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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 1-11906
MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2378738
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
710 ROUTE 46 EAST, SUITE 206, 07004
FAIRFIELD, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (973) 808-3020
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
At November 1, 2002, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $19.8 million
based on the closing price of the registrant's common stock on November 1, 2002.
Trading of the registrant's common stock on the American Stock Exchange was
suspended from July 15, 2002 until November 1, 2002.
At May 13, 2003, 11,922,958 shares of the registrant's common stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM 10-K,
EXCEPT FOR ITEMS 14 AND 15 OF PART III WHICH ARE INCLUDED HEREIN, IS SET FORTH
IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON
SEPTEMBER 23, 2003, TO BE FILED BY THE REGISTRANT WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER THAN 120 DAYS AFTER THE
FISCAL YEAR ENDED MARCH 31, 2003.
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MEASUREMENT SPECIALTIES, INC.
FORM 10-K
TABLE OF CONTENTS
MARCH 31, 2003
PART I
ITEM 1. BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 22
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND . . . 35
FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. . . . . . . . . . 35
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. . . . 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . . . . . 36
ITEM 14. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . 36
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . . . . . . . . . . . . 37
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. . . 37
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
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PART I
ITEM 1. BUSINESS
INTRODUCTION
NOTE: AS MORE FULLY DESCRIBED BELOW UNDER "CHANGES TO OUR BUSINESS," WE
DISCONTINUED CERTAIN OF OUR BUSINESSES AND SOLD ASSETS DURING THE FISCAL YEAR
ENDED MARCH 31, 2003. EXCEPT AS OTHERWISE NOTED, THE DESCRIPTIONS OF OUR
BUSINESS, RESULTS AND OPERATIONS CONTAINED IN THIS REPORT REFLECT ONLY OUR
CONTINUING OPERATIONS.
Measurement Specialties is 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, medical, military, and industrial
applications. Our Sensor business customers include manufacturers such as Alaris
Medical, Texas Instruments, the Allison Transmission Division of General Motors,
St. Jude Medical, and Graco.
Our Consumer Products business designs, manufactures and markets
sensor-based consumer products. These products include bathroom and kitchen
scales, tire pressure gauges, kitchen accessories and distance estimators. These
products are typically based on application-specific integrated circuits,
piezoresistive, and ultrasonic technologies. Our Consumer Products customers
include 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 benefit from the same core technology base. Our
advanced technologies include piezoresistive silicon sensors,
application-specific integrated circuits, micro-electromechanical systems
(MEMS), piezoelectric polymers, foil strain gauges, force balance systems, fluid
capacitive devices, linear and rotational variable differential transformers,
electromagnetic displacement sensors and ultrasonics. These technologies allow
our sensors to operate precisely and cost effectively. We have a global
operation with manufacturing, engineering, R&D facilities and sales offices
located in North America, Europe and Asia. By functioning globally we have been
able to enhance our applications engineering capabilities and increase our
geographic proximity to our customers.
Our strategy is to utilize our expertise in sensor technologies to target
expanding market segments and develop new products and applications, thereby
increasing demand for our sensors and sensor-based consumer products. Our
global design teams support our production facilities and engineering resources
in the United States and in China. By combining our manufacturing expertise with
our core technology, we strive to provide our global customers with an
advantageous price-value relationship.
OUR SENSORS
The majority of our sensors are devices, sense elements and transducers
that convert mechanical information into a proportionate electronic signal for
display, processing, interpretation, or control. Sensors are essential to the
accurate measurement, resolution, and display of pressure, motion, force,
displacement, angle, flow, and distance. Our other Sensor products are
transducers that convert an applied electrical signal into a mechanical motion
corresponding to the amplitude and frequency of the electrical input.
MARKETS
Sensor manufacturers are moving toward smart sensors that use digital
intelligence to enhance measurement and control signals. The shift toward
sensors utilizing digital signal processing technologies has enhanced
applications in the automotive, medical, military, and consumer products
markets. Examples of our sensor applications include:
- automotive applications in braking, transmission, fuel pressure,
diesel common rail pressure monitoring, security sensing, and onboard
tire pressure monitoring;
- industrial sensors for regulating flow in industrial paint sprayers
and agricultural equipment, monitoring pressures in refrigeration and
heating/ventilating/air conditioning compressors, controlling valves
in process control and electrical power generation equipment and
traffic monitoring, vehicle speed and red light enforcement:
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- medical sensors for invasive blood pressure measurement, drug infusion
flow monitoring, electronic stethoscopes, vascular health diagnostics,
sleep disorder sensing, and body activity feedback in heart
pacemakers;
- military applications, which continue to drive sensor development,
with new systems requiring small, high performance sensors for smart
systems such as navigation and weapons control systems, pressure
monitoring, and collision avoidance systems; and
- consumer products applications including the measurement of weight,
distance, and movement, digitizing information for electronic white
boards and pen input devices for laptops, acoustic devices for musical
instruments and speakers, and imbalance sensors for appliances.
In recent years, advances in microprocessor technology have fueled the
demand for sensors. As microprocessors have become smaller, more powerful and
less expensive, they have been incorporated into an increasing 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;
- the proliferation of silicon micromachining technology in
micro-electromechanical systems (MEMS) devices as a low-cost
alternatives to traditional technologies;
- manufacturers' increased use of advanced 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
In the rapidly evolving markets for sensors and sensor-based consumer
products, there is an increasing demand for technologies such as:
Piezoresistive Technology. Piezoresistive materials, most often silicon,
respond to changes in applied mechanical variables such as stress, strain, or
pressure by changing electrical conductivity. Changes in electrical
conductivity can be readily detected in circuits by changes in current with a
constant applied voltage, or conversely by changes in voltage with a constant
supplied current. Piezoresistive technology is widely used for the measurement
of pressure, load and acceleration, and its use in these applications is
expanding significantly.
Application Specific Integrated Circuits (ASICs). These circuits convert
analog electrical signals into digital signals for measurement, computation, or
transmission. Application specific integrated circuits are well suited for use
in consumer products because they can be designed to operate from a relatively
small power source and are inexpensive.
Micro-Electromechanical Systems (MEMS). Micro-electromechanical systems and
related silicon micromachining technology are used to manufacture components for
physical measurement and control. Silicon micromachining is an ideal technology
to use in the construction of miniature systems involving electronic, sensing,
and mechanical components because it is inexpensive and has excellent physical
properties. Micro-electromechanical systems have several advantages over their
conventionally manufactured counterparts. For example, by leveraging existing
silicon manufacturing technology, micro-electromechanical systems allow for the
cost-effective manufacture of small devices with high reliability and superior
performance.
