consumer Product sales were $47.9 million for the fiscal year ended
March 31, 2002, a decrease of $5.2 million, or 9.8%, from $53.1 for the fiscal
year ended March 31, 2001. Sales of tire pressure gauges were particularly
strong during the year ended March 31, 2001 due primarily to consumer demand
caused by the tire quality issues experienced by a major tire manufacturer and a
large number of Christmas promotions. Sales of tire pressure gauges declined
during the fiscal year ended March 31, 2002 due to a significant reduction in
promotions, a decrease in the number of new customers and less media attention
to tire quality issues from the previous year. Sales for Park Zone products were
significantly lower in fiscal year ended March 31, 2002 compared to the fiscal
year ended March 31, 2001, as many retailers opted out of this product category
following poor sell-through in 2001. Offsetting the decline in Park Zone sales
were stronger bath scales sales, primarily driven by stronger consumer demand in
the United States. We expect Consumer Product sales to Korona, historically a
significant customer of ours, to decrease to less than $1.0 million for the
fiscal year ending March 31, 2003 as a result of its acquisition by Bonso
Electronics, a competitor of ours. We expect further decreases in sales to
Korona in subsequent fiscal years. These substantially decreased sales to this
customer may result in decreased sales for our Consumer Products business as a
whole.
Gross Profit. Gross profit decreased $0.1 million, or 0.3%, to $35.0
million for the fiscal year ended March 31, 2002 from $35.1 million for the
fiscal year ended March 31, 2001. Gross profit for the fiscal year ended March
31, 2002 includes $9.0 million from Terraillon. Gross margin decreased to 26.4%
for the fiscal year ended March 31, 2002 from 34.4% for the fiscal year ended
March 31, 2001. In our Sensor business, the primary reason for the decrease in
gross margin relates to lower production levels. These lower production levels
resulted in greater allocation of fixed costs to individual products. In
response to these declining Sensor business margins, management has implemented
significant cost reduction measures, such as the liquidation of our Schaevitz UK
subsidiary in June 2002, sale of the IC Sensors wafer fab in July 2002, shutdown
of Valley Forge operations in September 2002, and a reduction in workforce (see
"Recent Developments - Our Restructuring Program"). However, we expect lower
than historical gross margins to occur in our Sensor business until the
restructuring activities are complete. Gross profit for our Consumer Products
business declined in the fiscal year ended March 31, 2002 compared to prior
years due to declining sales, increase in material costs, and certain
write-downs of slow moving inventory that was subsequently liquidated. Gross
margins in our Consumer Products business also decreased in the fiscal year
ended March 31, 2002 compared to the fiscal
46
year ended March 31, 2001. This decrease is attributable to the acquisition of
Terraillon, the products of which had lower margins than our other consumer
products.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased $15.0 million, or 50.8%, to $44.5 million for the fiscal year
ended March 31, 2002 from $29.5 million for the fiscal year ended March 31,
2001. For the fiscal year ended March 31, 2002, selling, general and
administrative expenses included $9.8 million and $8.4 million, respectively,
attributable to Schaevitz and Terraillon. For the fiscal year ended March 31,
2001, selling, general and administrative expenses included $5.8 million
attributable to Schaevitz. Excluding the expenses related to Schaevitz and
Terraillon, selling, general and administrative expenses increased $2.5 million,
or 10.5%, for the fiscal year ended March 31, 2002. The overall increase is
primarily due to the substantially increased consulting and professional fees
that were incurred as a result of the defaults under our credit agreement, the
restatement of our financial statements, the class action lawsuits and the SEC
investigation. We expect these increased consulting and professional fees to
continue in subsequent periods.
Research and Development. Research and development expenses increased $1.5
million, or 29.4%, to $6.6 million for the fiscal year ended March 31, 2002 from
$5.1 million for the fiscal year ended March 31, 2001. During the fiscal year
ended March 31, 2002, we received $1.8 million for customer funded development,
as compared to $4.1 million during the fiscal year ended March 31, 2001.
Customer-funded research and development was unusually high in the fiscal year
ended March 31, 2001 as a result of several large contracts. These contracts
were not renewed due to the inability of the customer to continue funding the
projects. IC Sensors generated approximately $1.0 million in customer funded
research and development in the fiscal year ended March 31, 2002. As a result of
the sale of the IC Sensors wafer fab, we will not receive these amounts during
the fiscal year ending March 31, 2003 and expect customer funded research and
development to decrease.
Goodwill Impairment. In connection with our restructuring program, we
performed additional impairment tests during the quarter ended March 31, 2002
that resulted in an impairment charge of $7.2 million.
Restructuring and other costs. Restructuring and exiting costs are costs
associated with our restructuring program. Our restructuring program is intended
to reduce costs, streamline operations and generate cash to repay our lenders.
The restructuring costs of $1.4 million during the fiscal year ended March 31,
2002 consist of severance costs and the writedown of fixed assets.
Interest Expense, Net. Net interest expense increased $0.1 million, or
11.5%, to $2.7 million during the fiscal year ended March 31, 2002 from $2.6
million for the fiscal year ended March 31, 2001. This increase is attributable
to higher average outstanding debt and higher default interest rates resulting
from the occurrence of the events of default under our credit agreement. We
expect interest expense to decrease in the future as our outstanding debt
balances decrease.
Income Taxes. Our effective tax rates for the fiscal years ended March 31,
2002 and 2001 were 9.6% and 45.7%, respectively. The difference relates to an
increase in the valuation allowance provided for our deferred tax assets. The
rate may change in future periods if operating results or acquisition related
costs differ significantly from current projections. Deferred income taxes are
not provided on our subsidiaries' undistributed earnings, which
47
approximated $7.1 million at March 31, 2002, because those earnings are expected
to be permanently reinvested.
FISCAL YEAR ENDED MARCH 31, 2001 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000
Net Sales. Net sales increased $42.0 million, or 70.0%, to $102.0 million
for the fiscal year ended March 31, 2001 from $60.0 million for the year ended
March 31, 2000. We attribute the increase primarily to the Schaevitz Sensors and
IC Sensors acquisitions, as well as higher United States sales from strong
consumer spending, and expansion of product offerings. Excluding the impact of
the Schaevitz Sensors and IC Sensors acquisitions, net sales increased 11.9% for
the fiscal year ended March 31, 2001 as compared to the fiscal year ended March
31, 2000.
Net sales of our Sensor business increased $33.0 million, or 207.5%, to
$48.9 million for the fiscal year ended March 31, 2001 from $15.9 million for
the year ended March 31, 2000. This increase is primarily a result of the
Schaevitz Sensors and IC Sensors acquisitions and increased sales from our
existing Sensor business.
Net sales in the Consumer Products business increased $9.1 million, or
20.4%, to $53.0 million for the fiscal year ended March 31, 2001 from $44.1
million for the fiscal year ended March 31, 2000. The increase resulted from
expansion of European sales, higher United States sales from strong consumer
spending, and expansion of our product offerings.
Gross Profit. Gross profit increased $9.6 million, or 37.6%, to $35.0
million for the fiscal year ended March 31, 2001 from $25.5 million for the
fiscal year ended March 31, 2000. Gross profit percentage decreased to 34.4% for
the fiscal year ended March 31, 2001 from 42.5% for the year ended March 31,
2000. The increase in overall gross profit resulted from increased volume,
favorable product mix, and lower manufacturing costs. However, the increase was
partially offset by price reductions, and higher manufacturing costs associated
with recently acquired Schaevitz Sensors and IC Sensors products, resulting in a
lower gross margin percentage. Production of some of these products has been
moved to our lower-cost facility in China.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased $13.4 million, or 83.2%, to $29.5 million for the fiscal year
ended March 31, 2001 from $16.1 million for the fiscal year ended March 31,
2000. The increase resulted primarily from the impact of the Schaevitz Sensors
and IC Sensors acquisitions and variable expenses associated with higher sales
volume.
Research and Development. Research and development expenses increased $1.7
million, or 50.0%, to $5.1 million for the fiscal year ended March 31, 2001 from
$3.4 million for the fiscal year ended March 31, 2000. The increase resulted
primarily from the impact of acquisitions. During the fiscal year ended March
31, 2001, we received $4.1 million for customer funded development, as compared
to $1.6 million during the fiscal year ended March 31, 2000.
Interest Expense, Net. Net interest expense increased $2.3 million, or
766.7%, to $2.6 million during the fiscal year ended March 31, 2001 from $0.3
million for the fiscal year ended March 31, 2000. This increase is attributable
to debt incurred in connection with acquisitions and cash flow from operations.
48
Income Taxes. Our effective tax rates for the fiscal years ended March 31,
2001 and 2000 were 45.7% and 24.7%, respectively. The increase in the tax rate
was due to losses of our foreign subsidiaries for which a tax benefit has not
been provided. Deferred income taxes are not provided on our subsidiaries'
undistributed earnings, which approximated $9.4 million at March 31, 2001,
because those earnings are expected to be permanently reinvested.
LIQUIDITY AND CAPITAL RESOURCES
Our net working capital deficit was approximately $10.3 million at March
31, 2002, compared to a deficit of approximately $15.5 million at March 31,
2001. At March 31, 2002, our current ratio was 0.8 compared to 0.7 at March 31,
2001. The significant change in working capital was primarily a result of
defaults under our credit agreement. As a result of these defaults, the
outstanding debt at March 31, 2002 and 2001 is reflected as a current liability.
Cash increased to $4.5 million at March 31, 2002, compared to $0.6 million at
March 31, 2001. Operating activities for the year ended March 31, 2002 used $9.9
million of cash. Investing activities for the year ended March 31, 2002 used
$13.0 million, primarily due to the costs associated with the Terraillon
acquisition. Financing activities for the year ended March 31, 2002 provided
$27.3 million, primarily consisting of proceeds from the issuance of common
stock.
Capital expenditures for the year ended March 31, 2002 were $2.4 million.
At March 31, 2002, there were no significant commitments for capital
expenditures.
Our Credit Agreement
We and our wholly-owned subsidiary, Measurement Specialties UK Limited,
are the borrowers under an Amended and Restated Revolving Credit, Term Loan and
Security Agreement dated February 28, 2001, as amended (the "credit agreement"),
among Wachovia Bank, National Association (formerly known as First Union
National Bank) as lender and agent, JP Morgan Chase Bank as lender and Fleet
National Bank as lender (Wachovia, Chase and Fleet are hereafter referred to as
the "lenders"). Our obligations under the credit agreement are secured by a lien
on substantially all of our assets.
The loans outstanding under the credit agreement as of March 31, 2002 were
a revolving credit line with an amount outstanding of approximately $20.9
million and a term loan in the amount of $8.2 million. The loans outstanding
under the credit agreement as of October 8, 2002 were a revolving credit line
with an amount outstanding of approximately $3.1 million and a term loan in the
amount of $6.2 million.
Events of Default under the Credit Agreement
Because of our inability to comply with certain financial covenants
contained in the credit agreement, events of default have occurred and are
continuing under the credit agreement. We sought, but did not obtain, a waiver
of such events of default from the lenders.
The occurrence of the events of default under the credit agreement gives
the lenders the right to require immediate repayment of all amounts outstanding
under the credit agreement and exercise their remedies as a secured creditor,
including taking immediate possession of all of our assets and requiring our
customers to pay all amounts owed to us directly to them. As a result of the
defaults under our credit agreement and the lenders' consequent right to
accelerate the loans, we were required to classify the long-term portion of our
debt to current. The consolidated financial statements included in this Annual
Report on Form 10-K reflect this reclassification.
49
Forbearance Agreement
On July 2, 2002, we signed an agreement with our lenders pursuant to which
the lenders agreed to forbear from exercising the rights and remedies available
to them under the credit agreement as a result of our defaults until the
earliest of (i) November 1, 2002, (ii) our breach or violation of the provisions
of the forbearance agreement, (iii) the institution of bankruptcy proceedings
under the federal bankruptcy laws, or (iv) the occurrence of additional defaults
under the credit agreement (the time period between July 2, 2002 and the
termination of the lenders' obligation to forbear from the exercise of their
rights is referred to herein as the "forbearance period"). We are required under
the forbearance agreement to, among other things, comply with certain strict
financial covenants, actively seek purchasers for certain of our assets,
continue to make required term loan payments, pledge certain unencumbered assets
in favor of the lenders and issue the lenders a warrant to purchase up to 4.99%
of our common stock. Half of this warrant has been canceled as we have repaid
certain obligations as required prior to October 1, 2002 and the balance of the
warrant will be canceled if our obligations to the lenders are repaid in full on
or before November 1, 2002. The forbearance agreement also provides that our
borrowings will bear interest at a rate equal to the lenders' prime rate plus
3%, which rate will increase by an additional 2% in the event of a default under
the forbearance agreement.
In connection with the execution of the forbearance agreement, the lenders
agreed to extend additional credit under our revolving credit facility (as more
fully described below), as well as allow us to apply the proceeds from the
sale/liquidation of certain assets against amounts outstanding under the
revolving credit facility (rather than against amounts outstanding under the
term loan as otherwise required by the credit agreement).
Available Credit under the Revolving Credit Facility during the
Forbearance Period
As of the consummation of our sale of Terraillon, and subject to our
continued compliance with the terms of the forbearance agreement, the maximum
available credit under the revolving credit facility during the forbearance
period is $13.5 million or such lesser amount as is determined based on certain
formulas in the credit agreement related to the value of our collateral. As of
October 8, 2002, we had $10.4 million of available credit under the revolving
credit facility. At October 8, 2002, the balances of our revolving credit line
and term loan were $3.1 million and $6.2 million, respectively.
Payment Obligations under the Forbearance Agreement
Subject to our continued compliance with its terms, the forbearance
agreement permitted us to maintain an over-advance under the revolving credit
facility of up to $9.0 million until July 31, 2002, after which time the
permitted over-advance was reduced to $8.0 million. As a result of the sale of
Terraillon and the application of the proceeds from the sale to amounts
outstanding under our revolving credit facility, the over-advance under the
revolving credit facility was eliminated.
Under the forbearance agreement, the deadline for repayment in full of the
notes evidencing the term loan and revolving credit facility has been changed to
November 1, 2002. We cannot assure you that we will be able to replace this
credit facility on acceptable terms, or at all, after its expiration.
50
No assurance can be given that we will be able to pay the amounts due
under the forbearance agreement or otherwise comply with all the terms and
conditions of the forbearance agreement. If we are unable to comply with the
terms of the forbearance agreement, we may be unable to continue operations, or
may be compelled to restructure our obligations in a bankruptcy proceeding under
Title 11 of the United States Code.
We are currently in negotiations with our lenders to extend the
forbearance period and the deadline for repayment in full of the notes
evidencing the term loan and the revolving credit facility beyond November 1,
2002. No assurance can be given that our lenders will grant such an extension
on terms reasonable to us, or at all.
Working Capital
At October 8, 2002, we had $10.4 million available under our revolving
credit facility. As stated above, this credit facility expires and all amounts
outstanding under the credit facility must be repaid by November 1, 2002. Our
working capital and our limited amount of borrowing capacity will not be
sufficient to satisfy our ongoing capital needs and other obligations, that
include payment of:
- the $9.3 million outstanding under our term loan and revolving
credit facility by November 1, 2002;
- substantially increased consulting and professional fees that are
being incurred as the result of the defaults under the credit
agreement, the class action lawsuits and SEC investigation;
- any judgments or penalties arising from the class action lawsuits,
SEC investigation or other litigation described under "Item 3.
Legal Proceedings";
- the obligations described below under "Obligations to Trade
Creditors and Others"; and
- payment of dilapidation claims under the Schaevitz UK real property
lease.
In an effort to obtain additional funds, we are currently in negotiations
with an asset based lender regarding a new $15.0 million revolving credit
facility that we intend to use to refinance our existing bank debt and to
provide our company with additional working capital. In addition to pursuing
asset based financing, we are exploring the sale of additional assets or the
sale of equity securities. No assurance, however, can be given that we will be
able to refinance our debt, or successfully sell assets or stock, or, even if
such transactions are possible, that they will be on terms reasonable to us,
that they will enable us to continue to satisfy our cash requirements or that
such actions will be permitted under our credit agreement. Additionally, any
sale of securities will dilute existing shareholders and may be at prices that
are substantially lower than current market prices. If we do not obtain
additional funds, we will likely be unable to continue operations, or we will be
compelled to restructure our obligations in a bankruptcy proceeding under Title
11 of the United States Code.
