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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended March 31, 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.
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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
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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
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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.
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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