Piezoelectric Polymer Technology. Piezoelectric materials convert
mechanical stress or strain into proportionate electrical energy, and
conversely, these materials mechanically expand or contract when voltages of
opposite polarities are applied. Piezoelectric polymer films are also
pyroelectric, converting heat into electrical charge. These polymer films offer
unique sensor design and performance because they are thin, flexible, inert,
broadband, and relatively inexpensive. This technology is ideal for applications
where the use of rigid sensors would not be possible or cost-effective.
Strain Gauge Technology. A strain gauge consists of metallic foil that is
impregnated into an insulating material and bonded to a sensing element. The
foil is etched to produce a grid pattern that is sensitive to changes in
geometry, usually length, along the sensitive axis producing a change in
resistance. The gauge operates through a direct conversion of strain to a
change in gauge resistance. This technology is useful for the construction of
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 a servo
amplifier and a current developed is fed back into a moving coil. This current
is proportional to the applied
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tilt angle or applied linear acceleration and will balance the mass back to its
original position. These devices are used in military and industrial
applications where high accuracy is required.
Fluid Capacitive Technology. This technology is also referred to as fluid
filled, variable capacitance. The output from the sensing element is two
variable capacitance signals per axis. Rotation of the sensor about its
sensitive axis produces a linear change in capacitance. This change in
capacitance is electronically converted into angular data, and provides the user
with a choice of ratiometric, analog, digital, or serial output signals. These
signals can be easily interfaced to a number of readout and/or data collection
systems.
Linear Variable Differential Transformers (LVDT). An LVDT is an
electromechanical sensor that produces an electrical signal proportional to the
displacement of a separate movable core. LVDT's are widely used as measurement
and control sensors wherever displacements of a few micro inches to several feet
can be measured directly, or where mechanical input, such as force or pressure,
can be converted into linear displacement. LVDT's are capable of extremely
accurate and repeatable measurements in severe environments.
Ultrasonic Technology. Ultrasonic sensors measure distance by calculating
the time of flight between transmitting and receiving an acoustic signal that is
inaudible to the human ear. This technology allows for the quick, easy, and
accurate measurement of distances between two points without physical contact.
BUSINESS SEGMENTS
Our financial results by business segment for the fiscal years ended March
31, 2003, 2002 and 2001 are presented in Note 17 to the consolidated financial
statements included in this Annual Report on Form 10-K.
PRODUCTS
Sensors. A summary of our Sensor business product offerings as of March
31, 2003 is presented in the following table:
PRODUCT TECHNOLOGY BRAND NAME APPLICATIONS
- ---------------- ------------------ ------------ --------------------------------------
Pressure Sensors Micro- IC Sensors Disposable catheter blood pressure,
Electromechanical altimeter, dive tank pressure, process
Systems (MEMS) instrumentation, fluid level, and
intravenous drug administration
monitoring
- ------------------------------------------------------------------------------------------
Piezoresistive microFused Fertilizer and paint spraying, diesel
engine control, hydraulics, and
automotive power train
- ------------------------------------------------------------------------------------------
Strain Gauge Schaevitz Instrumentation-grade aerospace and
weapon control systems, deep-sea
well head pressure, ship cargo level,
and steel mills
- ------------------------------------------------------------------------------------------
Accelerometers Piezoelectric PiezoSensors Transportation shipment monitoring,
Polymer audio speaker feedback, appliance
imbalance and consumer
exercise monitoring
- ------------------------------------------------------------------------------------------
Micro- IC Sensors Traffic alert and collision avoidance
Electromechanical systems, railroad, tilt, and
Systems (MEMS) instrumentation
- ------------------------------------------------------------------------------------------
Force Balance Schaevitz Aerospace, weapon fire control,
inertial navigation, angle, and tilt
- ------------------------------------------------------------------------------------------
Rotary Linear and Rotary Schaevitz Aerospace, machine control systems,
Displacement Variable knitting machines, industrial process
Sensors Displacement control, and hydraulic actuators
Transducer
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- ------------------------------------------------------------------------------------------
Tilt/Angle Fluid Capacitive Schaevitz Tire balancing, heavy equipment level
Sensors measurement, and consumer
electronic level measurement
- ------------------------------------------------------------------------------------------
Traffic Sensors Piezoelectric PiezoSensors Traffic survey, speed and red light
Polymer enforcement, toll, and in-motion
vehicle weight measurement
- ------------------------------------------------------------------------------------------
Custom Piezofilm Piezoelectric PiezoSensors Medical diagnostics, ultrasound,
Sensors Polymer consumer electronic, electronic
stethoscope, and sonar
- ------------------------------------------------------------------------------------------
Custom Micro- IC Sensors Atomic force microscopes, optical
Microstructures Electromechanical switching, hydrogen and humidity
Systems (MEMS) sensors
Consumer Products. A summary of our sensor-based consumer products as of
March 31, 2003 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 Health-o-meter,
Specific Laica,
Integrated Salter, and
Circuits Babyliss
Kitchen Scales $ 3.00-25.00
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
- ---------------------------------------------------------------------------------
Kitchen Tools Dalla Piazza Kitchen Tools $ 1.75-45.00
* Health-o-Meter, Laica, Salter, Babyliss, Royal, and Dalla Piazza are
trademarks, trade names, or service marks of our customers and are not
owned by us.
CUSTOMERS
We sell our sensor products throughout the world. Our Sensor business
designs, manufactures, and markets sensors for original equipment manufacturer
applications. Our extensive customer base consists of manufacturers of
electronic, automotive, medical, military, and industrial products. None of our
Sensor business customers accounted for more than 10% of our net sales during
the last three fiscal years. Our key Sensor customers include:
- Alaris Medical - Allison Transmission - Ingersol Rand
- Argon Medical - Badger Meter - Component Distributor
- Graco - St. Jude Medical - Texas Instruments
Our Consumer Products business customers are primarily retailers,
resellers, or manufacturers of consumer products in the United States and
Europe. No Consumer Products customer accounted for more than 10% of net sales
in the fiscal year ended March 31, 2003. Previously, we had two Consumer
Products customers who accounted for more than 10% of net sales, Korona
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Haushaltswaren GmbH (Korona), a German distributor of diversified housewares,
and Sunbeam Corp. (Health and Safety Division), a United States manufacturer and
distributor of housewares.
Korona was acquired in August 2000 by an Asian manufacturer of scales and
other electronic products that is competitor of ours. Korona accounted for
0.4%, 7.2%, and 10.5% of net sales, or $0.4 million, $7.0 million, and $10.2
million, for the fiscal years ended March 31, 2003, 2002 and 2001, respectively.