Obligations to Trade Creditors and Others
In order to conserve available cash, we have been delaying payments to our
trade creditors. We are beginning to cure overdue obligations and are making
efforts to meet all of our new trade obligations within terms. If we are unable
to cure overdue obligations or meet new obligations within terms, our suppliers
may be unwilling to provide us with the components and finished products
necessary to manufacture our products. If we lose one or more sources of supply
and/or assembly and we are not able to replace that source in a timely manner,
we may be unable to meet the needs of our customers, resulting in a reduction in
net sales and jeopardizing our customer relationships.
51
Our failure to timely file our quarterly report on Form 10-Q and annual
report on Form 10-K and our payment default render us, among other things,
ineligible to file registration statements on Form S-3 with the SEC. In
connection with the acquisition of Terraillon in August 2001, we entered into a
Registration Rights Agreement with the former shareholders of Terraillon,
pursuant to which we agreed to file a Registration Statement on Form S-3 to
register the resale of shares of our common stock issued in that acquisition.
Our present inability to file a registration statement to effect the resale
registration triggers our contractual obligation to repurchase shares of our
common stock that former Terraillon shareholders are unable to sell in the
market or to pay former Terraillon shareholders an amount determined by formula
and based on the number of shares they are unable to sell in the market. We are
presently precluded by the credit agreement from repurchasing shares of our
common stock. (See "Item 3. Legal Proceedings," above.)
Dividends
We have not declared cash dividends on our common equity. Additionally,
the payment of dividends is subject to the consent of our lenders. If permitted
under applicable law and our loan agreement, 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.
Inflation
We believe that inflation has not had a material effect on our business.
We compete on the basis of product design, features, and value. Accordingly, our
revenues generally have kept pace with inflation, notwithstanding that inflation
in the countries where our subsidiaries are located has been consistently higher
than inflation in the United States. We have ongoing cost reduction programs,
intended to result in improved competitiveness and gross margins. Increases in
labor costs have not had a significant impact on our business because most of
our employees are in China, where prevailing labor costs are low. Additionally,
we believe that while we have not experienced any significant increases in
materials costs such increases are likely to affect the entire electronics
industry and, accordingly, may not have a significant adverse effect on our
competitive position.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 or
Euros. Our costs and expenses are priced in United States dollars, Hong Kong
dollars, Chinese renminbi, British pounds and Euros. Accordingly, the
competitiveness of our products relative to products
52
produced domestically (in foreign markets) may be affected by the performance of
the United States dollar compared with that of our foreign customers'
currencies. Additionally, we are exposed to the risk of foreign currency
transaction and translation losses, which result from adverse fluctuations in
the values of the Hong Kong dollar, the Chinese renminbi, the British pound and
the Euro. At March 31, 2002, we had net liabilities of $3.7 million subject to
fluctuations in the value of the Hong Kong dollar, net assets of $0.5 million
subject to fluctuations in the value of the British pound, net assets of $17.5
million subject to fluctuations in the value of the Euro and net assets of $10.9
million subject to fluctuations in the value of the Chinese renminbi. At March
31, 2001, we had net assets of $0.2 million subject to fluctuations in the value
of the Hong Kong dollar, net assets of $6.6 million subject to fluctuations in
the value of the British pound and net assets of $10.4 million subject to
fluctuations in the value of the Chinese renminbi.
Fluctuations in the value of the Hong Kong dollar have not been
significant since October 17, 1983, when the Hong Kong government tied the value
of the Hong Kong dollar to that of the United States dollar. However, there can
be no assurance that the value of the Hong Kong dollar will continue to be tied
to that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to foreign currency and
translation risks, we may purchase currency exchange forward contracts, currency
options, or other derivative instruments, provided such instruments may be
obtained at suitable prices. However, to date we have not done so.
See "Recent Developments - Our Restructuring Program," for a discussion of
the elimination of certain of our foreign operations.
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 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K.
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.
53
PART III
Item 10. Directors and Executive Officers of the Registrant
Our executive officers and directors and their ages (ages are as of
October 8, 2002) are as follows:
NAME AGE POSITION
Joseph R. Mallon, Jr 57 Chairman of the Board
Morton L. Topfer (1)(2)(3) 66 Vice Chairman of the Board
Frank Guidone 37 Chief Executive Officer
Damon Germanton 60 Managing Director of Asian Operations, Secretary and Director
Mark W. Cappiello 48 Vice President and General Manager of the Consumer
Products Division
J. Victor Chatigny 52 Vice President and General Manager of the Sensor
Products Division
Fergal Mulchrone 45 Vice President and CEO Terraillon Holdings Ltd
Steven P. Petrucelli 50 Chief Technical Officer and Director
John D. Arnold (1)(2)(3) 48 Director
Dan J. Samuel (1)(2)(3) 77 Director
John P. Hopkins 42 Chief Financial Officer
(1) Member of our Governance/Nominating Committee
(2) Member of our Audit Committee
(3) Member of our Compensation Committee
Joseph R. Mallon, Jr. has been our Chairman of the Board since April 1995
and served as our Chief Executive Officer from April 1995 to June 2002. From
April 1995 to February 1998, Mr. Mallon also served as President. Mr. Mallon has
thirty-seven years of experience in electronic sensor and
micro-electromechanical systems (MEMS) technology and is a named inventor in
forty-one United States patents. From January 1990 to January 1993, Mr. Mallon
was a Director and Executive Vice President of Lucas NovaSensor. In October
1985, Mr. Mallon co-founded NovaSensor, where he served as a Director and
Co-President until its acquisition by Lucas Industries. Mr. Mallon serves as a
Director of Sepragen Corporation and Sensant Corporation. Mr. Mallon received a
B.S. in science from Fairleigh Dickinson University and an M.B.A. from
California State University, Hayward.
Morton L. Topfer has been a director since January 2002 and was appointed
Vice Chairman of the Board in June 2002. Mr. Topfer is Managing Director of
Castletop Capital and a member of the Board of Directors of Dell Computer
Corporation. He previously served at Dell as Counselor to the Chief Executive
Officer, from December 1999 to February 2002, and Vice Chairman, from June 1994
to December 1999. Prior to joining Dell, Mr. Topfer served for 23 years at
Motorola, Inc. where he held several executive positions, last serving as
Corporate Executive Vice President and President of the Land Mobile Products
Sector. Mr. Topfer was conferred the Darjah Johan Negeri Penang State Award in
July 1996 by the Governor of Penang for contributions to the development of the
electronics industry in Malaysia. He serves as a director for Alliance Gaming
and Bio Reference Laboratories. Mr. Topfer also serves on the advisory board of
Singapore Technologies.
54
Frank Guidone has served as Chief Executive Officer since June 2002. Mr.
Guidone has been a Managing Director/Principal of Corporate Revitalization
Partners, a Dallas-based turnaround/crisis management consultancy firm, since
2000. Mr. Guidone is also a partner/co-founder of Four Corners Capital Partners,
a boutique private investment firm since 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.
Damon Germanton founded our company in 1981. Mr. Germanton was our
President from February 1998 until June 2002, served as our Chief Operating
Officer from 1983 until June 2002 and has been a Director since 1981. Mr.
Germanton was appointed Managing Director of our Asian operations in June 2002.
Beginning in 1965, Mr. Germanton worked for sixteen years for Kulite
Semiconductor as an engineer and operations manager developing military and
aerospace applications of micromachined sensor technology. Mr. Germanton is a
named inventor in twelve United States patents and received a B.S. in
engineering from Fairleigh Dickinson 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 his appointment in 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. Mr. Chatigny also served in US Army Corps of Engineers
where he was Captain, 11th Engineering Battalion and Commander of the Atomic
Demolition Munition Detachment. 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.
Fergal Mulchrone served as our Vice President from August 2001 until
September 2002 and CEO of Terraillon since 1999. Prior to our acquisition of
Terraillon, he led a management buyout of the Terraillon Group in March 1999 and
executed a successful turnaround before the sale to Measurement Specialties.
Before working at Terraillon, Mr. Mulchrone had 18 years of Marketing & General
Management experience including Product Manager at Nestle, Marketing Manager at
RJR Nabisco, VP Sales & Marketing at Chiquita and Executive VP at Mama Tish's
International Foods. Mr. Mulchrone has a Bachelor of Commerce and M.B.S.
(Marketing) degrees from University College Dublin (Irl.) and an M.B.A. (Fin)
from Iona College.
Steven P. Petrucelli, Ph.D. has been a Director since June 1992 and our
Chief Technical Officer since September 2000. Dr. Petrucelli is a consultant in
electronic and medical technology and has been an Assistant Professor at Rutgers
University in the Biomedical and Electrical Engineering Departments since 1979.
Dr. Petrucelli received a B.S. in electrical engineering from Lehigh University
and an M.S. and Ph.D. in engineering from Rutgers University.
55
John D. Arnold has been a Director since June 1995. Mr. Arnold has been in
private law practice since 1988, primarily representing technology companies
with relationships with Asian investors and/or manufacturers. Prior to 1988, Mr.
Arnold was employed with the law firms of Wilson, Sonsini, Goodrich & Rosati in
Palo Alto, California and Foley & Lardner in Milwaukee, Wisconsin. Mr. Arnold
received a B.A. in business administration from the University of Wisconsin and
a J.D. from Stanford Law School.
The Honorable Dan J. Samuel has been a Director since October 1994. Since
1986, Mr. Samuel has been a business consultant and a director of public
companies, as well as of the British-American Educational Foundation and of the
Asian Institute of Technology Foundation. Previously, Mr. Samuel served as
President and Chief Executive Officer of Scallop Corporation, the New York
subsidiary of the Royal Dutch/Shell Group of Companies. Mr. Samuel, who serves
as a Director of Canadian Overseas Packaging Industries, received a B.A. and
M.A. from Oxford University.
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. Prior to joining Cambrex, 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.
TERM OF OFFICE
Officers are not elected for a fixed term of office, but hold office until
the earlier of their removal or the appointment of their successor.
BOARD COMPOSITION
Our Board currently consists of six directors. Our certificate of
incorporation provides that the number of directors is to be fixed by the Board,
but in no event shall be less than five or more than nine directors. Our Board
is divided into three groups, whose terms expire at successive annual meetings.
Directors are elected for staggered three-year terms.
COMMITTEES OF OUR BOARD
Our Board maintains an Audit Committee that requests and receives
information and reports from management, outside counsel, and our independent
auditing firm in order to review our auditing, internal control, financial
reporting, and compliance activities; a Compensation Committee that recommends
to the board compensation policy and programs for our executives; and a
Governance Committee that is responsible for reviewing and making
recommendations regarding the composition of, and procedures used by, the Board
and its committees.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
56
To our knowledge, based solely on a review of Forms 3, 4 and 5, amendments
thereto, and written representations regarding all reportable transactions
furnished to us, all reports required by Section 16(a) of the Securities
Exchange Act of 1934 were filed on a timely basis.
Item 11. Executive Compensation
Summary Compensation. The following table contains summary information
concerning the annual compensation for the fiscal years ended March 31, 2002,
2001 and 2000 for our chief executive officer and certain other executive
officers whose salary and bonus exceeded $100,000 for the fiscal year ended
March 31, 2002:
ANNUAL COMPENSATION LONG-TERM COMPENSATION
NUMBER OF SHARES
UNDERLYING ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS OPTION AWARDS COMPENSATION
Joseph R. Mallon, Jr. 2002 $275,000 $ -- -- $ 18,819 (2)
Chief Executive Officer and Chairman 2001 260,000 72,800 50,000 19,832
of the Board (1) 2000 225,000 125,000 -- 16,343
Damon Germanton 2002 275,000 -- -- 17,062 (4)
President, Chief Operating 2001 260,000 72,800 50,000 18,040
Officer and Secretary (3) 2000 225,000 125,000 -- 16,343
Mark W. Cappiello 2002 210,000 -- -- 17,063 (5)
Vice President and 2001 198,000 44,431 30,000 15,885
General Manager of the Consumer 2000 171,500 67,481 -- 13,000
Products Division
Kirk Dischino 2002 198,000 -- -- 17,648 (7)
Chief Financial Officer (6) 2001 187,000 40,112 30,000 15,922
2000 161,500 60,291 -- 13,000
Steven P. Petrucelli 2002 185,000 -- -- 3,881 (9)
Chief Technical Officer (8) 2001 174,000 34,800 45,000 3,269
2000 120,000 35,000 -- --
Fergal Mulchrone 2002 129,160 54,900 45,000 26,542 (11)
Vice President and Chief Executive
Officer Terraillon Holdings Ltd (10)
(1) In June 2002, Frank Guidone replaced Mr. Mallon as Chief Executive
Officer.
(2) For the fiscal year ended March 31, 2002, includes automobile allowance of
$11,000 and $7,819 in matching contributions by us pursuant to our 401(k)
plan.
(3) In June 2002, Mr. Germanton became Managing Director of our Asian
Operations and ceased to be President and Chief Operating Officer.
(4) For the fiscal year ended March 31, 2002, includes automobile allowance of
$11,000, $2,507 in long- term disability income insurance premiums paid by
us for Mr. Germanton's benefit, and $3,555 in matching contributions by us
pursuant to our 401(k) plan.
57
(5) For the fiscal year ended March 31, 2002, includes automobile allowance of
$11,000 and $6,063 in matching contributions by us pursuant to our 401(k)
plan.
(6) Mr. Dischino's employment was terminated on February 15, 2002.
(7) For the fiscal year ended March 31, 2002, includes automobile allowance of
$9,625 and $8,023 in matching contributions by us pursuant to our 401(k)
plan.
(8) Mr. Petrucelli became an employee of Measurement Specialties in September
2000.
(9) For fiscal year ended March 31, 2002, includes $3,881 in matching
contributions by us pursuant to our 401(k) plan.
(10) Mr. Mulchrone became an officer of Measurement Specialties in August 2001
and ceased to be an employee of Measurement Specialties in September 2002.
(11) For the fiscal year ended March 31, 2002, includes automobile allowance of
$11,000, living expenses of $12,000 and $ 3,542 in matching contributions
by us pursuant to our 401(k) plan.
For the fiscal year ending March 31, 2003, the annual salaries of Mr.
Mallon and Mr. Germanton have been reduced to $225,000/year.
Option Grants in Last Fiscal Year to Named Executive Officers. The
following table sets forth information related to the grant of stock options by
us during the year ended March 31, 2002 to the named executive officers.
INDIVIDUAL GRANTS
-------------------------------------------------------- POTENTIAL
REALIZABLE VALUE
AT ASSUMED
PERCENT OF ANNUAL
TOTAL APPRECIATION
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE FOR OPTION
UNDERLYING EMPLOYEES OR BASE TERM
OPTIONS IN FISCAL PRICE EXPIRATION -----------------
GRANTED YEAR ($/SHARE) DATE 5% 10%
------- ---- --------- ----------- -- ---
Fergal
Mulchrone 45,000 20.2 15.80 8/7/12 25.74 40.98
Aggregated Option Exercises and Fiscal Year-End Option Values. The
following table contains information concerning the aggregated option exercises
during the fiscal year ended March 31, 2002 and the value of unexercised options
held as of March 31, 2002 by the executive officers named in the summary
compensation table:
VALUE OF UNEXERCISED
NUMBER OF SHARES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
MARCH 31, 2002 MARCH 31, 2002 (1)
SHARES
ACQUIRED ON VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Joseph R. Mallon, Jr -- -- 202,000 40,000 $865,920 --
Damon Germanton 30,000 $ 131,400 10,000 40,000 -- --
Mark W. Cappiello -- -- 6,000 24,000 -- --
Kirk Dischino 60,000 1,023,000 -- -- -- --
Steven P. Petrucelli 15,000 218,220 9,000 42,000 -- $29,700
Fergal Mulchrone -- -- -- -- -- --
58
----------
(1) Value of in-the-money options is based on the excess of the closing price
of our common stock on the American Stock Exchange on February 14, 2002
($6.95) over the exercise price of the options, multiplied by the number
shares underlying the options. The trading of our common stock was
suspended from February 15, 2002 until June 5, 2002. The closing price of
our common stock on the American Stock Exchange on July 12, 2002 was
$2.25. Trading of our common stock was subsequently suspended on July 15,
2002 and has been suspended since that date.