Sales to Sunbeam accounted for 7.9%, 7.9%, and 10.5% of net sales, or $8.5
million, $7.6 million, and $10.2 million, for the fiscal years ended March 31,
2003, 2002 and 2001, respectively.
Other key Consumer Products customers include:
- Bed Bath & Beyond - Beurer - Brookstone
- Costco - Laica - Linens 'n Things
- Ole Bodtcher Hanson - Sam's Club - Sears
- Target
SALES AND DISTRIBUTION
We sell our sensor products through a combination of experienced direct
sales engineers and generally exclusive sales relationships with outside sales
representatives throughout the world. Our engineering teams work directly with
our global customers to tailor our sensors to meet their specific application
requirements.
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. 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. The
growing Asian market is a significant target of opportunity for our business.
International sales accounted for 24.0% of net sales of our business for the
fiscal year ended March 31, 2003, 27.9% of net sales of our business for the
fiscal year ended March 31, 2002, and 31.9% of net sales of our business for the
fiscal year ended March 31, 2001.
SUPPLIERS
We rely on contract manufacturers for a significant portion of our
consumer-finished products. The majority of our sensor-based consumer products
are assembled by a single contract manufacturer located in China. We utilize
alternative manufacturers located in China to assemble additional sensor-based
consumer products. We procure components and finished products as needed,
through purchase orders, and do not have long-term contracts with any of our
suppliers. We believe that the components we utilize could be obtained from
alternative sources, or that our products could be redesigned to use alternative
suppliers' components, if necessary.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on expanding our core
technologies, improving our existing products, developing new products, and
designing custom sensors for specific customer applications. Our gross research
and development expenses, including customer funded projects, were $3.6
million, or 3.3% of net sales, for the fiscal year ended March 31, 2003,$6.9
million, or 7.1% of net sales, for the fiscal year ended March 31, 2002, $5.7
million, or 5.9% of net sales, for the fiscal year ended March 31, 2001.
Research and development expenses for our Sensor business were $3.0 million,
or 5.7% of net sales of our Sensor business, for the fiscal year ended March 31,
2003, $6.2 million, or 12.9% of net sales of our Sensor business, for the
fiscal year ended March 31, 2002, and $5.1 million, or 11.6% net sales of our
Sensor business, for the fiscal year ended March 31, 2001. Research and
development expenses in the Consumer Products business, which are historically
lower than Sensor business research and development expenses, were $0.6
million, or 1.1% of net sales of our Consumer Products business, for the fiscal
year ended March 31, 2003, $0.7 million, or 1.5% of net sales of our Consumer
Products business, for the fiscal year ended March 31, 2002, and $0.6 million,
or 1.3% net sales of our Consumer Products business, for the fiscal year ended
March 31, 2001.
To maintain and improve our competitive position, our research, design, and
engineering teams work directly with customers to design custom sensors for
specific applications. For certain programs we receive funding from customers
for new product development, including $0.4 million for the fiscal year ended
March 31, 2003, $1.8 million for the fiscal year ended March 31, 2002, and $4.1
million for the fiscal year ended March 31, 2001. The primary cause of the
reduction in customer-funded development was the sale of the IC Sensors wafer
fab in July 2002. See Note 7 to the consolidated financial statements included
in this Annual Report on Form 10-K for a discussion of the sale of the IC
Sensors wafer fab.
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COMPETITION
The global market for sensors includes many diverse products and
technologies and is highly fragmented and subject to low to moderate pricing
pressures.
MSI piezoresistive, MEMS and microFused pressure sensing technologies
compete directly within the largest and fastest growing segments in the global
market for industrial pressure sensors. Most of our Sensor business competitors
are small companies or divisions of large corporations such as Emerson,
Motorola, Siemens, General Electric and Honeywell. The principal elements of
competition in the sensor market are production capabilities, price, quality,
service, and the ability to design unique applications to meet specific customer
needs.
The market for sensor-based consumer products is characterized by frequent
introductions of competitive products and moderate to high pricing pressures.
Recently, a number of brand name scale companies have been acquired by larger
brand name companies or by Asian original equipment manufacturers. 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 sensor-based consumer products market are price,
quality, and the ability to introduce new and innovative products.
Although we believe that we compete favorably in our Sensor and Consumer
Products businesses, new product introductions by our competitors could cause a
decline in sales or loss of market acceptance for our existing products. If
competitors introduce more technologically advanced products, the demand for our
products would likely be reduced.
INTELLECTUAL PROPERTY
We rely in part on patents to protect our intellectual property. We own 60
United States utility patents, 37 United States design patents, and 23 foreign
patents to protect our rights in certain applications of our core technology.
We have 18 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, customers, and others. We cannot be certain
that these agreements will adequately protect our proprietary rights in the
event of any unauthorized use or disclosure, that our employees, consultants,
advisors, customers, or others will maintain the confidentiality of such
proprietary information, or that our competitors will not otherwise learn about
or independently develop such proprietary information.
Despite our efforts to protect our intellectual property, unauthorized
third parties may copy aspects of our products, violate our patents, or use our
proprietary information. In addition, the laws of some foreign countries do not
protect our intellectual property to the same extent as the laws of the United
States. The loss of any material trademark, trade name, trade secret, patent
right, or copyright could 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 in
Hampton, VA and San Jose, CA. 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 contain key components that are obtained from
a limited number of sources. These concentrations in external and foreign
sources of supply present risks of interruption for reasons beyond our control,
including political and other uncertainties regarding Hong Kong and China.
The Chinese government has continued to pursue economic reforms hospitable
to foreign investment and free enterprise, although the continuation and success
of these efforts is not assured. Our operations could be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation
and currency exchange controls, by the imposition of economic austerity measures
intended to reduce inflation, and by social and political unrest. China became a
member of World Trade Organization (WTO) on December 11, 2001. Such membership
requires China and each other member of the WTO to grant one another reciprocal
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"Normal Trade Relations" (NTR) status (formerly known as Most Favored Nation).
Accordingly, China's preferred trading status with the United States (and other
WTO members) is no longer subject to annual review and Chinese goods exported to
the United States are subject to a low tariff and receive other favorable
treatment.
The continued stability of political, legal, economic or other conditions
in Hong Kong cannot be assured. No treaty exists between Hong Kong and the
United States providing for the reciprocal enforcement of foreign judgments.
Accordingly, Hong Kong courts may not enforce judgments predicated on the laws
of the United States, whether arising from actions brought in the United States
or, if permitted, in Hong Kong.
Most of our revenues are priced in United States dollars. Most of our costs
and expenses are priced in United States dollars, Chinese renminbi and Hong Kong
dollars. Accordingly, the competitiveness of our products relative to products
produced locally (in foreign markets) may be affected by the performance of the
United States dollar compared with that of our foreign customers' currencies.
United States sales were $82.0 million, $69.8 million and $66.1 million, or
76.0%, 72.1%, and 68.1% of net sales, for the fiscal years ended March 31, 2003,
2002, and 2001, respectively. Foreign sales were $25.9 million, $27.0 million
and $30.9 million, or 24.0%, 27.9%, and 31.9% of net sales, for the fiscal years
ended March 31, 2003, 2002, and 2001, respectively. While limited, we are
exposed to foreign currency transaction and translation losses, which might
result from adverse fluctuations in the value of the Hong Kong dollar and
Chinese renminbi.
At March 31, 2003, we had net assets of $7.7 million in the United States.
At March 31, 2003, we had net liabilities of $2.0 million subject to
fluctuations in the value of the Hong Kong dollar and net assets of $13.7
million subject to fluctuations in the value of the Chinese renminbi.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to potential foreign currency,
transaction and translation risks, we may purchase currency exchange forward
contracts, currency options, or other derivative instruments, provided such
instruments may be obtained at suitable prices. However, to date we have not
done so.
EMPLOYEES
As of March 31, 2003, we employed 1,463 persons, including 187 employees in
the United States, 3 employees in the United Kingdom, 1,267 employees in
Shenzhen, China, and 6 employees in Hong Kong, China.
As of March 31, 2003, 853 employees were engaged in manufacturing, 500 were
engaged in administration, 39 were engaged in sales and marketing and 71 were
engaged in research and development.
Our employees are not covered by collective bargaining agreements.
ENVIRONMENTAL MATTERS
We are subject to comprehensive and changing foreign, federal, state, and
local environmental requirements, including those governing discharges to the
air and water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
We believe that we are in compliance with current environmental requirements.
Nevertheless, we use hazardous substances in our operations and, as is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from our properties, we may be held liable and may be required to pay the cost
of remedying the condition. The amount of any resulting liability could be
material.
BACKLOG
At March 31, 2003, our backlog of unfilled orders was approximately $31.8
million. At March 31, 2002, our backlog of unfilled orders was approximately
$29.2 million. 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 Consumer Products sales are seasonal, with highest sales during the
second and third fiscal quarters. There is no significant seasonality to our
Sensor sales.
10
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 at
such locations, 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 Pricewaterhouse Coopers (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. 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
absorption 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.
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 our 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;
11
- 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 determined that these errors in our valuation of inventory were of a
sufficient magnitude to require restatement. Accordingly, we 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 Note 3 to our
consolidated financial statements included in 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 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 and
for the first three quarters of the fiscal year ended March 31, 2002. These
errors were corrected in a form 8-k filing and quarterly information for the
year ended March 31, 2002 is 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.
12
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 RESTATED,
ADJUSTED FOR
Dollars in thousands, PREVIOUSLY AS DISCONTINUED
except per share amounts REPORTED RESTATED OPERATIONS (1)
------------- --------- ---------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales $ 103,095 $ 101,975 $ 97,033
Cost of goods sold 58,782 66,938 62,849
Gross profit 44,313 35,037 34,184
Selling, general and administrative 29,232 29,541 27,420
Income from continuing operations
before income taxes and cumulative
effect of accounting change 11,790 2,205 3,470
Provision for income taxes 2,829 1,008 1,008
Income from continuing operations
before cumulative effect of accounting change 8,961 1,197 2,462
Income from operations of discontinued units - - (1,265)
Income before cumulative effect of
accounting change 8,961 1,197 1,197
Cumulative effect of accounting change, net
of taxes - -
Net Income 8,961 1,197 1,197
Income per common share:
Basic 1.10 0.15 0.15
Diluted 0.99 0.13 0.13
(1)The consolidated financial statements for the fiscal years ended March
31, 2003, 2002 and 2001 include only the results of our ongoing operations.
Accordingly, Terraillon and Schaevitz UK are classified as discontinued
operations in the consolidated financial results for all periods presented. See
"Recent Changes in Our Business" below.
See "Item 14. Controls and Procedures" for a discussion of the actions that
we have taken to strengthen our internal controls.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. Forward looking statements may
be identified by such words or phrases as "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will," "may" and similar expressions. All
statements that address operating performance, events or developments that we
expect or anticipate will occur in the future are forward-looking statements.
The forward-looking statements above are not guarantees of future performance
and involve a number of risks and uncertainties. Factors that might cause
actual results to differ materially from the expected results described in or
underlying our forward-looking statements include:
- Conditions in the general economy and in the markets served by us;
- Competitive factors, such as price pressures and the potential
emergence of rival technologies;
- Interruptions of suppliers' operations or the refusal of our suppliers
to provide us with component materials;
- Timely development and market acceptance, and warranty performance of
new products;
- Changes in product mix, costs, yields and fluctuations in foreign
currency exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the European consumer products market;
- A decline in the United States consumer products market;
- The class action lawsuit filed against us, the pending SEC
investigation and other legal proceedings described below under "Item
3 - Legal Proceedings"; and
- The risk factors listed from time to time in our SEC reports.
13
This list is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the filing of this Annual Report on Form 10-K, whether as a result of new
information, future events, changes in assumptions or otherwise.
RISK FACTORS
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.
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:
OUR CASH AND AMOUNTS AVAILABLE UNDER OUR REVOLVING CREDIT FACILITY MAY NOT BE
SUFFICIENT TO SATISFY OUR FUTURE REQUIREMENTS. OUR AUDITORS HAVE EXPRESSED
UNCERTAINTY ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The company has incurred net losses of $ 9.1 million and $ 29.0 million for
the fiscal years ended March 31, 2003 and 2002, respectively. During this
period, we have incurred significant expenses for professional fees related to
our restructuring and pending litigation, certain of which are likely to
continue, in somewhat reduced amounts, for the foreseeable future.
We are currently the defendant in several pending lawsuits, including a
securities class action lawsuit. We are also the subject of a formal
investigation being conducted by the Division of Enforcement of the United
States Securities and Exchange Commission. We may incur significant liabilities
as a result of these pending legal proceedings which are described below in
"Item 3- Legal Proceedings" and in Note 16 to our consolidated financial
statements included in this Annual Report on Form 10-K.
Our revolving credit facility may not be available or adequate to fund
operations and losses, if any, capital expenditures or the amounts, if any, to
be paid in settlement of, or for judgments related to, our pending legal
proceedings. Under the terms of our credit agreement, we are prohibited from
making any cash payment in settlement of any litigation unless, after giving
effect to such payment and for a period of 30 consecutive days prior thereto,
availability under the credit facility is not less than $1.5 million. Moreover,
we are prohibited from making any cash payment in settlement of the class action
lawsuit, the DeWelt litigation or the Hibernia litigation without the prior
written consent of the lender under our revolving credit facility.