1995 STOCK OPTION PLAN
We adopted the Measurement Specialties, Inc. 1995 Stock Option Plan, which
allows us to issue stock options to our employees, directors, and consultants.
We reserved 1,828,000 shares of common stock for issuance under this plan and
its predecessor plan. The exercise price of options under this plan is
determined by our Board of Directors, but may not be less than the fair market
value of our common stock on the date of grant. Payment of the exercise price
may consist of cash, check, the delivery of shares of our common stock held for
a minimum of six months and having a fair market value equal to the exercise
price, or any combination of such methods or other methods as is determined by
the Board in accordance with the New Jersey Business Corporation Act.
1998 STOCK OPTION PLAN
We adopted the Measurement Specialties, Inc. 1998 Stock Option Plan, which
allows us to issue stock options and stock appreciation rights to our key
employees, consultants, professionals, and non-employee directors. We reserved
1,500,000 shares of common stock for issuance under this plan. The exercise
price of options under this plan is determined by our Board of Directors, but
may not be less than the fair market value of our common stock on date of grant
in the case of incentive stock options and 85% of the fair market value of our
common stock on the date of grant in the case of non-qualified options. In the
discretion of the Board of Directors, payment of the exercise price may consist
of cash, check, notes, delivery of shares of our common stock having a fair
market value equal to the exercise price, or any combination of such methods, or
other means of payment permitted under the New Jersey Business Corporation Act.
The term during which each option is exercisable is determined by the Board and
may not be more than ten years from the date of grant.
401(K) PLAN
All our full time employees in the United States over the age of eighteen
are eligible to participate in our 401(k) Plan after three months of employment.
Subject to certain limitations imposed by federal tax laws, employees may
contribute up to 15% of their salary (including bonuses and/or commissions) per
year. During fiscal year 2002, we matched 100% of the first 3% of employee
contributions and 50% of the next 3% of employee contributions. We provided
aggregate matching contributions approximating $598,000 for all employees in the
fiscal year ended March 31, 2002. Effective April 1, 2002, we no longer make
matching contributions under our 401(k) plan. Employees may direct the
investment of their contributions in several different investment funds.
DEFINED BENEFIT PLAN
We provide a contributory defined benefit retirement plan for certain
Schaevitz UK employees. See "Recent Developments - Our Restructuring Program"
for further discussion of the liquidation of Schaevitz UK.
COMPENSATION OF DIRECTORS
59
Directors who are also our employees do not receive additional
compensation for serving as our directors. For the fiscal year ended March 31,
2002, non-employee directors received an annual retainer of $35,000 payable in
equal quarterly installments and no separate compensation related to Board or
committee meetings.
For the fiscal year ended March 31, 2002, each non-employee director was
granted an option to purchase 10,000 shares of our common stock at market value
for the first year of service and an option to purchase 5,000 shares of our
common stock at market value for each succeeding year of service. Non-employee
directors do not receive retirement or other fringe benefits.
Additionally, we donated $21,000 in the fiscal year ended March 31, 2002
to the gifts and grants program of the Biomedical Engineering Department at
Rutgers University's College of Engineering, where Dr. Petrucelli is a
professor. Additional compensation paid to Mr. Arnold, who serves on the Board's
Compensation Committee, is described below under "Compensation Committee
Interlocks and Insider Participation."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our Compensation Committee is an officer or
employee of Measurement Specialties. None of our executive officers serves as a
member of the Board or compensation committee of any entity that has one or more
executive officers serving on our Board or Compensation Committee. The members
of our Compensation Committee for the fiscal year ended March 31, 2002 were John
D. Arnold, Dan Samuel, David Morton, and Theodore J. Coburn. Mr. Morton and Mr.
Coburn served until their resignations on January 30, 2002 and February 21,
2002, respectively. Mr. Arnold provided legal services to us and received
approximately $15,000 in legal fees during fiscal year ended March 31, 2002.
60
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table shows information regarding the beneficial ownership
of our common shares as of October 8, 2002 for:
- each of our directors;
- each person named in the summary compensation table;
- all directors and executive officers as a group; and
- each person known to us to be the beneficial owner of more than 5% of our
outstanding shares of common stock.
COMMON STOCK BENEFICIALLY
OWNED (2)
OPTIONS
NUMBER EXERCISABLE
NAME AND ADDRESS OF BENEFICIAL OF WITHIN 60
OWNER (1) SHARES PERCENT DAYS(1)
--------- ------ ------- -------
DIRECTORS AND EXECUTIVE OFFICERS:
Joseph R. Mallon, Jr. 559,840 4.6% 202,000
Damon Germanton(3) 465,292 3.9 10,000
Morton L. Topfer 325,492 2.7 --
Mark W. Cappiello 141,200 1.2 6,000
Steven P. Petrucelli 121,000 1.0 9,000
Fergal Mulchrone 117,945 1.0 --
Dan J. Samuel 57,600 * 31,000
John D. Arnold 36,000 * 11,000
Kirk Dischino 25,000 * --
Frank Guidone -- -- --
All directors and officers as a 1,849,369 15.1% 269,000
group (ten persons)
FIVE PERCENT STOCKHOLDERS:
Wellington Management Company, LLP 1,135,400 9.5% --
75 State Street
Boston, MA 02109 (4)
61
----------
* less than 1%
(1) Unless otherwise indicated, the address of each person is c/o Measurement
Specialties, Inc., 80 Little Falls Road, Fairfield, NJ 07004.
(2) Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the
number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to options held
by that person that are currently exercisable or exercisable within 60
days of the date hereof are deemed outstanding. Such shares, however, are
not deemed outstanding for the purposes of computing the percentage
ownership of any other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, each
stockholder named in the table has sole voting and investment power with
respect to the shares set forth opposite such stockholder's name. The
percentage of beneficial ownership is based on 11,912,958 shares of common
stock outstanding as of October 8, 2002.
(3) Includes 125,156 shares of which Mr. Germanton's children are the record
owners. Does not include 92,115 shares owned by other family members of
Mr. Germanton.
(4) Includes 1,035,400 shares of common stock for which Wellington Management
Company, LLP (WMC), an investment adviser, has shared voting power and
1,135,400 shares for which WMC has shared dispositive power. The shares
are owned of record by WMC's clients. The shares were acquired by
Wellington Trust Company, NA, a wholly-owned subsidiary of WMC. Based
solely on the Schedule 13G filed by WMC on February 12, 2002.
The following table provides information with respect to the equity
securities that are authorized for issuance under our compensation plans as of
March 31, 2002:
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
NUMBER OF
SECURITIES
REMAINING
AVAILABLE
FOR FUTURE
ISSUANCE
UNDER
EQUITY
NUMBER OF COMPENSATION
SECURITIES TO BE WEIGHTED-AVERAGE PLANS
ISSUED UPON EXERCISE PRICE (EXCLUDING
EXERCISE OF OF OUTSTANDING SECURITIES
OUTSTANDING OPTIONS, REFLECTED
OPTIONS, WARRANTS WARRANTS AND IN COLUMN
AND RIGHTS (A) RIGHTS (B) (A)) (C)
-------------- ---------- --------
Equity compensation plans approved
by security holders 1,049,670 $9.39 797,530
--------- ----- -------
Equity compensation plans not
approved by security holders -- -- --
--------- ----- -------
Total 1,049,670 $9.39 797,530
--------- ----- -------
62
Item 13. Certain Relationships and Related Transactions
(a) Transactions with management and others.
In May 2002, we retained Corporate Revitalization Partners (CRP) to
conduct our ongoing operational/financial restructuring efforts. In June 2002,
Frank Guidone, a Managing Director of CRP, became our chief executive officer.
As of October 8, 2002, we have incurred $1.2 million in consulting fees to CRP
(excluding the success fees described in the following sentence). 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), a "success fee" consisting of $50,000 and a warrant
exercisable to purchase 43,860 shares of our common stock (at an exercise price
of $2.28 per share) is payable upon the occurrence of the each of the following
three events:
- the successful negotiation and execution of an extended forbearance
agreement with our lenders (this agreement has been executed);
- our compliance as of September 30, 2002 with the terms of the forbearance
agreement with our lenders (we were in compliance with the forbearance
agreement as of September 30, 2002); and
- the repayment of all amounts due to our existing senior lenders and
refinancing of our debt on or before November 1, 2002.
Mr. Guidone may be deemed to have an indirect beneficial ownership interest in
the warrants issued to CRP.
On September 20, 2002, we paid $1.4 million to Fergal Mulchrone, our Vice
President until September 2002 and the current Chief Executive Officer of
Terraillon, and agreed to pay Mr. Mulchrone up to an additional $260,859 upon
the release of the escrowed portion of the proceeds from our sale of Terraillon
to Fukuda. This payment (along with the acceleration of certain vesting
provisions applicable to our common stock held by Mr. Mulchrone and the release
of Mr. Mulchrone from certain restrictions on competition) was made in
connection with the settlement of any and all claims of Mr. Mulchrone against
us, including claims for compensation and claims related to his sale of shares
of Terraillon to us in August 2001.
We sublet a residence used by employees in China from Damon Germanton, an
officer and director, under a month to month arrangement. Rent expense for the
fiscal year ended March 31, 2002 was $5,784.
We donated $21,000 in the final year ended March 31, 2002 to the gifts and
grants program of the Biomedical Engineering Department at Rutgers University's
College of Engineering, where Dr. Steven Petrucelli, our Chief Technical Officer
and Director, is a professor.
(b) Business relationships.
We paid approximately $15,000 in legal fees to John Arnold, a member of
our board of directors, during the fiscal year ended March 31, 2002.
(c) Indebtedness of management.
63
In September 2001, we loaned $125,000 to Steven Petrucelli, a member of
our board of directors, to cover margin calls generated by lower market prices
of our common stock. At the time, Mr. Petrucelli was subject to a lockup period
related to our August 2001 public offering that prevented him from selling
shares of our common stock to cover the margin calls. The largest amount
outstanding under this loan during the last fiscal year was $131,000. The loan,
which was subsequently memorialized by a Promissory Note dated August 1, 2002,
accrues interest at a rate of 6% per year. As of September 30, 2002, there was
$126,000 outstanding under this loan. Bimonthly payments of principal and
interest in the amount of $1,000 are payable until September 15, 2006. The
entire unpaid balance of principal and accrued interest under the note is due
and payable on September 15, 2006.
64
PART IV
ITEM 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. We have identified
significant and material weaknesses in our internal disclosure controls and
procedures. As a result of these deficiencies, we needed to perform extensive
detail testing and reconciliation of past transactions in order to be able to
determine the proper presentation of our financial information for past and
current periods. In addition, our independent auditors have expanded their
procedures to audit periods during which the weaknesses were present.
These deficiencies in our internal disclosure controls and procedures have
contributed to our filing of inaccurate financial reports for the periods from
June 30, 2000 through December 31, 2001 and to the delay in filing of this
Annual Report on Form 10-K. Accordingly, this report contains restated financial
statements for the fiscal year ended March 31, 2001, and we intend to file a
current report on Form 8-K to provide restated quarterly financial information
for each of the quarterly periods in the fiscal year ended March 31, 2001 and
the first three quarters in the fiscal year ended March 31, 2002.
(b) Changes in internal controls.
Interim compensating controls and procedures
While we are in the process of implementing a more efficient and reliable
system of disclosure controls and procedures, we have, on an immediate basis,
instituted interim compensating controls and procedures to ensure that
information required to be disclosed in this Annual Report on Form 10-K has been
recorded, processed, summarized and reported to our senior management. The steps
that we have taken to ensure that all material information about our company is
accurately disclosed in this report, include:
- the appointment of a new chief executive officer in June 2002;
- the appointment of a new chief financial officer in July 2002;
- the performance of an extensive review of our financial statements
for the fiscal years ended March 31, 2002 and March 31, 2001;
- the reaudit of our financial statements for the fiscal year ended
March 31, 2001;
- the performance of a comprehensive evaluation of our historical
valuation of inventory; and
- the engagement of outside professionals specializing in accounting
and finance to assist our management in the collection,
substantiation and analysis of the information contained in this
report.
Ongoing changes in internal controls
In order to correct the deficiencies described above and to improve our
internal disclosure and control procedures on a going forward basis, we have:
65
- initiated the process of consolidating the financial information for
our Sensor business onto one information technology platform and
general ledger;
- reassigned the financial reporting responsibility from the corporate
accounting level to the respective separate general managers and
controllers of each of our business units;
- implemented consolidated financial and operational review
procedures; and
- hired additional qualified financial reporting personnel.
We intend to continue to evaluate our internal disclosure controls and
procedures and implement improvements as required.
66
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following financial statements and schedules are filed at the end of
this report, beginning on page F-l. Other schedules are omitted because they are
not required or are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
Document Pages
Report of Independent Certified Public Accountants F-1 to F-2
Consolidated Statements of Operations for the Years Ended
March 31, 2002, 2001 and 2000 F-3
Consolidated Balance Sheets as of March 31, 2002 and 2001 F-4 to F-5
Consolidated Statements of Shareholders' Equity for the Years
Ended March 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the Years Ended F-7
March 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements F-8 to F-37
Schedule II - Valuation and Qualifying Accounts, for the Years
Ended March 31, 2002, 2001 and 2000 S-1
(b) Reports on Form 8-K
During the three months ended March 31, 2002, we filed the following
current reports on Form 8-K:
Current Report on Form 8-K filed pursuant to Item 5 on January 9, 2002 to
include, as an exhibit, a press release announcing, among other things, the
appointment of Morton Topfer to our board of directors and a stock purchase
agreement related to the purchase of 314,081 shares of our common stock by
Castletop Capital.
Current Report on Form 8-K filed pursuant to Item 5 on February 15, 2002
to include, as an exhibit, a press release announcing, among other things, third
quarter losses and the possibility of restatement of our financial statements.
Current Report on Form 8-K filed pursuant to Item 5 on February 21, 2002
to include, as an exhibit, a press release announcing, among other things, the
continued delay of the release of our quarterly earnings.
(c) Exhibits
67
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1# Second Restated Certificate of Incorporation of Measurement
Specialties, Inc.
3.2++ Bylaws of Measurement Specialties, Inc.
4.1+ Specimen Certificate for shares of common stock of Measurement
Specialties, Inc.
10.1# Supply and Distribution Agreement dated September 26, 1997
between Korona GmbH & Co. KG and Measurement Specialties, Inc.
10.2## Product Line Acquisition Agreement dated January 5, 2000 between
Exeter Technologies, Inc., Dr. Michael Yaron and Measurement
Specialties, Inc.
10.3### Stock Purchase Agreement dated February 11, 2000 between
PerkinElmer, Inc. and Measurement Specialties, Inc.
10.4* Purchase Agreement dated August 4, 2000 between TRW Sensors &
Components, Inc. and Measurement Specialties, Inc.
10.5** Asset Purchase Agreement dated August 14, 1998 between AMP
Incorporated, The Whitaker Corporation and Measurement
Specialties, Inc.
10.6+ Measurement Specialties, Inc. 1995 Stock Option Plan.
10.7*** Measurement Specialties, Inc. 1998 Stock Option Plan.
10.8+ Lease dated December 30, 1999 between Hollywood Place Company
Limited and Measurement Limited for property in Kowloon, Hong
Kong.
10.9+ Lease dated September 14, 1977 between Schaevitz E.M. Limited
and Slough Trading Estate Limited for property in Slough, England.
10.10+ Deed of Variation dated July 14, 1992 of Lease between Slough
Trading Estate Limited and Lucas Schaevitz Limited
10.11+ Assignment dated August 4, 2000 of Lease from Lucas Schaevitz
Limited to Measurement Specialties (England) Limited.
10.12+ License to Assign dated August 4, 2000 between Slough Trading
Estate Limited, Lucas Schaevitz Limited, Measurement Specialties
(England) Limited and Measurement Specialties, Inc. for property
in Slough, England.