Our cash and amounts available under our revolving credit facility may not
be sufficient to satisfy the obligations discussed above. If we are unable to
satisfy these obligations, we may need to explore other fund raising
alternatives, including the sale of assets or equity securities. No assurance,
however, can be given that we will be able to successfully sell assets or stock,
or, even if such transactions are possible, that they will be on terms
reasonable to us, that they will enable us to satisfy our obligations or that
such actions will be permitted under our credit agreement. Additionally, any
sale of securities will dilute existing shareholders and may be at prices that
are substantially lower than current market prices. If we are unable to satisfy
our loss contingencies and do not obtain additional funds, we will likely be
unable to continue operations, 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 the matters described in the preceding paragraphs, 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.
IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, WE MAY NOT
BE ABLE TO MEET THE NEEDS OF OUR CUSTOMERS AND OUR NET SALES MAY DECLINE.
Our success depends upon our ability to develop and introduce new sensor
products, sensor-based consumer products, and product line extensions. If we
are unable to develop or acquire new products in a timely manner, our net sales
will suffer. The development of new products involves highly complex processes,
and at times we have experienced delays in the introduction of new products.
Since many of our sensor products are designed for specific applications, we
must frequently develop new products jointly with our customers. We are
dependent on the ability of our customers to successfully develop, manufacture,
and market products that include our sensors. Successful product development
and introduction of new products depends on a number of factors, including the
following:
14
- 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 34.2% of our net
sales in the fiscal year ended March 31, 2003 and 34.1% of our net sales in the
fiscal year ended March 31, 2002. At March 31, 2003, our foreign subsidiaries'
total assets aggregated $20.5 million, $4.9 million was in Hong Kong and $15.6
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 Chinese renminbi and the Hong Kong dollar. At March 31, 2003, we
had net liabilities of $2.0 million subject to possible fluctuations in the
value of the Hong Kong dollar and net assets of $13.7 million subject to
fluctuations in the value of the Chinese renminbi. Our foreign subsidiaries'
operations reflect intercompany transfers of costs and expenses, including
interest on intercompany trade receivables, at amounts established by us.
We manufacture or source nearly all of our sensor-based consumer products
and the majority of our 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.
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;
- 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; and
- the current outbreak of SARS and the associated risks to our
operations in China and Hong Kong.
COMPETITION IN THE MARKETS WE SERVE IS INTENSE AND COULD REDUCE OUR NET SALES
AND HARM OUR BUSINESS.
Our Sensor business is characterized by highly fragmented markets and high
levels of competition. Despite recent consolidations, including the acquisition
of several smaller competitors of ours by larger competitors like General
Electric, Honeywell, and Danaher Corporation, the sensor industry remains highly
fragmented. The Consumer Products business is also highly competitive and is
becoming more competitive as a result of the emergence of new scale
manufacturers and enhanced product lines from existing competitors. Competitors
in our Consumer Products business include some customers for whom we manufacture
products. We cannot assure that our original equipment manufacturer customers,
who are also competitors, will not develop their own production capability or
locate alternative sources of supply, and discontinue purchasing products from
us. In addition, the barriers to entry are being reduced in the scale industry
due to the emergence of low cost, commercially available electronics and load
cells. Some of our competitors and potential competitors may have a number of
significant advantages over us, including:
15
- 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, 2003,
the five largest customers of our Consumer Products business represented 44.9%
of net sales for that business and 23.2% of our net sales, and the five largest
customers of our Sensor business represented 27.3% of net sales for that
business and 10.8% of our net sales. No customer accounted for more than 10%
of our net sales for the fiscal year ended March 31, 2003. 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.
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 other than Silicon Microstructures, Inc. (a wholly owned
subsidiary of Elmos Semiconductor, AG) with whom we have a long term silicon
wafer supply agreement as an outcome of their acquisition of the IC Sensors
wafer fab in August 2002. These suppliers 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.
RECENT OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME (SARS) COULD ADVERSELY
EFFECT OUR OPERATIONS IN ASIA
SARS is a new respiratory illness that has recently been reported in Asia,
North America, and Europe. The disease produces flu-like symptoms, and has an
approximately 8% mortality rate. According to the World Health Organization
(WHO), as of May 13, 2003, there were approximately 7,548 reported SARS cases
worldwide resulting in approximately 573 deaths, with more than half of the
reported cases concentrated in China and Hong Kong. The current infection
control practice is to manage exposure to infected or potentially infected
individuals by isolation or quarantine. If our employees in Asia or the
employees of our principal supplier in China were to contract the SARS virus
(resulting in isolation or quarantine), we could experience delivery delays,
supply shortages, or production interruptions. The majority of our Shenzhen,
China employees live in dormitory-style housing arrangements which would make it
difficult to restrict the spread of airborne pathogens. In addition, one of our
employees lives in a building in Hong Kong, in which, according to media
reports, SARS is believed to have been spread through the plumbing system.
As of May 13, 2003, none of our employees have been diagnosed with SARS. To
mitigate this risk, we have established a special task force to implement and
monitor a comprehensive prevention strategy, including providing education and
training to our employees to enhance awareness of the disease, promoting careful
and frequent hand hygiene, monitoring of temperature/wellness, routine use of
personal protective equipment, limiting travel and direct contact to the region,
and establishing a special reporting and communication system.
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
16
directly or indirectly with us. We do not have key person life insurance on,
and generally do not have non-compete agreements with, any of our executives.
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 procedures with our subsidiaries located
in the United States, Hong Kong and China to regulate intercompany transfers.
Our procedures call for the transfer of goods, services, or intellectual
property from one company to a related company at prices that the related
parties believe are arm's length. We have established these procedures due to
the fact that some of our assets, such as intellectual property developed in the
United States, are transferred among our affiliated companies. 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.
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 we are successful, would be time consuming and costly to defend. Our product
liability insurance may not be available or adequate to cover claims.
RISKS RELATED TO OUR INDUSTRIES
OUR CONSUMER PRODUCTS SALES MAY BE REDUCED BY DOWNTURNS 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, a downturn in the retail economy could adversely
affect our sales and results of operations.
SUBSTANTIAL PRODUCT RETURNS COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS.
Certain consumer products may be sold with rights of return. 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.
WE RELY ON PROMOTIONAL PROGRAMS FOR A SIGNIFICANT PORTION OF OUR CONSUMER
PRODUCTS REVENUES. ANY REDUCTION IN CUSTOMER PROMOTIONS MAY RESULT IN A LOSS OF
NET SALES.
Promotional programs by our Consumer Products customers resulted in net
sales of $3.4 million for the fiscal year ended March 31, 2003, net sales of
$2.7 million for the fiscal year
17
ended March 31, 2002 and net sales of $6.8 million for the fiscal year ended
March 31, 2001. These promotional programs result in significant orders by
customers who do not carry our products on a regular basis. Promotional programs
often involve special pricing terms or require us to spend funds to have our
products promoted. We cannot assure you that promotional purchases by our retail
industry customers will be repeated regularly, or at all. These promotional
sales could cause our quarterly results to vary significantly. Any reduction in
customer promotions may result in a loss of net sales.
PRESSURE BY OUR CUSTOMERS TO REDUCE PRICES AND TO AGREE TO LONG-TERM SUPPLY
ARRANGEMENTS MAY CAUSE OUR NET SALES OR PROFIT MARGINS TO DECLINE.
Our customers are under pressure to reduce prices of their products.
Therefore, we expect to experience pressure from our customers to reduce the
prices of our products. Our customers frequently negotiate supply arrangements
with us well in advance of delivery dates, thereby requiring us to commit to
price reductions before we can determine if we can achieve the assumed cost
reductions. We believe that we must reduce our manufacturing costs and obtain
larger orders to offset declining average sales prices. If we are unable to
offset declining average sales prices, our gross profit margins will decline.
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, 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 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.
18
ITEM 2. PROPERTIES
As of March 31, 2003, 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 2007
Corporate
Headquarters
Wayne, PA USA Research and development, Sensor 2,900 December 2004
sales and marketing
San Jose, CA USA Manufacturing, research Sensor 4,700 August 2005
and development, sales and
marketing
Shenzhen, China Sensors principal Asian Sensor 125,860 Between August 2003
manufacturing and February 2005
facility
Shenzhen, China Research and development Consumer 12,214 February 2005
product support facility
Hampton, Virginia USA Sensors principal domestic Sensor 80,725 July 2011
manufacturing and
distribution facility
Hampton, Virginia USA Distribution and warehouse Consumer 39,275 July 2011
Hong Kong, China Trading office Consumer 2,000 February 2004
Kings Langley, England Sales and marketing Consumer 1,070 Month to Month
Our sensor manufacturing facilities located in China and Virginia are ISO
9001 certified. We believe that these premises are suitable and adequate for
our present operations.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION:
In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No.
1071 (D.N.J.).
On March 20, 2002, a class action lawsuit was filed on behalf of purchasers
of our common stock in the United States District Court for the District of New
Jersey against the company and certain of our present and former officers and
directors. The complaint was subsequently amended to include the underwriters
in our August 2001 public offering and our former auditors. The lawsuit alleges
violations of the federal securities laws. The lawsuit seeks an unspecified
award of money damages. After March 20, 2002, nine additional similar class
actions were filed in the same court. The ten lawsuits have been consolidated
into one case under the caption In re: Measurement Specialties, Inc. Securities
Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs filed a Consolidated Amended
Complaint on September 12, 2002. The underwriters have made a claim for
indemnification under the underwriting agreement. The parties have fully
briefed motions to dismiss the case, which remain under consideration by the
court.
We have Directors and Officers liability insurance that provides an
aggregate of $10.0 million in coverage for the period during which this claim
was filed ($5.0 million in primary coverage and $5.0 million in excess
coverage). Our primary D&O insurance carrier initially denied coverage of this
claim, which position we contested. After discussion, the insurer reversed its
previous coverage position and agreed to participate in the potential settlement
of the class action lawsuit (subject to the $5.0 million policy limit). As part
of the arrangement, we renewed our D&O coverage for the coming fiscal year. The
new policy provides for an aggregate of $6.0 million in coverage. The $3.2
million renewal premium represents a combination of the market premium for D&O
coverage for the period from April 7, 2003 through April 7, 2004 plus our
contribution toward a potential settlement in the class action lawsuit. No
assurance can be given that this insurance will be adequate, or
19
that our excess insurance coverage will be available or adequate, to cover
losses, if any, arising from this litigation.
In addition, our credit agreement precludes us from making cash payment in
settlement of this litigation without the prior consent of Fleet Capital
Corporation.
This litigation is ongoing and we cannot predict its outcome at this time
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.
SEC/U.S. Attorney Investigation
In February 2002, we contacted the staff of the SEC after discovering that
our former chief financial officer had made the misrepresentation to senior
management, our Board of Directors and our auditors that a waiver of a covenant
default under our credit agreement had been obtained when, in fact, our lenders
had refused to grant such a waiver. Since February 2002, we and a special
committee formed by our Board of Directors, have been cooperating with the staff
of the SEC. In June 2002, the staff of the Division of Enforcement of the SEC
informed 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 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 these investigations will continue or their
outcome.
Hibernia Litigation
On or about July 23, 2002, Hibernia Capital Partners I, ilp and Hibernia
Capital Partners II, ilp filed a lawsuit against us 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 us as a result of an
operative misrepresentation and misstatement. Plaintiffs further seek damages
for misrepresentation and/or breach of contract and/or breach of warranty and
costs of the proceedings. On August 9, 2002, we entered an Appearance, which is
the equivalent of the acceptance of service of process. On August 22, 2002,
plaintiffs filed a Statement of Claim, which is the equivalent of a complaint.
We have now filed our defense, which is similar to an answer, and await
commencement of the discovery process. This litigation is ongoing and we cannot
predict its outcome at this time.
Robert L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No.
02-CV-3431.
On July 17, 2002, Robert DeWelt, our former acting chief financial officer
and general manager of our Schaevitz Division, filed a lawsuit against us and
certain of the our officers and directors. Mr. DeWelt resigned on March 26,
2002 in disagreement with management's decision not to restate certain of our
financial statements. The lawsuit alleges a claim for constructive wrongful
discharge and violations of the New Jersey Conscientious Employee Protection
Act. Mr. DeWelt seeks an unspecified amount of compensatory and punitive
damages. We have filed a Motion to Dismiss this case. This litigation is
ongoing and we cannot predict its outcome at this time.
Semex, Inc. v. Measurement Specialties, Inc. and AMP Incorporated, Court of
Common Pleas of Montgomery County Pennsylvania, Docket Number NO. 02-23609.
On October 24, 2002, Semex, Inc. ("Semex") filed a lawsuit against us and
Amp Incorporated alleging breaches of the lease for our former facility in
Valley Forge, Pennsylvania. We are the assignee of Amp Incorporated under the
lease. The plaintiff alleges that we owe at least $770,166 for certain payment
defaults under the lease. The plaintiff also seeks an unspecified amount of
damages related to plaintiff's allegations of, among other things, damage to the
property, failure to remove alterations and failure to conduct environmental
testing. An answer has been filed disputing certain of the amount s claimed to
be due.