10.13+ Lease dated May 5, 1994 between Transcube Associates and
Measurement Specialties, Inc. for property in Fairfield, New
Jersey.
10.14+ First Amendment dated February 24, 1997 to Lease between
Transcube Associates and Measurement Specialties, Inc.
10.15+ Second Amendment dated July 10, 2000 to Lease between Transcube
Associates and Measurement Specialties, Inc.
10.16+ First Amendment dated February 1, 2001 to Lease between
Kelsey-Hayes Company and Measurement Specialties, Inc. for
property in Hampton, Virginia.
10.17++ Lease Agreement dated May 20, 1986 between Semex, Inc. and
Pennwalt Corporation and all amendments for property in Valley
Forge, Pennsylvania.
10.18++ Lease Agreement dated January 10, 1986 between Creekside
Industrial Associates and I.C. Sensors and all amendments for
property in Milpitas, California.
10.19++ Lease Agreements for property in Shenzhen, China
10.20++ Lease dated August 4, 2000 between Kelsey-Hayes Company and
Measurement Specialties, Inc. for property in Hampton, Virginia.
10.21++ Amended and Restated Revolving Credit, Term Loan and Security
Agreement dated as of February 28, 2001 among Measurement
Specialties, Inc., Measurement Specialties UK Limited, Summit
Bank, The Chase Manhattan Bank and First Union National Bank as
agent and all amendments.
10.22++ Agreement for the Purchase of the Share Capital of Terraillon
Holdings Limited, dated 7
68
June 2001, among Hibernia Development Capital Partners I ilp,
Hibernia Development Capital Partners II ilp, Fergal Mulchrone and
Chris Duggan and Andrew Gleeson and Measurement Specialties, Inc.
10.23+ Supplemental Agreement, dated 11 July 2001, concerning the
amendment of the Agreement for the Purchase of the Share Capital
of Terraillon Holdings Limited, dated 7 June 2001.
10.24+++ Asset Purchase Agreement dated July 12, 2002 by and among Elmos
Semiconductor AG, Silicon Microstructures, Inc., Measurement
Specialties, Inc., and IC Sensors Inc.
10.25++++ Stock Purchase Agreement, dated as of September 18, 2002, by and
between FUKUDA (Luxembourg) S.a.r.l. and Measurement Specialties,
Inc.
10.26 Forbearance Agreement, dated as of June , 2002, by and among
Wachovia Bank, National Association, for itself and as agent for
Fleet National Bank and JP Morgan Chase Bank, Measurement
Specialties, Inc., Measurement Specialties UK Limited., IC
Sensors, Inc., Measurement Limited, Jingliang Electronics
(Shenzhen) Co., Ltd. and Terraillon Holdings Limited.
10.27 Agreement of Lease, commencing October 1, 2002, between Liberty
Property Limited Partnership and Measurement Specialties, Inc.
10.28 Sublease Agreement, dated August 1, 2002, between Quicksil, Inc.
and Measurement Specialties, Inc.
21.1+ Subsidiaries.
23.1 Consent of Grant Thornton LLP.
# Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-Q filed on February 3, 1998 and
incorporated herein by reference.
## Previously filed with the Securities and Exchange Commission as an Exhibit
to the Quarterly Report on Form 10-Q filed on February 14, 2000 and
incorporated herein by reference.
### Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on March 1, 2000 and incorporated
herein by reference.
* Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on August 22, 2000 and
incorporated herein by reference.
** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K/A filed on August 27, 1998 and
incorporated herein by reference.
*** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Proxy Statement for the Annual Meeting of Shareholders filed on
August 18, 1998 and incorporated herein by reference.
+ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form S-1 (File No. 333-57928) and
incorporated herein by reference.
++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-K filed on July 5, 2001 and incorporated
herein by reference.
+++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on August 14, 2002 and
incorporated herein by reference.
69
++++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Current Report on Form 8-K filed on October 7, 2002 and
incorporated herein by reference.
70
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 October 28, 2002
---------------------
Frank Guidone
Chief Executive Officer
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.
/s/ Frank Guidone October 28, 2002
------------------------------------------
Frank Guidone, principal executive officer
/s/ John P. Hopkins October 28, 2002
------------------------------------------
John P. Hopkins,
principal financial and accounting officer
A majority of the Board of Directors:
/s/ Joseph R. Mallon, Jr. October 28, 2002
------------------------------------
Joseph R. Mallon, Jr., Chairman
/s/ Morton L. Topfer October 28, 2002
------------------------------------
Morton L. Topfer, Vice Chairman
/s/ John D. Arnold October 28, 2002
------------------------------------
John D. Arnold, Director
/s/ Damon Germanton October 28, 2002
------------------------------------
Damon Germanton, Director
/s/ Steven P. Petrucelli October 28, 2002
------------------------------------
Steven P. Petrucelli, Director
/s/ The Hon. Dan J. Samuel October 28, 2002
------------------------------------
The Hon. Dan J. Samuel, Director
71
I, Frank Guidone, certify that:
1. I have reviewed this annual report on Form 10-K of Measurement Specialties,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 28, 2002 /s/ Frank Guidone
_____________________________
Name: Frank Guidone
Title: Chief Executive Officer
72
I, John P. Hopkins, certify that:
1. I have reviewed this annual report on Form 10-K of Measurement Specialties,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 28, 2002 /s/ John P. Hopkins
-------------------
Name: John P. Hopkins
Title: Chief Financial Officer
73
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Measurement Specialties, Inc.
We have audited the accompanying consolidated balance sheets of Measurement
Specialties, Inc. and Subsidiaries (a Delaware corporation) as of March 31, 2002
and 2001, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Measurement
Specialties, Inc. and Subsidiaries as of March 31, 2002 and 2001, and the
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 3, the accompanying consolidated financial statements as of
and for the year ended March 31, 2001 have been restated. The effect of the
restatement is disclosed in Note 3.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company incurred a net loss of $29,047,000 during the year ended March 31, 2002
and anticipates incurring additional losses for the next several quarters.
Additionally, the Company was in default of certain financial covenants in its
credit agreement and the Company and its lenders have entered into a forbearance
agreement which expires November 1, 2002 or earlier. These factors, among
others, as discussed in Note 1 to the financial statements, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS 133") on April 1, 2001.
In addition, as disclosed in notes 2, 4 and 7, the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") on April 1, 2001.
We have also audited Schedule II for each of the three years in the period ended
March 31, 2002. In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein.
GRANT THORNTON LLP
New York, New York
October 9, 2002
F-1
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31,
----------------------------------------
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
--------------------------------------------------------- ------------ ------------ -----------
AS RESTATED
NOTE 3
------------
Net sales $ 132,619 $ 101,975 $ 59,997
Cost of goods sold 97,611 66,938 34,524
--------- --------- ---------
Gross profit 35,008 35,037 25,473
--------- --------- ---------
Operating expenses (income):
Selling, general and administrative 44,464 29,541 16,132
Research and development 6,591 5,082 3,360
Customer funding of research and development (1,784) (4,132) (1,611)
Goodwill and other impairments 7,479 -- --
Restructuring and other costs 1,413 -- --
--------- --------- ---------
Total operating expenses 58,163 30,491 17,881
--------- --------- ---------
Operating income (loss) (23,155) 4,546 7,592
Interest expense, net of interest income of $33,
$20, and $99 in 2002, 2001, and 2000, respectively 2,681 2,634 287
Other (income) expense 441 (293) 17
--------- --------- ---------
3,122 2,341 304
--------- --------- ---------
Income (loss) before provision for income
taxes and cumulative effect of accounting change (26,277) 2,205 7,288
Provision for income taxes 2,522 1,008 1,757
--------- --------- ---------
Income (loss) before cumulative effect
of accounting change (28,799) 1,197 5,531
Cumulative effect of accounting change, net of taxes (248) -- --
--------- --------- ---------
Net income (loss) $ (29,047) $ 1,197 $ 5,531
========= ========= =========
Earnings (loss) per common share - Basic
Income (loss) before cumulative effect
of accounting change (2.74) 0.15 0.73
Cumulative effect of accounting change (0.02) -- --
--------- --------- ---------
Net income (loss) $ (2.76) $ 0.15 $ 0.73
========= ========= =========
Earnings (loss) per common share - Diluted
Income (loss) before cumulative effect
of accounting change $ (2.74) $ 0.13 $ 0.64
Cumulative effect of accounting change (0.02) -- --
--------- --------- ---------
Net income (loss) $ (2.76) $ 0.13 $ 0.64
========= ========= =========
Weighted average number of common and common
equivalent shares outstanding:
Basic 10,531 8,144 7,612
========= ========= =========
Diluted 10,531 9,045 8,696
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
-----------------------
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2002 2001
-------------------------------------------------------- -------- ----------
AS RESTATED
ASSETS NOTE 3
-----------
CURRENT ASSETS:
Cash and cash equivalents $ 4,542 $ 593
Accounts receivable, trade, net of allowance for doubtful
accounts of $1,004 and $914, respectively 19,914 14,902
Inventories 22,969 24,362
Deferred income taxes -- 2,129
Refundable income taxes 1,146 --
Prepaid expenses and other current assets 2,477 1,137
------- -------
TOTAL CURRENT ASSETS 51,048 43,123
------- -------
PROPERTY AND EQUIPMENT 35,851 29,598
Less accumulated depreciation and amortization 17,506 12,529
------- -------
18,345 17,069
------- -------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $483 and $963, respectively 8,265 11,412
Trademark 9,549 --
Deferred income taxes -- 2,055
Other assets, net 2,405 3,820
------- -------
20,219 17,287
------- -------
TOTAL ASSETS $89,612 $77,479
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
--------------------------
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2002 2001
-------------------------------------------------- ----------- -----------
AS RESTATED
LIABILITIES AND SHAREHOLDERS' EQUITY NOTE 3
-----------
CURRENT LIABILITIES:
Current portion of long term debt $ 32,758 $ 36,736
Accounts payable 19,252 13,713
Accrued compensation 2,070 2,529
Accrued acquisition costs -- 604
Accrued expenses and other current liabilities 7,287 4,999
-------- --------
TOTAL CURRENT LIABILITIES 61,367 58,581
-------- --------
OTHER LIABILITIES:
Long term debt, net of current portion 249 --
Other liabilities 1,169 1,181
-------- --------
1,418 1,181
-------- --------
TOTAL LIABILITIES 62,785 59,762
-------- --------
COMMITMENTS AND CONTINGENCIES
Shareholders' equity
Serial preferred stock;
221,756 shares authorized; none outstanding -- --
Common stock, no par; 20,000,000 shares authorized;
shares issued and outstanding 11,864,958 and
8,333,340, respectively 5,502 5,502
Additional paid-in capital 42,346 3,769
Accumulated (deficit) retained earnings (20,586) 8,461
Other comprehensive loss (435) (15)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 26,827 17,717
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 89,612 $ 77,479
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED MARCH 31, 2002, 2001, AND 2000
Retained Other
Additional Earnings Compre- Compre-
Common paid-in (Accumulated hensive hensive
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) stock capital Deficit) Loss Total Income (Loss)
----------------------------------------------- --------- --------- -------- --------- ---------- -------------
Balance, April 1, 1999 $ 5,502 $ 308 $ 1,733 $ (1) $ 7,542
Comprehensive income, March 31, 2000:
Net income -- -- 5,531 -- 5,531 $ 5,531
--------
Comprehensive income $ 5,531
========
Tax benefit on exercise of options -- 610 -- -- 610
652,266 common shares issued upon
exercise of options -- 1,124 -- -- 1,124
-------- -------- -------- -------- --------
Balance, March 31, 2000 5,502 2,042 7,264 (1) 14,807
Comprehensive income, March 31, 2001:
Net income, as restated (Note 3) -- -- 1,197 -- 1,197 $ 1,197
Currency translation adjustment -- -- -- (14) (14) (14)
--------
Comprehensive income, as restated (Note 3) $ 1,183
========
Tax benefit on exercise of options -- 924 -- -- 924
353,500 common shares issued upon
exercise of options -- 803 -- -- 803
-------- -------- -------- -------- --------
Balance, March 31, 2001, as restated (Note 3) 5,502 3,769 8,461 (15) 17,717
Comprehensive income, March 31, 2002:
Net (loss) -- -- (29,047) -- (29,047) $(29,047)
Currency translation adjustment -- -- -- (420) (420) (420)
--------
Comprehensive (loss) $(29,467)
========
Reversal of tax benefit on exercise of options -- (1,534) -- -- (1,534)
2,530,000 common shares issued in secondary
offering, net of expenses -- 30,874 -- -- 30,874
503,692 common shares issued upon acquisition -- 6,800 -- -- 6,800
182,434 common shares issued upon
exercise of options -- 429 -- -- 429
315,492 common shares issued
in private placement -- 2,008 -- -- 2,008
-------- -------- -------- -------- --------
BALANCE, MARCH 31, 2002 $ 5,502 $ 42,346 $(20,586) $ (435) $ 26,827
======== ======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
MARCH 31,
----------------------------------------
($ IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
---------------------------------------------------------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES: AS RESTATED
NOTE 3
----------
Net income (loss) $(29,047) $ 1,197 $ 5,531
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,977 2,841 2,083
Deferred rent 126 178 --
Goodwill and other impairments 7,479 -- --
Provision for writedown of assets 458 -- --
Provision for doubtful accounts 1,158 698 (8)
Provision for warranty 85 380 17
Loss on disposal of assets -- -- --
Reversal of tax benefit on exercise of options (1,534) -- --
Deferred income taxes 2,650 (947) 8
Tax benefit on exercise of stock options -- 924 610
Net changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable, trade 84 (3,146) (1,020)
Inventories 8,882 (10,672) (3,417)
Prepaid expenses and other current assets (1,375) (455) (324)
Other assets 1,291 (513) (151)
Accounts payable, trade (1,071) (3,227) (1,117)
Accrued expenses and other liabilities 1,156 112 2,137
-------- -------- --------
Net cash (used in) provided by operating activities (9,940) (5,727) 8,129
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,366) (5,653) (2,510)
Purchases of intangible assets -- (40) (1,121)
Acquisition of businesses, net of cash acquired (10,669) (17,408) (12,368)
-------- -------- --------
Net cash used in investing activities (13,035) (23,101) (15,999)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under bank line of credit agreement 23,632 14,736 --
Repayments under bank line of credit agreement (14,935) -- --
Repayments under capital lease obligations (597) -- --
Proceeds from long term debt -- 25,000 10,000
Repayments of long term debt (13,836) (13,000) (3,800)
Payment of deferred financing costs (231) -- (283)
Proceeds from exercise of options and warrants 429 803 1,124
Proceeds from issuance of common stock, net of expenses 32,882 -- --
-------- -------- --------
Net cash provided by (used in) financing activities 27,344 27,539 7,041
-------- -------- --------
Effect of exchange rates (420) -- --
-------- -------- --------
Net change in cash and cash equivalents 3,949 (1,289) (829)
Cash and cash equivalents, beginning of year 593 1,882 2,711
-------- -------- --------
Cash and cash equivalents, end of year $ 4,542 $ 593 $ 1,882
======== ======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 2,818 $ 2,409 $ 368
Taxes 621 817 681
Non-cash transactions:
Common stock issued in connection with acquisition 6,800 -- --
Capital lease obligation for equipment 2,007 -- --
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
Notes to Consolidated Financial Statements
MARCH 31, 2002
($ IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS AND LIQUIDITY:
Description of business:
Measurement Specialties, Inc., a New Jersey Corporation, ("MSI" or "the
Company") is a designer and manufacturer of sensors and sensor-based consumer
products. The Company produces a wide variety of sensors that use advanced
technologies to measure precise ranges of physical characteristics, including
pressure, motion, force, displacement, angle, flow and distance. The Company has
a Sensor segment and a Consumer Products segment. The Sensor segment designs and
manufactures sensors for leading original equipment manufacturers for
electronic, automotive, medical, military and industrial applications. Sensor
products include pressure sensors, custom microstructures and accelerometers.
The Consumer Products segment designs and manufactures sensor based consumer
products which are sold to leading retailers and distributors in both the United
States and Europe. Consumer products include bathroom and kitchen scales, tire
pressure gauges, and distance estimators (see Note 17).
Current Developments:
In February 2002, the Company, at its own initiative, contacted the staff of the
SEC after discovering that our former Chief Financial Officer made the
misrepresentation to senior management, the Board and our auditors that a waiver
of our covenant default under our credit agreement had been obtained when the
lenders had, in fact 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. We cannot predict how long the SEC
investigation will continue or its outcome.
Liquidity and Going Concern:
The Company has incurred a net loss of approximately $29,047 for the year ended
March 31, 2002, and anticipates incurring additional losses for the next several
quarters. From September 30, 2001 through March 31, 2002, the Company was in
default of certain financial covenants in its credit agreement and as a result
of the restatement of previously issued financial statements the Company was
also in default of certain financial covenants for earlier periods. The Company
sought, but did not obtain, a waiver of such events of default from its lenders.
As described in Note 8, the Company and its lenders have entered into a
forbearance agreement which expires November 1, 2002 or earlier.
As a result of the significant losses for the last several reporting periods and
the Company's inability to make the required payments under the Company's loan
agreement, management and the Board of Directors approved a restructuring
program with the aim of reducing costs, streamlining operations and generating
cash to repay the Company's lenders. As of March 31, 2002, excluding the effects
of Terraillon and Schaevitz UK, the Company has reduced its workforce by 138
employees as compared to its workforce as of June 30, 2001. Additionally, as of
September 30, 2002, the Company has reduced its workforce by an additional 49
employees as compared to its workforce as of March 31, 2002. In addition, the
Company (i) discontinued its operations in the United Kingdom, (ii) sold the
assets related to its silicon wafer fab manufacturing
F-7
operations in Milpitas, California, which were part of the Company's IC Sensors
division for approximately $5,250 in July 2002, and (iii) sold all of the
outstanding stock of Terraillon Holdings Limited, the Company's European
subsidiary, that it purchased in August 2001, for approximately $22,300.
Approximately $2,282 of the purchase price will be held in escrow until January
24, 2003 to secure payment of certain purchase price adjustments, if any (see
Note 20).
The Company is currently in the process of responding to the claims made in the
class action lawsuit (see Note 16). The Company intends to defend the foregoing
lawsuit vigorously, but cannot predict the outcome and is not currently able to
evaluate the likelihood of its success or the range of potential loss, if any.
However, if the Company were to lose this lawsuit, the judgment would likely
have a material adverse effect on its consolidated financial position, results
of operations and cash flows. The Company has Directors and Officers insurance
policies that provide an aggregate coverage of $10,000, for the period during
which the lawsuit was filed, but cannot evaluate at this time whether such
coverage will be available or adequate to cover losses, if any, arising out of
this lawsuit.
The Company is also subject to a formal investigation conducted by the Division
of Enforcement of the United States Securities and Exchange Commission related
to matters reported in the Company's quarterly report on Form 10-Q for the
quarter ended December 31, 2001. The United States Attorney for the District of
New Jersey is also conducting an inquiry into the matters being investigated by
the SEC. In addition, the trading of the Company's common stock on the American
Stock Exchange ("AMEX") has been suspended and the Company has received a letter
from the AMEX indicating that the Company is no longer in compliance with AMEX
listing requirements. The Company has appealed this determination.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The Company has been pursuing and will continue to pursue,
among other initiatives, i) refinancing existing bank debt, ii) seeking
additional sales opportunities within its core business, iii) reducing expenses
to a level that would provide the Company with sufficient cash flow to meet its
obligations, iv) additional equity investments, v) sales of assets and/or vi) a
combination of any of the foregoing. Although there can be no assurances that
the Company will be able to achieve any of the foregoing initiatives, the
financial statements included in this report do not contain any adjustments that
might be necessary if the Company is unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of MSI and its
wholly-owned subsidiaries (the "Subsidiaries"): Measurement Limited, organized
in Hong Kong ("ML"); Jingliang Electronics (Shenzhen) Co. Ltd. ("JL"), organized
in the People's Republic of China ("China"); IC Sensors Inc. ("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 4, on August 7, 2001, the Company acquired the
stock of Terraillon Holdings Limited; on February 14, 2000, acquired the stock
of IC Sensors from PerkinElmer Inc.; and on August 4, 2000, acquired certain
assets and assumed certain liabilities of the Schaevitz Sensors business based
in Virginia and the United Kingdom (collectively "Schaevitz") from TRW
Components, Inc. (TRW). Results of operations of acquired subsidiaries are
included in the consolidated results of operations from their date of
acquisition. 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.
F-8
Cash equivalents:
The Company considers highly liquid investments with maturities of up to three
months, when purchased to be cash equivalents.
Fair value of financial instruments and derivative 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.
During the year ended March 31, 2002, an aggregate of $315 was reflected in the
income statement relating to the interest rate swap. Of such amounts, $248 was
reflected as a cumulative effect of adoption of an accounting principle and $67
was reflected as interest expense.
During the year ended March 31, 2002, $50 was reflected as a reduction of cost
of goods sold for the value of the foreign currency options and contracts that
do not qualify for hedges.
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.
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:
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax assets and
liabilities 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.
Tax benefits from early disposition of the stock by employees of incentive stock
options and from exercise of 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
F-9
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.
Intangible assets:
Goodwill represents the excess of cost over the net tangible and identifiable
assets of acquired businesses. Effective April 1, 2001, goodwill and certain
identifiable intangible assets with indefinite useful lives, primarily
trademarks, are no longer being amortized in accordance with SFAS No. 142, as
more fully described below under Recent Accounting Pronouncements. Other
identifiable intangible assets with finite useful lives are amortized over a
period of 3 to 5 years.
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 not sold to third party
customers. Upon shipment, the Company provides for allowances for returns and
warranties based upon historical and estimated return rates.
The company utilizes manufacturing representatives as sales agents for certain
of the Company's 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.
Classification of certain costs
Shipping and handling costs are recorded in cost of sales. Promotional and other
consideration provided to customers is reflected as a reduction in revenue.
Advertising Costs:
Advertising costs are included in selling, general and administrative expenses
and are expensed when the advertising or promotion is published or presented to
customers. Advertising expenses for the years ended March 31, 2002, 2001 and
2000 were approximately $1,243, $967 and $735, respectively.
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:
F-10
The Company's products generally are marketed under warranties to end users of
up to ten years. 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.
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:
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS
123"), the Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations ("APB 25") in accounting for its employee stock options. Under
APB 25, when the exercise price of the employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recorded. The Company has presented the additional pro forma disclosures
required by SFAS 123, in Note 15.
Derivative Instruments:
The Company utilizes derivative financial instruments to reduce interest rate
and foreign currency risks. The Company does not hold or issue derivative
financial instruments for trading purposes. In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended in June 2000
by SFAS No. 138. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments and hedging activities. They require that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
Changes in the fair value of those instruments will be reported in earnings or
other comprehensive income depending on the use of the derivative and whether it
qualifies for hedge accounting. The accounting for gains and losses associated
with changes in the fair value of the derivative and the effect on the
consolidated financial statements will depend on its hedge designation and
whether the hedge is highly effective in achieving offsetting changes in the
fair value of cash flows of the asset or liability hedged. The Company adopted
SFAS 133, as amended, as of April 1, 2001. The cumulative effect of the adoption
of the accounting principle was $248. The fair value of the swap at March 31,
2002 was included in accrued expenses.
The Company manages exposure to fluctuations in foreign exchange rates by
creating offsetting positions through the use of forward exchange contracts or
currency options. The Company enters into forward exchange contracts and foreign
currency options to hedge anticipated transactions. Gains and losses on forward
exchange contracts are charged to cost of sales because they do not qualify as
hedges. The fair value of the contracts held at March 31, 2002 are included in
prepaid expenses and other current assets.
Pro forma income before cumulative effect of change in accounting principle, net
income (loss) and related diluted earnings per common share amounts as if SFAS
133 had been in effect for the years ended March 31, 2001 and 2000 are as
follows:
F-11
For the Year Ended March 31,
2001 2000
----------- -----------
Net income
As reported $ 1,197 $ 5,531
Pro forma 949 5,526
Net income per diluted share
As reported $ 0.15 $ 0.73
Pro forma 0.12 0.73
Reclassifications:
Certain reclassifications have been made to conform prior years to the current
year's presentation.
Recent accounting pronouncements:
On July 29, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred, rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. SFAS 146 is
required to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company is currently evaluating the impact of this
standard.
The Company's current policy is to accrue restructuring and other costs at
commitment date of a plan in accordance with the provisions of Emerging Issues
Task Force ("EITF") No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" and Staff Accounting
Bulletin No. 100, "Restructuring and Impairment Charges." Accordingly, the
Company has provided for certain restructuring costs during the year ended March
31, 2002 and expects to provide for additional costs during the first quarter of
fiscal 2003 (see notes 4 and 20).
In 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections." The
Statement rescinds SFAS No. 4 which required all gains and losses from
extinguishment of debt to be aggregated and, when material, classified as an
extraordinary item net of related income tax effect. SFAS No. 145 also amends
Statement 13 to require that certain lease modifications having economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The Company is required to implement this standard
for transactions occurring after May 15, 2002 and do not expect this Statement
will have a material effect on our financial position or results of operations.
The Company will implement the provisions related to the rescission of SFAS No.
4 in the first quarter of fiscal 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This standard supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The standard retains the previously existing accounting
requirements related to the recognition and measurement of the impairment of
long-lived assets to be held and used while expanding the measurement
requirements of long-lived assets to be disposed of by sale to include
discontinued operations. It also expands on the previously existing reporting
requirements for discontinued operations to include a component of an entity
that either has
F-12
been disposed of or is classified as held for sale. The Company is required to
implement SFAS No. 144 on April 1, 2002. The Company does not expect this
standard to have a material impact on its consolidated financial position or
results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard addresses financial accounting and reporting for
obligations associated with retirement of tangible long-lived assets and the
associated assets' retirement costs. The Company is required to implement SFAS
No. 143 on April 1, 2003. The Company does not expect this standard to have a
material impact on its consolidated financial position or results of operations.
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), effective April 1, 2001.
Under SFAS 142, goodwill is not amortized but is tested for impairment on an
annual basis. The impairment test is a two step process. The first step
identifies potential impairment by comparing an entity's fair value (including
goodwill) to its carrying amount. If the entity's carrying amount exceeds its
fair value, a second step is performed which compares the fair value of the
entity's goodwill to the carrying amount of that goodwill. If the carrying
amount of goodwill exceeds the fair value, an impairment loss is recognized.
Upon adoption, any impairment loss identified is presented as a change in
accounting principle and recorded as of the beginning of the fiscal year of
adoption. After adoption, any impairment loss recognized is recorded as a charge
to income from operations. In connection with its restructuring program, the
Company performed additional impairment tests, which resulted in an impairment
charge of $7,194 for the quarter ended March 31, 2002. Refer to Note 7, Goodwill
for further discussions of the impact of SFAS 142 on the Company's financial
position and results of operations.
The Company adopted Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141"), effective July 1, 2001. SFAS 141 addresses
the accounting and reporting requirements for business combinations. This
statement requires that all business combinations be accounted for under the
purchase method, as well as some additional disclosures. SFAS 141 is effective
for all business combinations completed after June 30, 2001.
In April 2001, the Company adopted EITF No. 00-09 "Consideration Given by a
Vendor to a Customer," which specified the accounting for and classification of
coupons and promotional items. Accordingly, volume rebates and co-operative
advertising costs are classified as reductions in revenue. Previously, these
costs were included in sales and marketing expense. The financial statements for
the applicable periods in the year ended March 31, 2001 have been reclassified
to conform to the current period's classifications.
3. RESTATEMENT:
Based on the advice of its auditors and discussion with the Securities and
Exchange Commission, the Company determined it was necessary to conduct a
thorough re-examination of its historical determination of inventory values and
cost of goods sold. As a result of additional procedures employed, a number of
errors in the Company's historical inventory valuation relating to the
absorption of manufacturing costs were discovered. Each of the Company's
business units experienced various types of calculation and application errors.
These errors varied by quarter, type and cause. The errors and causes thereof
are included in the following general categories:
- Failure to analyze and account for standard cost variances properly and on
a timely basis;
- Failure to use readily available accounting and costing records to
determine manufacturing costs;
- Inclusion of inappropriate expenses in inventory cost pools;
- Apparent mathematical errors (including amounts used in calculations that
could not be reconciled to our underlying accounting records);
- Failure to adjust inventories to the lower of cost or market; and
- Use of inconsistent parameters to determine cost pools that relate to
inventory at each reporting period.
Accordingly, the Company has restated its financial statements for the fiscal
year ended March 31, 2001 and the Company's previously issued selected financial
information for each of the quarterly periods in the fiscal year ended March 31,
2001 and the first three quarters in the fiscal year ended March 31, 2002. The
effect of the restatement was a reduction of our previously reported inventory
values and operating income and a corresponding increase to costs of goods sold
aggregating approximately $8,200 for the fiscal year ended March 31, 2001.
In connection with the restatement and due in part to the cessation of
operations of Arthur Andersen LLP, the previous auditors of our financial
statements for the fiscal year ended March 31, 2001, the Company requested our
current auditors to conduct a reaudit of the financial statements for the fiscal
year ended March 31, 2001. The reaudit resulted in the following additional
adjustments: reclassification of certain costs included in selling, general, and
administrative expenses to revenue for $1,009; acceleration of amortization of
deferred financing costs relating to the company's bank loan in the amount of
$667; expensing of
F-13
unallocated acquisition costs of $439; straight-lining of lease expense in
accordance with SFAS No. 13 in the amount of $178; and certain other
adjustments. As a result of all the above adjustments, the Company recalculated
its tax provision resulting in a benefit of $1,821.
FISCAL YEAR ENDED
MARCH 31, 2001
-------------------------
AS PREVIOUSLY AS
REPORTED RESTATED
------------- --------
Consolidated statements of operations data:
Sales $103,095 $101,975
Cost of goods sold 58,782 66,938
Gross profit 44,313 35,037
Selling, general and administrative expenses 29,232 29,541
Income before provision
for income taxes 11,790 2,205
Provision for income taxes 2,829 1,008
Net income 8,961 1,197
Earnings per common share
Basic $ 1.10 $ 0.15
Diluted 0.99 0.13
Consolidated balance sheet data:
Accounts receivable, net $ 14,935 $ 14,902
Inventories 31,868 24,362
Deferred income taxes, current 2,180 2,129
Goodwill 12,606 11,412
Other assets 3,894 3,820
Accrued expenses and other current liabilities 6,221 4,999
Accrued compensation 2,579 2,529
Other liabilities 1,003 1,181
Accumulated retained earnings 16,225 8,461
Stockholders' equity 25,481 17,717
See Note 19, Quarterly Financial Information (Unaudited) for selected restated
quarterly information for fiscal 2001 and fiscal 2002.
4. ACQUISITIONS/DISPOSITIONS:
Terraillon. In August 2001, the Company acquired all of the outstanding shares
of Terraillon Holdings Limited ("Terraillon"), a European manufacturer of
branded consumer bathroom and kitchen scales. As a result of the acquisition,
the Company expected to add new technologies, diversify our product mix, and
expand distribution channels. The acquisition was accounted for as a purchase,
and accordingly, the consolidated financial statements include operations of
Terraillon from the date of acquisition. The aggregate purchase price was
$17,468 and included $10,320 in cash, the issuance of 503,692 in 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.
The purchase price allocation of assets purchased and liabilities assumed was
based on management's estimate of fair values at the date of
F-14
acquisition. The excess of the purchase price over the net assets acquired of
$13,551 was assigned to indefinite life trademarks of $9,477 and to goodwill of
$4,074 in accordance with SFAS No. 141. All of the intangibles have been
allocated to the consumer segment. The Company financed the acquisition through
the use of proceeds of an underwritten offering of its common stock, which is
described in Note 9. Included in the liabilities assumed below is a liability of
approximately $1,404 for severance and related costs from the closure of
Terraillon's manufacturing plant in Sligo, Ireland. All employees at such
facility were terminated in November, 2001. At March 31, 2002, there is no
remaining liability. The Company is obligated to file a registration statement
to register the resale of the 503,692 restricted shares issued to the seller.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
Current assets $ 13,868
Property, plant, and equipment 2,338
Trademark 9,477
Goodwill 4,074
--------
Total assets acquired 29,757
--------
Current liabilities (including
severance liability of $1,404) 12,289
--------
Net assets acquired $ 17,468
========
The value assigned to the trademark was based upon a third-party valuation and
is not subject to amortization.