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration).
Exeter Technologies, Inc. and Michael Yaron have alleged underpayments by
us at approximately $322,000 relating to a Product Line Acquisition Agreement,
dated January 5, 2000. The parties are working together to resolve their
dispute through a non-binding arbitration and both sides have exchanged
documents in order to facilitate the resolution process. If these efforts are
not successful, an arbitration is scheduled for June 17 and June 18, 2003.
Czarnek & Orkin Laboratories, Inc. v. TRW, Inc. and Measurement
Specialties, Inc. (Arbitration)
Czarnek & Orkin Laboratories, Inc. ("Orkin") submitted a demand for
arbitration with the American Arbitration Association on July 8, 2002. The
demand indicated that Orkin was seeking approximately $2.0 million in royalty
revenue from us. At issue was a
20
license agreement relating to the expected development and marketing of certain
sensor technology. The arbitration was concluded in the quarter ended March 31,
2003 and resulted in our making a settlement payment in the amount of $165,000.
In re: Service Merchandise Company, Inc. (Service Merchandise Company, Inc.
v. Measurement Specialties, Inc.), Case No. 399-02649, Adv. Pro. No. 301-0462A.
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. Section 547(b), the action alleges that we
received $645,000 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 $645,000 from the company. This litigation
is ongoing and we cannot predict its outcome at this time.
In re: Clark Material Handling Company, et al. (Clark Material Handling
Company, et al. v. Lucas Control Systems, Case No. 02-997). We are currently
the defendant (as successor to Lucas Control Systems) in a lawsuit filed in
April 2002 by Clark Material Handling Company and its related debtors (the
"Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
Plaintiffs assert that Lucas Control Systems ("Lucas") received $34,413 from one
or more of the Debtors during the ninety (90) day period before the Debtors
filed their bankruptcy petitions, that the transfers were to Lucas' benefit,
were for or on account of an antecedent debt owed by one or more of the Debtors,
made when one or more of the Debtors were insolvent, and that the transfers
allowed Lucas to receive more than it would have received if the cases were
cases under Chapter 7 of the United States Bankruptcy Code. The action seeks to
disgorge the sum of $34,413 from Lucas. This litigation is ongoing and we
cannot predict its outcome at this time.
Measurement Specialties, Inc. vs. Stayhealthy.com, Docket Number 03-3017
(E.D. Pa.)
On or about May 8, 2003, we filed a complaint against Stayhealthy, Inc.
("Stayhealthy") in United States District Court in the Eastern District of
Pennsylvania. The Complaint alleges that Stayhealthy owes us at least
$1,185,842 for failing to make certain payments in accordance with the terms of
a sales contract. The Complaint asserts claims against Stayhealthy for breach
of contract, sale of goods, action for price, collection of account, and unjust
enrichment. To date, we have not been served with Stayhealthy's answer to the
complaint. This action is ongoing and we cannot predict its outcome at this
time.
Litigation Accruals
As of March 31, 2003, we have provided an accrual of $3.6 million
associated with certain of the legal matters discussed above. However, there
can be no assurances that additional amounts may not be required to dispose of
such matters.
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
We held an Annual Meeting of Shareholders on March 3, 2003. At that
meeting, our shareholders elected one director for a term that will expire at
our Annual Meeting in 2005. In addition, our shareholders ratified the
appointment of Grant Thornton LLP as our independent auditors for the fiscal
year ended March 31, 2003. The results of the shareholder voting are as
follows:
VOTES FOR VOTES AGAINST
--------- -------------
Election of Director 9,510,696 41,347
Morton L. Topfer
VOTES FOR VOTES AGAINST ABSTENTIONS
--------- ------------- -----------
Ratification of Auditors 9,527,381 14,025 10,637
There were no broker non votes on any of the above matters. The following
individuals whose terms expire in either 2003 or 2004 continue to serve as our
directors: Joseph R. Mallon, Jr., The Honorable Dan J. Samuel, John D. Arnold
and Frank D. Guidone.
21
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers as of March 31, 2003 were as follows:
NAME AGE POSITION
Frank Guidone 38 Chief Executive Officer and Director
Morton L. Topfer 66 Chairman of the Board
John P. Hopkins 42 Chief Financial Officer
Mark W. Cappiello 49 Vice President and General Manager of the
Consumer Products Division
J. Victor Chatigny 52 Vice President and General Manager of the
Sensors Products Division
Morton L. Topfer has been a director since January 2002 and was appointed
Chairman of the Board in January 2003. Mr. Topfer is Managing Director of
Castletop Capital and a member of the Board of Directors of Dell Computer
Corporation. He previously served at Dell as Counselor to the Chief Executive
Officer, from December 1999 to February 2002, and Vice Chairman, from June 1994
to December 1999. Prior to joining Dell, Mr. Topfer served for 23 years at
Motorola, Inc. where he held several executive positions, last serving as
Corporate Executive Vice President and President of the Land Mobile Products
Sector. Mr. Topfer was conferred the Darjah Johan Negeri Penang State Award in
July 1996 by the Governor of Penang for contributions to the development of the
electronics industry in Malaysia. He serves as a director for Alliance Gaming
and Bio Reference Laboratories. Mr. Topfer also serves on the advisory board of
Singapore Technologies.
Frank Guidone has served as Chief Executive Officer since June 2002 and a
Director since December 2002. Mr. Guidone remains a principal of Corporate
Revitalization Partners (CRP), a Dallas-based turnaround/crisis management
consulting firm. Mr. Guidone has been a Managing Director/Principal of CRP since
2000. Mr. Guidone is also a partner/co-founder of Four Corners Capital
Partners, a boutique private investment and consulting firm founded in 1999.
Prior to Four Corners, Mr. Guidone spent 13 years in management consulting with
Andersen Consulting and George Group, Inc. Mr. Guidone has worked with numerous
solvent and insolvent companies, focusing on operational and financial
restructurings. Mr. Guidone received a B.S. in mechanical engineering from The
University of Texas at Austin.
John P. Hopkins was appointed Chief Financial Officer in July 2002. Prior
to joining Measurement Specialties, he was Vice President, Finance from April
2001, and was Vice President and Controller from January 1999 to March 2001,
with Cambrex Corporation, a provider of scientific products and services to the
life sciences industry. From 1988 to 1998, he held various senior financial
positions with ARCO Chemical Company, a manufacturer and marketer of specialty
chemicals and chemical intermediates. Mr. Hopkins is a Certified Public
Accountant and was an Audit Manager for Coopers & Lybrand prior to joining ARCO
Chemical. Mr. Hopkins holds a B.S. in Accounting from West Chester University,
and an M.B.A. from Villanova University.