The following unaudited pro forma consolidated results of operations for the
period assumes the Terraillon acquisition had occurred as of April 1, 2000,
giving effect to purchase accounting adjustments. The pro forma data is for
informational purposes only and may not necessarily reflect results of
operations had Terraillon been operated as part of the Company since April 1,
2000.
F-15
Year Ended March 31,
------------------------------
2002 2001
------------ ------------
As Restated
Note 3
------------
(unaudited)
Net sales $ 146,877 $ 144,749
Net (loss) before cumulative effect
of change in accounting principle $ (29,394) $ (587)
Cumulative effect of change in accounting principle (248) --
----------- -----------
Net (loss) $ (29,642) $ (587)
=========== ===========
(Loss) per common share - basic
(Loss) before cumulative effect of accounting change $ (2.79) $ (0.07)
Cumulative effect of accounting change (0.02) --
----------- -----------
Net (loss) $ (2.81) $ (0.07)
=========== ===========
(Loss) per common share - diluted
(Loss) before cumulative effect of accounting change $ (2.79) $ (0.07)
Cumulative effect of accounting change (0.02) --
----------- -----------
Net (loss) $ (2.81) $ (0.07)
=========== ===========
In September 2002, the Company sold the stock of Terraillon (see Subsequent
Events, Note 20).
Schaevitz. In August 2000, the Company acquired Schaevitz(TM) Sensors
("Schaevitz") from TRW Components, Inc. Schaevitz designs and manufacturers a
variety of tilt, displacement, and pressure transducers and transmitters in the
United States and Europe which are sold worldwide. The acquisition was accounted
for as a purchase, and accordingly, the consolidated financial statements
include operations of Schaevitz from the date of acquisition. The aggregate cash
paid was $17,860 (including payment to TRW Components Inc. of $16,775 and
closing costs of $1,085). The excess of the purchase price over the net assets
acquired (principally goodwill) of $6,998 was being amortized over 15 years
(prior to implementation of SFAS 142, as more fully described in Note 1). The
transaction was financed with a term loan issued by a syndicate of lending
institutions led by the Company's principal bank. Net assets acquired were
$10,862, consisting of the fair value of assets acquired of $13,991 less
liabilities assumed of $3,129.
The following unaudited pro forma consolidated results of operations for the
period assumes the Schaevitz acquisition had occurred as of April 1, 1999,
giving effect to purchase accounting adjustments. The pro forma data is for
informational purposes only and may not necessarily reflect results of
operations had Schaevitz been operated as part of the Company since April 1,
1999.
F-16
YEAR ENDED MARCH 31,
2001 2000
------------ ---------
AS RESTATED
NOTE 3
-----------
(unaudited)
Net sales $110,933 $ 83,801
Net income (loss) 479 4,855
Earnings (loss) per common share
Basic $ 0.06 $ 0.64
======== ==========
Diluted $ 0.05 $ 0.56
======== ==========
At March 31, 2002, as a result of the planned liquidation of Schaevitz UK, we
recorded an impairment charge of $3,062 relating to goodwill allocated to the
Schaevitz UK operation. In addition, based upon the results of the tests defined
in SFAS 142, goodwill in the amount of $3,625 (see Note 7) remaining from this
acquisition was determined to be impaired and written off during the fourth
quarter of fiscal 2002.
IC Sensors. On February 14, 2000, the Company acquired IC Sensors, Inc. from
PerkinElmer, Inc. IC Sensors designs, manufactures and markets micromachined
silicon pressure sensors, accelerometers and microstructures. The acquisition
was accounted for as a purchase, and accordingly, the consolidated financial
statements include the operations of IC Sensors from the date of acquisition.
The aggregate cash paid was $12,368 (including payment to PerkinElmer of $12,000
and closing costs of $368). The excess of the purchase price over the net assets
acquired (principally goodwill) of $3,177 was being amortized over 15 years
(prior to implementation of SFAS 142, as more fully described in Note 1). The
transaction was financed with a term loan issued by a syndicate of lending
institutions led by the Company's principal bank. Net assets acquired were
$9,191 consisting of the fair value of assets acquired of $10,451 less
liabilities assumed of $1,260. In connection with the acquisition of IC Sensors
Inc., the Company recorded a liability of approximately $350 for severance and
related costs. As of March 31, 2002 these costs have been paid.
The following unaudited pro forma consolidated results of operations for the
period assumes the IC Sensors acquisition had occurred as of April 1, 1999,
giving effect to purchase accounting adjustments. The pro forma data is for
informational purposes only and may not necessarily reflect results of
operations had IC Sensors been operated as part of the Company since April 1,
1999.
YEAR ENDED
MARCH 31, 2000
------------
(unaudited)
Net sales $ 70,727
Net income 1,320
Earnings per common share
Basic $ 0.17
==========
Diluted $ 0.15
==========
As discussed in Note 20, the assets related to the silicon wafer fab
manufacturing operations of IC Sensors were sold during July 2002.
F-17
Exeter. On January 5, 2000 the Company acquired, for cash, certain assets
comprising the ultrasonic garage parking system business of Exeter Technologies,
Inc. Pursuant to the acquisition agreement, the Company made an initial payment
of $625 and is required to pay additional consideration based upon future sales.
The additional consideration is equal to 15% of net sales in year one, 10% in
year two and 5% in year three. No payments are to be made after year three. The
acquisition was accounted for under the purchase method of accounting. Net
assets acquired were $469, consisting of the fair value of the assets acquired
of $625 and liabilities assumed of $156. Goodwill of $956 was being amortized
over 7 years prior to adoption of SFAS 142. During September 2001, we
discontinued this product line and wrote off the remaining goodwill in the
amount of $779.
5. INVENTORIES
Inventories are summarized as follows:
March 31,
------------------------
2002 2001
-------- -----------
As Restated
Note 3
-----------
Raw materials $ 7,367 $ 9,431
Work in process 2,763 3,266
Finished goods 12,839 11,665
------- -------
$22,969 $24,362
======= =======
6. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
March 31,
----------------------------------------
2002 2001 Useful Life
---------- -------- ----------------
Production machinery and equipment $ 22,017 $ 19,582 5-7 years
Tooling costs 3,765 2,022 5-7 years
Furniture and equipment 5,537 3,694 3-10 years
Remaining term
Leasehold improvements 3,329 3,148 of the lease
Construction in progress 1,203 1,152 -
-------- -------
Total 35,851 29,598
Less: accumulated depreciation and
amortization (17,506) (12,529)
-------- --------
$ 18,345 $ 17,069
======== ========
Depreciation expense was $4,303, $2,655, and $1,744 for the years ended March
31, 2002, 2001, and 2000, respectively.
7. GOODWILL
F-18
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, 2002 and 2001 are as follows:
SENSORS CONSUMER TOTAL
-------- -------- --------
Balance as of March 31, 2000 $ 4,687 $ 914 $ 5,601
Purchase business combination 6,558 -- 6,558
Goodwill amortization (612) (135) (747)
-------- -------- --------
Balance as of March 31, 2001 10,633 779 11,412
Purchase business combination -- 4,074 4,074
Impairment loss (6,415) (779) (7,194)
Other (27) -- (27)
-------- -------- --------
Balance as of March 31, 2002 $ 4,191 $ 4,074 $ 8,265
======== ======== ========
During the fourth quarter of fiscal 2002 and the first quarter of fiscal 2003,
the Company, 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. In addition to goodwill, an impairment of $285 was provided for
patents.
The following table provides comparative disclosure of adjusted net income
excluding goodwill amortization expense, net of taxes, for the periods
presented:
FOR THE YEARS ENDED MARCH 31,
----------------------------------------
2002 2001 2000
-------- -------- --------
As Restated
Note 3
-----------
Income (loss) before cumulative
effect of accounting changes, as reported $(28,799) $1,197 $5,531
Goodwill Amortization -- 747 146
-------- ------ ------
Income (loss) before cumulative
effect of accounting changes, as adjusted (28,799) 1,944 5,677
Net income (loss), as reported (29,047) 1,197 5,531
Goodwill Amortization -- 747 146
-------- ------ ------
Net income (loss), as adjusted $(29,047) $1,944 $5,677
======== ====== ======
Income (loss) before cumulative effect
of accounting change per share
Basic, as reported $ (2.74) $ 0.15 $ 0.73
Goodwill Amortization -- 0.09 0.02
-------- ------- ------
Basic, as adjusted $ (2.74) $ 0.24 $ 0.75
======== ====== ======
Diluted, as reported (2.74) 0.13 0.64
Goodwill Amortization -- 0.08 0.01
-------- ------ ------
Diluted, as adjusted $ (2.74) $ 0.21 $ 0.65
======== ====== ======
Earnings (loss) per share
Basic net income (loss) per share, $ (2.76) $ 0.15 $ 0.73
as reported
Goodwill Amortization -- $ 0.09 $ 0.02
-------- ------ ------
Net income (loss) per share, as adjusted $ (2.76) $ 0.24 $ 0.75
Diluted net income (loss) per share,
as reported $ (2.76) $ 0.13 $ 0.64
Goodwill amortization -- 0.08 0.01
-------- ------ ------
Diluted net income (loss) per share, as adjusted $ (2.76) $ 0.21 $ 0.65
======== ====== ======
8. LONG-TERM DEBT:
F-19
Long-term debt is summarized as follows:
MARCH 31,
---------------------
2002 2001
------- ------
Borrowings under bank line of credit $20,899 $14,736
Term loan 8,164 22,000
Bank loans - Terraillon 2,534 --
Other, principally capital lease obligations 1,410 --
------- -------
Total long-term debt 33,007 36,736
Less: current portion 32,758 36,736
------- -------
Long-term portion (foreign capital lease obligations) $ 249 $ --
======= =======
Bank loans. In connection with the acquisition of Schaevitz, the Company repaid
the then outstanding balance of a previous term loan and entered into a $25,000
term loan agreement with a syndicate of lending institutions led by the
Company's principal bank. The term loan originally bore interest at a LIBOR rate
plus 3.25% (6.67% and 8.13% as of March 31, 2002 and 2001, respectively). The
term loan required quarterly principal payments of $1,000 through 2007. The term
loan is collateralized by a senior security interest in substantially all of the
Company's assets. Additional principal payments were required from a portion of
the net proceeds of any issuance of additional equity sales. During August 2001,
there was a mandatory prepayment of $9,169 as a result of funds received in a
public offering of common stock (see Note 9).
In August 2000, February 2001 and September 6, 2001, the Company renegotiated
its bank line of credit. As of March 31, 2002, the maximum amount available
amount under the revolving credit portion of the facility was $23,000 which
included an excess line of credit of $6,000 which was scheduled to expire on
March 31, 2002. The Company had been unable to make the mandatory payments
required by the loan agreement to repay this excess amount. The Company also had
availability under the revolving credit portion of the line of credit to borrow
up to the Pounds Sterling equivalent of $3,500 U.S. dollars. Borrowings under
the line of credit were limited to the calculation of "availability" defined as
sum of eligible Accounts Receivable and Inventory, as defined, and are
collateralized by a senior security interest in substantially all the Company's
domestic and U.K. assets. Borrowings bore interest at a maximum of the lesser of
the bank's prime rate plus 1.00% or LIBOR plus 2.75% (7.75% as of March 31,
2002). If the Company achieved certain financial ratios (which did not occur),
the lowest rate became the lesser of the bank's prime rate plus 0.50% or a LIBOR
rate plus 2.25%. Upon an event of a default under the credit agreement, the
interest rate became the lesser of the bank's prime rate plus 3% or LIBOR plus
4.75%. The agreement required annual payment of a commitment fee equal to 0.375%
of the unutilized available balance. As of March 31, 2002, borrowings under the
line of credit exceeded availability as defined above by approximately $8,864.
Debt covenants required the Company to maintain certain fixed charge coverage
ratios and other ratios. Additionally loan agreement required the lenders'
consent for the payment of dividends, acquisitions, and divestitures. Because of
the Company's inability to comply with certain financial covenants contained in
its credit agreement with respect to the fiscal quarters ended September 30,
2001, December 31, 2001, and March 31, 2002, events of default have occurred and
are continuing under the credit agreement. The Company sought, but did not
obtain, a waiver of such events of default from its lenders. Additionally, after
restating the financial statements as discussed in Note 3 the Company determined
that they would not have been in compliance with certain financial covenants at
March 31, 2001 based on the restated results. As a result of the actual defaults
under the credit agreement and the defaults that became
F-20
apparent as a result of the restatement, the Company has classified all of its
outstanding debt as current as of March 31, 2002 and 2001. Further, as a result
of these events the remaining deferred financing costs were fully amortized in
the restated results as of March 31, 2001. Additional financing costs incurred
during the year ended March 31, 2002, were reflected as interest expense.
In April 2002, the Company entered into a forbearance agreement with its lenders
that upon extension expired June 21, 2002 and signed an additional forebearance
agreement on July 2, 2002, pursuant to which the lenders agreed to forbear from
exercising the rights and remedies available to them under the credit agreement
as a result of the Company's defaults until the earlier of November 1, 2002 or
(i) the Company's breach or violation of the provisions of the forbearance
agreement, (ii) the institution of bankruptcy proceedings under the federal
bankruptcy laws, or (iii) the occurrence of additional defaults under the credit
agreement (the time period between July 2, 2002 and the termination of the
lenders' obligation to forbear from the exercise of their rights is referred to
herein as the "forbearance period"). The Company is required under the
forbearance agreement to, among other things, comply with certain strict
financial covenants, actively seek purchasers for certain assets, continue to
make required term loan payments, pledge certain unencumbered assets in favor of
the lenders and issue the lenders a warrant to purchase up to 4.99% of the
Company's common stock. The warrant was issued in July 2002, and subsequently
50% was canceled on October 1, 2002. The balance of the warrant will be canceled
if the company's obligations to the lenders are repaid in full on or before
November 1, 2002. The forbearance agreement also provides that the Company's
borrowings will bear interest at a rate equal to the lenders' prime rate plus
3%, which rate will increase by an additional 2% in the event of a default under
the forbearance agreement.
In connection with the execution of the forbearance agreement, the lenders
agreed to extend additional credit under the revolving credit facility as well
as allow the Company to apply the proceeds from the sale/liquidation of certain
assets against amounts outstanding under the revolving credit facility (rather
than against amounts outstanding under the term loan as otherwise required by
the credit agreement).
Subject to the Company's continued compliance with its terms, the forbearance
agreement permitted the Company to maintain an over advance under the revolving
credit facility of up to $9.0 million until July 31, 2002, after which time the
Company's permitted over advance was reduced to $8.0 million. As a result of the
sale of Terraillon and the application of the proceeds of the sale to amounts
outstanding under the revolving credit facility, the over advance under the
revolving credit facility was eliminated.
Under the forbearance agreement, the deadline for repayment of the term loan and
revolving credit facility has been changed to November 1, 2002.
As of March 31, 2002, the weighted average short-term interest rate on the
revolving credit facility was 7.2%. The average amount outstanding under this
agreement during the year ended March 31, 2002 was $18,873.
Terraillon. At March 31, 2002, Terraillon had short-term debt obligations of
approximately $2,534 with various French bank facilities pursuant to which there
was an unsecured overdraft facility of FRF 2.5 million and a factoring agreement
(collateralized by factored accounts receivable) with a limit of FRF 20 million.
These obligations are not subject to bank covenants, but are callable with 60
days notice. Accordingly, they are included in the current portion of long-term
debt in the financial statements. As of March 31, 2002 the weighted average
short term interest rate on the above borrowings was 6.2%.
Capital lease obligations. During the year ended March 31, 2002, the Company
entered into capital lease obligations which had an aggregate principal balance
of $2,007. Monthly payments aggregate $54 and interest ranges from 7.35% to 9.0%
per annum. Maturity dates for these leases range from April 2003 through
December 2004. At March 31, 2002, equipment under capital lease was $2,007 and
F-21
accumulated depreciation was $449. Most of the capital leases contain certain
cross-default provisions and therefore the capital leases are classified as
current as of March 31, 2002.
Summary. The aggregate contractual maturities of long-term debt as of March 31,
2002 (which is classified as current on such date) are as follows:
FISCAL PRINCIPAL
YEAR REPAYMENTS
------------------ ---------
2003 $27,984
2004 4,547
2005 471
2006 5
-------
Total $33,007
=======
The above schedule of principal repayments includes $353, $380, and $211 for
capital leases for IC Sensors for the fiscal years ended 2003, 2004, and 2005,
respectively. A portion of this operation, along with the capital leases, was
sold as of July, 2002 (see Note 20).
The carrying amounts of the Company's debt instruments approximate fair value as
defined under SFAS No. 107 due to the short maturity of such instruments.
Interest rate swap. As a hedge of its interest rate risk associated with the
term loan, the Company entered into two Interest Rate Swap Agreements (the
"Swaps"). As of March 31, 2002, the Swaps have an initial notional amount of
$14,000 and mature June 2004. The Swaps require 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%). The notional reduction of
the Swaps is as follows:
NOTIONAL
FISCAL REDUCTION
YEAR (MILLIONS)
--------- -----------
2003 2.0
2004 2.0
2005 3.0
As discussed in Note 1, the Company adopted SFAS 133 as of April 1, 2001. The
fair value of the outstanding interest rate swap agreements at March 31, 2001
was $248, or $0.02 per share, representing the amount that would be payable by
the Company if the interest rate swaps were terminated at such date. As of March
31, 2002, the fair market value of the swap of $315 is included in accrued
expenses.
9. SHAREHOLDERS' EQUITY:
The Company is authorized to issue 21,200,000 shares of capital stock, of which
221,756 shares have been designated as serial preferred stock and 20,000,000
shares have been designated as common stock. Each share of common stock has one
vote. The Board of Directors has not designated 978,244 authorized shares of
preferred stock.
F-22
In December 2001, the Company issued 314,081 shares of its newly issued,
unregistered shares of common stock in connection with a private placement with
a member of the Board of Directors. The purchase price was $2,000 or $6.37 per
share, which was an eight percent discount from the average closing price for
the twenty trading days preceding December 24, 2001, the effective date of the
purchase. These monies which 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.
In August 2001, the Company completed an underwritten offering of 2,530,000
shares of its common stock, including the exercise of the overallotment 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 outstanding principal on the term loan.
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, 2002 and 2001, JL's restricted net assets approximated $9,476 and $6,281,
respectively.
10. BENEFIT PLANS:
Defined contribution plans:
MSI has a qualified defined contribution plan under section 401(k) of the
Internal Revenue Code. Substantially all of its U.S. employees are eligible to
participate after completing three months of service. Participants may elect to
contribute a portion of their compensation to the plan. Until April 1, 2002, MSI
matched a portion of participants' contributions, at which time the Company
decided to suspend the Company's contribution to the 401(k) program. For the
years ended March 31, 2002, 2001, and 2000, matching participants' contributions
were $598, $463, and $164, respectively. At the discretion of the Board, the
Company may make profit sharing contributions. No profit sharing contributions
were made for fiscal 2002, 2001, or 2000. Terraillon also maintained defined
contribution plans in France and Ireland.
Defined benefit plans:
MSI provides a contributory defined benefit retirement plan for certain
Schaevitz United Kingdom employees. As a result of the Company's decision to put
its Schaevitz, UK operations in liquidation in the first quarter of fiscal year
2003, the Company will be required to concurrently account for the termination
of the retirement plan (see Note 20, Subsequent Events).
The following tables set forth reconciliations of the beginning and ending
balances of the benefit obligation, fair value of plan assets, funded status and
amounts recognized in the Consolidated Balance Sheets included in other assets
related to the defined benefit plans.
F-23
YEAR ENDED MARCH 31,
2002 2001
------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 2,862 $ --
Service cost 285 142
Interest cost 171 115
Benefits paid (413) --
Plan participants' contributions -- 37
Acquisition -- 3,458
Actuarial (gain) loss 345 (890)
------- -------
Benefit obligation at end of year $ 3,250 $ 2,862
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 5,737 $ --
Actual return on plan assets (834) (74)
Benefits paid (413) --
Acquisition -- 5,774
Plan participants' contributions 827 37
------- -------
Fair value of plan assets at end of year $ 5,317 $ 5,737
======= =======
RECONCILIATION OF FUNDED STATUS:
Funded status $ 2,067 $ 2,678
Unrecognized net actuarial loss (gain) 242 (548)
------- -------
Net amount recognized $ 2,309 $ 2,130
======= =======
At March 31, 2002 and 2001, the net funded status of $2,309 and $2,130,
respectively, is included in other assets in the consolidated balance sheet.
The assumptions used in determining the projected benefit obligations were as
follows:
YEAR ENDED MARCH 31,
2002 2001
------- -------
Weighted-average assumed discount rate 5.9% 6.0%
Expected long-term rate of return on assets
used in determining net periodic pension cost 7.3% 7.5%
Rate of compensation increase used to
measure the projected benefit obligation 5.0% 4.0%
The net periodic pension cost included the following components:
F-24
YEAR ENDED MARCH 31,
2002 2001
----- -----
Service cost $ 285 $ 142
Interest cost 171 115
Expected return on plan assets (428) (267)
----- -----
Net periodic pension cost $ 28 $ (10)
===== =====
11. RELATED PARTY TRANSACTIONS:
The Company paid approximately $15 in legal fees to a member of its board of
directors during each of the years ended March 31, 2002, 2001 and 2000.
In September 2001, the Company loaned $125 to a 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. 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.
The Company sublets a residence used by employees in China from an officer and
director under a month to month arrangement. Rent expense was approximately
$6,000 for each of the fiscal years ended March 31, 2002, 2001 and 2000.
12. RESTRUCTURING AND OTHER COSTS:
During the quarter ended March 31, 2002, management and the Board of Directors
approved a plan of reduction of workforce and a reduction of operating capacity
at certain locations. The reduction in workforce consisted of approximately 106
employees in the consumer and sensor segments, in addition to the corporate
offices. These costs consist of severance costs and the writedown of fixed
assets which amounted to $1,413. As of March 31, 2002 the remaining unpaid
balance of accrued severance costs was $85 and is included in accrued expenses
and other current liabilities in the consolidated balance sheet. All other
previous amounts provided for have been paid.
Additionally, the Company recorded the following costs:
March 31, 2002
--------------
Write-downs of fixed assets $ 458
Severance 955
------
Total $1,413
======
13. INCOME TAXES:
Income (loss) before income taxes and the cumulative effect of accounting change
consists of the following:
F-25
2002 2001 2000
---------- ------------- --------
AS RESTATED
NOTE 3
------------
Domestic $(24,004) $ (533) $ 2,384
Foreign (2,273) 2,738 4,904
-------- -------- --------
$(26,277) $ 2,205 $ 7,288
======== ======== ========
The income tax provision (benefit) consists of the following:
2002 2001 2000
-------- ----------- -------
AS RESTATED
NOTE 3
-----------
CURRENT
Federal $ (132) $ 1,139 $ 939
Foreign 59 691 670
State (55) 125 140
------- ------- -------
Total (128) 1,955 1,749
------- ------- -------
DEFERRED
Federal $ 1,689 $ (769) $ 55
Foreign 120 (65) (47)
State 841 (113) --
------- ------- -------
Total 2,650 (947) 8
------- ------- -------
$ 2,522 $ 1,008 $ 1,757
======= ======= =======
Differences between the federal statutory income tax rate and the effective tax
rates are as follows:
2002 2001 2000
----------- ------------ ------
As Restated
Note 3
-----------
Statutory tax rate (34.0)% 34.0% 34.0%
Effect of foreign taxes 3.1 (13.8) (14.3)
State taxes and other (0.1) 0.4 4.4
Other nondeductible -- 25.1 --
Valuation allowance 40.6 -- --
---- ---- ----
9.6% 45.7% 24.1%
==== ==== ====
The Company's share of cumulative undistributed earnings of its foreign
subsidiaries were approximately $7,100 and $9,373 at March 31, 2002 and 2001 (as
restated), respectively. No provision has been made for U.S. or additional
foreign taxes on the undistributed earnings of foreign subsidiaries because such
earnings are expected to be reinvested indefinitely in the subsidiaries'
operations. It is not practical to estimate the amount of additional tax that
might be payable on these foreign earnings in the event of
F-26
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 state
corporate tax rate of 15 percent. Additionally, because JL has agreed to operate
in China for a minimum of ten years, a tax holiday (which expired on March 31,
1998) was available for two years, and a 50 percent tax rate reduction to 7.5
percent (which expired on March 31, 2001) was available for the three years
thereafter. In July 2001, JL was granted and treated as an advanced technology
enterprise. As a result, JL is entitled to a 50 percent tax rate reduction to
7.5 percent for the following three years. The Hong Kong corporate tax rate, at
which ML's earnings are taxed, is 16 percent.
The significant components of the net deferred tax assets consist of the
following:
YEAR ENDED MARCH 31,
-----------------------------
2002 2001
---------- ---------
As Restated
Note 3
-----------
CURRENT DEFERRED TAX ASSETS (LIABILITIES):
Accrued expenses $ 574 $ 488
Inventory 1,622 682
Accounts receivable allowance 641 785
Other 144 174
Valuation allowance (2,981) --
-------- --------
Total $ -- $ 2,129
======== ========
LONG-TERM DEFERRED TAX ASSETS (LIABILITIES):
Basis difference in acquired property and equipment $ 2,648 $ 2,648
Net operating loss carryforward 7,639 --
Other (254) (93)
Valuation allowance (10,034) (500)
-------- --------
Total $ -- $ 2,055
======== ========
The Company has a pretax loss for financial reporting purposes. Recognition of
deferred tax assets will require generation of future taxable income. As there
can be no assurance that the Company will generate earnings in future years, the
Company has established a valuation allowance on deferred tax assets of
approximately $13,015 and $500 as of March 31, 2002 and 2001, respectively.
The Company has federal net operating loss carryforwards of approximately
$13,390, which expire beginning in fiscal year 2022. The utilization of these
net operating loss carryforwards may be significantly limited under the Internal
Revenue Code as a result of ownership changes due to the Company's stock and
other equity offerings.
The Company has net operating loss carryforwards for state tax purposes of
approximately $6,760 which expire beginning in fiscal years ending 2010.
F-27
The Company has current year net operating losses from its foreign operations of
approximately $9,300 which begin to expire in 2007.
A portion of the Company's deferred tax valuation allowance, when reduced, will
be allocated to additional paid in capital ($2,153).
14. PER SHARE INFORMATION:
Basic per share information is computed based on the weighted-average common
shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or conversion
of stock options, less the shares that may be repurchased with the funds
received from their exercise. Potentially dilutive securities are not included
in earnings per share for the year ended March 31, 2002, as their inclusion
would be antidilutive.
The following is a reconciliation of the numerators and denominators of basic
and diluted EPS computations:
WEIGHTED
AVERAGE
INCOME (LOSS) SHARES (000) PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------ ----------
March 31, 2002
Basic per share information $(29,047) 10,531 $(2.76)
Effect of dilutive securities -- --
-------- ------
Diluted per-share information $(29,047) 10,531 $(2.76)
======== ======
MARCH 31, 2001
Basic per share information $ 1,197 8,144 $ 0.15
Effect of dilutive securities -- 901
-------- ------
Diluted per-share information $ 1,197 9,045 $ 0.13
======== ======
MARCH 31, 2000
Basic per share information $ 5,531 7,612 $ 0.73
Effect of dilutive securities -- 1,084
-------- ------
Diluted per-share information $ 5,531 8,696 $ 0.64
======== ======
For the year ended March 31, 2002, an aggregate of 446,000 options were excluded
from the earnings per share calculation because the effect would be
antidilutive. No options were excluded in the years ended March 31, 2001 or
2000.
15. STOCK OPTION PLANS:
Options to purchase up to 1,828,000 common shares may 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 issuable under 1995 Plan
grants which expire or otherwise terminate without being exercised become
available for later issuance. All shares eligible for grant were issued prior to
April 1, 1999.
Options to purchase up to 1,500,000 shares may be granted under the Company's
1998 Stock Option Plan, (the "1998 Plan") until its expiration on October 19,
2008. Shares issuable under 1998 Plan grants which expire or otherwise terminate
without being exercised become available for later issuance. The aggregate
F-28
numbers of shares available for grants of options under the 1998 Plan were
661,558 and 639,008 as of March 31, 2002 and March 31, 2001, respectively. A
total of 728,438 and 818,692 options to purchase shares were outstanding at
March 31, 2002 and March 31, 2001, respectively.
Options under all Plans generally vest over service periods of up to five years,
and expire no later than ten years from the date of grant. Options may, but need
not, qualify as "incentive stock options" under section 422 of the Internal
Revenue Code. Tax benefits are recognized upon nonqualified exercises and
disqualifying dispositions of shares acquired by qualified exercises. There were
no changes in the exercise prices of outstanding options, through cancellation
and reissuance or otherwise, for 2002, 2001, or 2000.
A summary of the status of stock options as of March 31, 2002, 2001, and 2000
and changes during the years ended on those dates is presented below:
NUMBER OF SHARES WEIGHTED-AVERAGE EXERCISE PRICE
----------------------------------------- -------------------------------------------------
OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE
-------------------- ------------------ --------------------- ----------------------
March 31, 1999 1,658,200 988,532 1.88 1.90
Granted at market 130,450 6.42
Forfeited (52,000) 2.23
Exercised (652,266) 1.75
----------
MARCH 31, 2000 1,084,384 601,400 2.50 2.46
Granted at market 466,600 15.67
Forfeited (13,800) 8.81
Exercised (337,300) 2.33
----------
MARCH 31, 2001 1,199,884 458,044 7.60 2.71
Granted at market 222,300 15.10
Forfeited (190,080) 11.53
Exercised (182,434) 2.35
----------
MARCH 31, 2002 1,049,670 514,660 9.39 4.55
==========
Summarized information about stock options outstanding at March 31, 2002
follows:
Weighted-
Weighted-average average
Number of underlying shares Exercise Exercise price remaining
-------------------------------- -------------------------------
Outstanding Exercisable Price Range Outstanding Exercisable contractual life
--------------- ----------- ------------------------- -------------- ----------- ----------------
475,570 337,700 $ 1.38 $ 6.19 $ 2.21 $ 2.26 5.56
58,000 32,200 $ 8.34 $12.63 $ 8.96 $ 9.10 7.87
516,100 144,760 $14.19 $24.88 $16.06 $15.53 8.53
--------- ------- ------ ------ ----
1,049,670 514,660 $ 9.39 $ 4.55 7.06
========= ======= ------ ------ ----
Had the Company adopted the fair value based method for employee stock options
at grant dates, the Company's pro forma net income (loss) for 2002, 2001, and
2000 would have been reduced to $(29,186), ($(2.77) per basic share and $(2.77)
per diluted share), $187 ($0.02 per basic share and $0.02 per diluted share),
and $5,257 ($.69 per basic share and $.60 per diluted share), respectively.
Based on calculations using the Black-Scholes option pricing model, the
weighted-average fair value of options granted in 2002, 2001, and 2000 at the
date of grant was $9.03, $7.93, and $3.68 per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model
F-29
(single grant assumption with straight-line amortization) with the following
weighted-average assumptions:
2002 2001 2000
------- ----- -----
Expected volatility 90.0% 53.0% 63.0%
Risk-free interest rate 4.9% 5.8% 5.9%
Dividend yield -- -- --
Expected life in years 5.0 5.0 5.0
16. COMMITMENTS AND CONTINGENCIES:
LEASES. The Company leases certain property and equipment under noncancellable
operating leases expiring on various dates through July 2011. Rent expense,
including real estate taxes, insurance and maintenance expenses associated, with
net operating leases approximated $3,032 for 2002, $1,864 for 2001, and $1,050
for 2000. At March 31, 2002, total minimum rentals under leases with initial or
remaining noncancellable lease terms of more than one year were:
YEAR ENDING MARCH 31,
--------------------------------------
2003 $ 2,789
2004 1,803
2005 1,501
2006 1,106
2007 884
Thereafter
Approximately $353 of such lease commitments in 2003, $380 in 2004, and $211 in
2005, ceased when the Company sold the assets relating to its silicon wafer
manufacturing facility in Milpitas, CA in July 2002. The lease for this facility
was assumed by the buyer of these assets. See Note 20.
LEGAL. Class Action Lawsuits. On March 20, 2002, a class action lawsuit was
filed on behalf of purchasers of the Company's common stock in the United States
District Court for the District of New Jersey against Measurement Specialties
and certain 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 and the Company's former auditors. The lawsuit
alleges violations of the federal securities laws including, among other things,
that the registration statement related to the Company's August 2001 public
offering and the Company's periodic SEC filings misrepresented or omitted
material facts and that certain of the Company's officers made false or
misleading statements of material fact. The lawsuit seeks an unspecified award
of money damages. After March 20, 2002, nine additional similar class actions
were filed in the same court. The ten lawsuits have been consolidated into one
case under the caption In re: Measurement Specialties, Inc. Securities
Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs filed a Consolidated Amended
Complaint on September 12, 2002. The Company must file a responsive pleading by
November 11, 2002.
The Company is currently in the process of responding to the claims made in the
class action lawsuit, and intends to defend the foregoing lawsuit vigorously,
but cannot predict the outcome and is not currently able to evaluate the
likelihood of success or the range of potential loss, if any. However, if the
Company were to lose this lawsuit, judgment would likely have a material adverse
effect on the Company's consolidated financial position, results of operations
and cash flows. The Company maintains Directors and Officers insurance policies
that provide an aggregate coverage of $10,000 for the period during which
the claims were filed, but cannot evaluate at this time whether such coverage
will be available or adequate to cover losses, if any, arising out of this
litigation.
F-30
SEC Investigation. In February 2002, the Company, at its own initiative,
contacted the staff of the SEC after discovering that the Company's former Chief
Financial Officer misrepresented to senior management, the Board and the
Company's auditors that a waiver of the covenant default under the Company's
credit agreement had been obtained when, in fact, the lenders 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 the Company's quarterly report on Form 10-Q for the quarter ended
December 31, 2001. The Company cannot predict how long the SEC investigation
will continue or its outcome.
United States Attorney Inquiry.
The Company has also learned that the Office of the United States Attorney for
the District of New Jersey is conducting an inquiry into the same matters that
are being investigated by the SEC. The Company cannot predict how long the
United States Attorney's inquiry will continue or its outcome.
Other Litigation.
In re Service Merchandise Company, Inc. (Service Merchandise Company, Inc. v.
Measurement Specialties, Inc.), United States Bankruptcy Court for the Middle
District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro. No.
301-0462A
The Company is currently a the defendant in a lawsuit filed in March 2001 by
Service Merchandise Company, Inc. ("SMC") and its related debtors (collectively,
the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
The Bankruptcy Court entered a stay of the action in May 2001, which was lifted
in February 2002. Citing 11 U.S.C. Section 547(b), the action alleges that the
Company received $645 from one or more of the Debtors during the ninety (90) day
period before the Debtors filed their bankruptcy petitions, that the transfers
were to the Company's benefit, were for or on account of an antecedent debt owed
by one or more of the Debtors, made when one or more of the Debtors were
insolvent, and that the transfers allowed the Company to receive more than it
would have received if the cases were cases under Chapter 7 of the United States
Bankruptcy Code. The action seeks to disgorge the sum of $645 from the Company.
It is not possible at this time to predict the outcome of the litigation or
estimate the extent of any damages that could be awarded in the event that the
Company is found liable to the estates of SMC or the other Debtors.
Robert L. DeWelt v. Measurement Specialties, Inc. et al., United States District
Court, District of New Jersey, Civil Action No. 02-CV-3431.
On July 17, 2002, the Company's former acting Chief Financial Officer and
general manager of the Company's Schaevitz Division, filed a lawsuit against the
Company and certain of its officers and directors. The lawsuit alleges a claim
for constructive wrongful discharge and violations of the New Jersey
Conscientious Employee Protection Act. The former Chief Financial Officer seeks
an unspecified amount of compensatory and punitive damages. The Company has
filed a Motion to Dismiss for which a hearing is scheduled on November 12, 2002.
At this early point in the litigation, we cannot predict its outcome.
Terraillon Stock Purchase. On or about July 23, 2002, Hibernia Capital Partners
I, ilp and Hibernia Capital Partners II, ilp filed a lawsuit against the Company
in the High Court of Dublin. The Plenary Summons states that plaintiffs seek a
declaration that the plaintiffs entered into the share purchase agreement on
June 7, 2001 for the sale of their shares in Terraillon Holdings Limited to
Measurement Specialties as a result of an operative misrepresentation and
misstatement. Plaintiffs further seek damages for misrepresentation and/or
breach of contract and/or breach of warranty and costs of the proceedings. On
August 9, 2002, the Company entered an Appearance, which is the equivalent of
the acceptance of service of process. On August 22, 2002, plaintiffs filed a
Statement of Claim, which is the equivalent of a Complaint. The Company is still
engaged in the initial pleadings process wherein
F-31
plaintiffs' claims and our defenses will be set forth in detail. The Company
intends to defend the foregoing lawsuit vigorously, but cannot predict the
outcome and are not currently able to evaluate the likelihood of success or the
range of potential loss, if any.
The Company has other litigation occurring in the normal course of its business.
The Company does not believe that this litigation will have a material effect on
financial position or results of operations.
17. SEGMENT INFORMATION:
The Company's reportable segments are strategic business units that operate in
different industries and are managed separately. Management has organized the
business based on the nature of the 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, 2002 the foreign subsidiaries' total assets aggregated $53,108 of
which $5,431 was in the United Kingdom, $27,985 was in France and Ireland,
$5,239 was in Hong Kong and $14,453 was in China. At March 31, 2001 the foreign
subsidiaries' total assets aggregated $24,935 of which $9,796 was in the United
Kingdom, $4,789 was in Hong Kong and $10,350 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:
F-32
2002 2001 2000
--------- ---------- ----------
As Restated
Note 3
----------
Net sales:
Consumer Products $ 76,395 $ 53,027 $ 44,123
Sensors 56,224 48,948 15,874
--------- --------- ---------
Total $ 132,619 $ 101,975 $ 59,997
========= ========= =========
Operating income
Consumer Products $ 4,487 $ 9,089 $ 9,302
Sensors (18,655) 916 3,275
--------- --------- ---------
Total segment operating income (loss) (14,168) 10,005 12,577
Unallocated expenses (8,987) (5,459) (4,985)
--------- --------- ---------
Total operating income (loss) (23,155) 4,546 7,592
Interest expense, net of interest income (2,681) (2,634) (287)
Other (expense) income (441) 293 (17)
--------- --------- ---------
Income (loss) before taxes and
cumulative effect of accounting change $ (26,277) $ 2,205 $ 7,288
========= ========= =========
Depreciation and amortization:
Consumer Products $ 1,430 $ 1,018 $ 1,079
Sensors 3,547 1,823 1,004
--------- --------- ---------
Total $ 4,977 $ 2,841 $ 2,083
========= ========= =========
Segment assets:
Consumer Products $ 43,617 $ 19,229 $ 12,505
Sensors 43,801 55,425 23,672
Unallocated 2,194 2,825 3,434
--------- --------- ---------
Total $ 89,612 $ 77,479 $ 39,611
========= ========= =========
Capital expenditures:
Consumer Products $ 687 $ 1,455 $ 841
Sensors 1,679 4,198 1,669
--------- --------- ---------
Total $ 2,366 $ 5,653 $ 2,510
========= ========= =========
Unallocated assets consist mainly of cash and other assets not attributable to
any reportable segment. Unallocated expenses consist of general corporate
expenses.
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:
F-33
2002 2001 2000
-------- ----------- --------
As Restated
-----------
Net sales:
Germany $ 15,453 $ 11,046 $ 9,835
France 15,193 1,394 846
Other Europe 15,184 14,279 5,011
Other 16,994 9,155 1,351
United States 69,795 66,101 42,954
-------- -------- --------
Total $132,619 $101,975 $ 59,997
======== ======== ========
Long-lived assets by jurisdiction are as follows:
2002 2001 2000
------- ----------- -------
As Restated
-----------
Hong Kong $ 2,013 $ 1,447 $ 707
China 7,451 6,686 1,936
France 14,390 -- --
United Kingdom 2,070 5,887 --
United States 12,640 20,336 16,038
------- ------- -------
Total $38,564 $34,356 $18,681
======= ======= =======
18. CONCENTRATIONS:
Financial instruments which potentially subject the Company to significant
concentrations of credit risk are principally are cash trade accounts receivable
and interest rate swaps and foreign currency options and forwards.
The Company generally maintains its cash and cash equivalents at major financial
institutions in the United States, United Kingdom, France, Hong Kong and China.
Cash held in foreign institutions amounted to $930 and $487 at March 31, 2002
and 2001, 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, California, and
Pennsylvania and its Slough, United Kingdom facility. Additionally, certain key
management, sales and support activities are conducted at leased premises in
France and 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, with respect to China, political, economic and
legal uncertainties.
F-34
A United States manufacturer and distributor of electric housewares accounted
for 10% and 19% of total net sales for the fiscal years ended March 31, 2001 and
2000, respectively. A German distributor of diversified housewares accounted for
10% and 14% of total net sales for the fiscal years ended March 31, 2001 and
2000, respectively. Both customers are in the Company's Consumer Products
segment. There were no customers who accounted for more than 10% of total sales
for the year ended March 31, 2002.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Presented below is a schedule of selected restated quarterly operating results
(see Note 3).
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
ENDED JUNE 30 ENDED SEPT. 30 ENDED DEC. 31 ENDED MARCH 31
------------- -------------- ------------- --------------
YEAR ENDED MARCH 31, 2002
AS REPORTED
Net sales $25,871 $34,868 $43,022 $29,917(1)
Gross profit 10,699 8,682 420 7,544
Net income (loss) 1,351 (3,811) (11,346) (18,056)
Income (loss)
EPS basic 0.16 (0.37) (0.98) (1.52)
EPS diluted 0.15 (0.37) (0.98) (1.52)
AS RESTATED
Net sales $25,658 $34,399 $42,190 $30,372
Gross profit 6,718 7,991 11,838 8,461
Net income (loss) (2,545)(2) (5,835) (1,935) (18,732)
Income (loss)
EPS basic (0.29) (0.57) (0.17) (1.58)
EPS diluted (0.29) (0.57) (0.17) (1.58)
YEAR ENDED MARCH 31, 2001
AS REPORTED
Net sales $16,302 $28,237 $34,330 $24,226
Gross profit 7,511 11,999 13,936 10,867
Net income (loss) 1,196 2,816 3,148 1,801
Income (loss)
EPS basic 0.30 0.35 0.38 0.22
EPS diluted 0.27 0.32 0.35 0.20
AS RESTATED
Net sales $16,154 $28,277 $34,438 $23,106
Gross profit 5,369 11,689 10,087 7,892
Net income (loss) (1,703) 1,821 213 866
Income (loss)
EPS basic (0.43) 0.23 0.03 0.11
EPS diluted (0.43) 0.21 0.02 0.10
F-35
(1) Not previously reported.
(2) Includes cumulative effect of accounting change.
Earnings per share are computed independently for each of the quarters
presented, on the basis described in Note 14. The sum of the quarters may not be
equal to the full year earnings per share amounts.
20. SUBSEQUENT EVENTS (UNAUDITED):
During June 2002, the Board of Directors approved a second restructuring program
with the aim of reducing costs, streamlining operations and generating cash to
repay the Company's Lenders. In connection with this restructuring program, the
Company has taken the following actions:
UK Operations. The Company placed its United Kingdom subsidiary, 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. The receiver's function was to dispose of Schaevitz, UK's business
and assets for the best price possible. The book debt recoveries and sale
proceeds were applied in settlement of the receiver's remuneration, costs and
expenses, the preferential creditors' claims, (i.e. the claims of the Inland
Revenue, Customs & Excise and employee claims up to certain statutory limits)
and then to (i) claims by our lenders in accordance with UK insolvency
legislation (the Insolvency Act 1986) and (ii) priority arrangements. Schaevitz,
UK's landlord has a potential dilapidations claim of up to 350,000 pounds
sterling (approximately $549,000 United States dollars based on market exchange
rates as of October 8, 2002) against Schaevitz, UK that arose on the expiration
of the lease of 543/544 Ipswich Road Trading Estate, Slough, Berkshire, England
on June 23, 2002. The Company is currently in negotiations with the landlord
regarding this matter.
IC Sensors. In July 2002, the Company sold the assets related to its silicon
wafer fab manufacturing operation in Milpitas, California 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 $1,000 of the cash purchase price was used to satisfy an
outstanding equipment lease obligation. The prepaid credits for products and
services, if utilized, will be accounted for as a component of our wafer costs.
The estimated gain on this sale is approximately 150, net of tax.
Terraillon. In September 2002, we sold all of the outstanding stock of
Terraillon Holdings Limited, a European manufacturer of branded consumer
bathroom and kitchen scales, to Fukuda (Luxembourg) S.a.r.l., an investment
holding company incorporated in Luxembourg, for approximately $22,300.
Approximately $2,282 of the purchase price will be held in escrow until January
24, 2003 to secure payment of certain purchase price adjustments, if any. The
estimated gain on this sale is approximately $1,500, net of tax.
Corporate Revitalization Partners. In May 2002, the Company retained Corporate
Revitalization Partners (CRP) to conduct its ongoing operational/financial
restructuring efforts. In June 2002, Frank Guidone, Managing Director of CRP,
became the Company's chief executive officer. As of October 8, 2002, the Company
has incurred $1,200 in consulting fees to CRP (excluding the success fees
described in the following sentence). In addition to consulting fees based on
hours billed by CRP consultants, there is a "success fee" consisting of $50 and
a warrant exercisable to purchase 43,860 shares of the Company's common stock
(at an exercise price of $2.28 per share) that is payable upon the occurrence
of each of the following three events:
- the successful negotiation and execution of an extended forbearance
agreement with the Company's lenders (this agreement has been
executed);
- the Company's compliance as of September 30, 2002 with the terms of
the forbearance agreement with its lenders (the Company was in
compliance with the forbearance agreement as of September 30, 2002);
and
- the repayment of all amounts due to the Company's existing senior
lenders and refinancing of the Company's debt on or before November 1,
2002.
F-36
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED MARCH 31, 2002, 2001, AND 2000
---------------------------------------------------------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
---------------------------------------------------------------------------------------------------------------------------
Description Balance at Additions Deductions -- Balance at
Beginning Describe End
Of Period ------------------------- of Period
(1) (2)
Charged to Charged to
Costs and Other
Expenses Accounts --
Describe
---------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2002*
Deducted from asset accounts:
Allowance for doubtful accounts $ 914 $ 1,158 $ -- $ (1,068)(a) $ 1,004
Sales return reserve 337 876 -- (824)(b) 389
Inventory allowance 2,628 3,762 -- -- 6,390
Valuation allowance for deferred taxes 500 12,515 -- -- 13,015
---------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2001*
Deducted from asset accounts:
Allowance for doubtful accounts $ 318 $ 698 $ -- $(102)(a) $ 914
Sales return reserve 80 380 -- (123)(b) 337
Inventory allowance 2,897 (269) -- -- 2,628
Valuation allowance for deferred taxes 500 -- -- -- 500
---------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 326 $ (8) $ -- $ -- $ 318
Sales return reserve 63 17 -- -- 80
Inventory allowance 1,195 1,702 -- -- 2,897
Valuation allowance for deferred taxes -- 500 -- -- 500
---------------------------------------------------------------------------------------------------------------------------
(a) Bad debts written off, net of recoveries
(b) Actual returns received
* As Restated
S-1