Mark W. Cappiello was appointed Vice President and General Manager of our
Consumer Products Division in June 2002. Mr. Cappiello was our Vice President
of Sales and Marketing from January 1988 until June 2002. Mr. Cappiello has
over twenty-five years of experience in international consumer products
marketing, over twenty of which have been in the scale industry. From January
1985 to October 1987, Mr. Cappiello was employed by Terraillon S.A., a French
manufacturer and distributor of scales and balance products. Mr. Cappiello
received a B.A. in business from the University of Connecticut.
J. Victor Chatigny has been Vice President and General Manager of our
Sensors Division since June 2002. Mr. Chatigny joined Measurement Specialties
through our 1998 acquisition of PiezoSensors from AMP Incorporated, where he
served as Director of Sales, Marketing and Research and Development since 1993.
He held management positions in PiezoSensors since 1982, and, previously, in the
Electronics Division of Corning International from 1978. Mr. Chatigny served in
US Army Corps of Engineers where he was Captain, 11th Engineering Battalion. He
holds B.S. and M.S. degrees in industrial engineering and management from
Clarkson University, and a M.B.A. (finance) from The American University.
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:
22
HIGH LOW
------ ------
YEAR ENDING MARCH 31, 2003
Quarter ended June 30, 2002 $ 3.25 $ 1.00
Quarter ended September 30, 2002 2.91 2.06
Quarter ended December 31, 2002 3.20 1.35
Quarter ended March 31, 2003 3.26 1.95
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
The trading of our common stock was suspended by the AMEX on February 15,
2002 because of delays in the filing of our quarterly report on Form 10-Q for
the three months ended December 31, 2001. Trading of the stock resumed on June
5, 2002. Trading of the stock was subsequently suspended from July 15, 2002
until November 1, 2002 as a result of our failure to timely file our Annual
Report on Form 10-K for the fiscal year ended March 31, 2002. On August 21,
2002, we received a letter from the AMEX indicating that we were not in
compliance with AMEX listing guidelines due to our failure to furnish certain
reports and information to shareholders and that our securities were, therefore,
subject to being delisted from the AMEX. We appealed this determination and
requested a hearing. In a letter dated December 27, 2002, the AMEX indicated
that the pending hearing was moot based on the determination by the staff of the
AMEX that we evidenced compliance with applicable AMEX continued listing
requirements. Accordingly, our hearing file with the AMEX was closed.
(B) Approximate Number of Holders of Common Stock
At May 8, 2003, there were approximately 111 shareholders of record of our
common stock.
(C) Dividends
We have not declared cash dividends on our common equity. Additionally,
the payment of dividends is prohibited under our credit agreement and bridge
loan agreement.
At present, there are no material restrictions on the ability of our Hong
Kong subsidiary to transfer funds to us in the form of cash dividends, loans,
advances, or purchases of materials, products, or services. Chinese laws and
regulations, including currency exchange controls, restrict distribution and
repatriation of dividends by our China subsidiary.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and the related notes to the consolidated
financial statements included in this Annual Report on Form 10-K.
YEARS ENDED MARCH 31,
2003 2002 2001(1) 2000 1999
Results of operations:
Net sales $107,888 $ 96,790 $ 97,033 $ 59,997 $37,596
Income (loss) from continuing operations $ (6,323) $(24,234) $ 2,462 $ 5,531 $ 1,729
Net income (loss) $ (9,097) $(29,047) $ 1,197 $ 5,531 $ 1,729
Net cash provided by (used in):
Operating activities $ 3,047 $ (6,077) $ (4,123) $ 8,129 $ 3,471
Investing activities $ 21,113 $(12,070) $(19,287) $(15,999) $(4,993)
Financing activities $(24,178) $ 27,344 $ 27,539 $ 7,041 $ 3,927
Income (loss) from continuing operations
per common share:
Basic $ (0.53) $ (2.30) $ 0.30 $ 0.73 $ 0.24
Diluted $ (0.53) $ (2.30) $ 0.27 $ 0.64 $ 0.23
Loss per common share from discontinued operations
Basic $ (0.23) $ (0.43) $ (0.15) $ - $ -
Diluted $ (0.23) $ (0.43) $ (0.14) $ - $ -
Net income (loss) per common share:
Basic $ (0.76) $ (2.76) $ 0.15 $ 0.73 $ 0.24
Diluted $ (0.76) $ (2.76) $ 0.13 $ 0.64 $ 0.23
Cash dividends declared per common share None None None None None
As of March 31,
Total assets $ 46,168 $ 89,612 $ 67,685 $ 39,647 $18,535
Long-term debt, net of current maturities (2) $ 2,000 $ - $ - $ 9,000 $ 3,250
(1) Reflects the restatement of our financial statements for fiscal year
ended March 31, 2001. See "Restatement" above and Note 3 to our consolidated
financial statements included in this Annual Report on Form 10-K.
(2) In 2002 and 2001, long-term debt was reclassified to current as a
result of our defaults under the credit agreement, as discussed in Note 8 to our
consolidated financial statements included in this Annual Report on form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read together with the other financial information and
consolidated financial statements and related notes included in this Annual
Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in the forward-looking statements as a result of a variety of
factors.
OVERVIEW
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics, including pressure, motion,
force, displacement, angle, flow, and distance. We have two businesses, a Sensor
business and a Consumer Products business.
Our Sensor business designs, manufactures, and markets sensors for original
equipment manufacturer applications. These products include pressure sensors,
custom microstructures, accelerometers, tilt/angle sensors, and displacement
sensors for electronic, automotive, medical, military, and industrial
applications.
Our Consumer Products business designs, manufactures and markets
sensor-based consumer products. These products include bathroom and kitchen
scales, tire pressure gauges, kitchen accessories and distance estimators.
24
NEW ACCOUNTING STANDARDS
On May 15, 2003, the Financial Accounting Standards Board issued Statement
("FASB") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"), which requires
that certain financial instruments be presented as liabilities that were
previously presented as equity or as temporary equity. Such instruments include
mandatory redeemable preferred and common stock, and certain options and
warrants. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and is generally effective at the beginning of the
first interim period beginning after June 15, 2003. We are currently evaluating
the impact that Statement 150 will have on our consolidated financial position
and results of operations when adopted.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock
- -Based Compensation- Transition and Disclosure", an amendment of FASB Statement
No. 123. The standard amends FASB statement No 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for voluntary change
to fair value based method of accounting for stock-based employee compensation.
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require
disclosure in the significant accounting policy footnote of both annual and
interim financial statements of the method of accounting for stock based
compensation and the related pro-forma disclosures when the intrinsic value
method continues to be used. The statement is effective for fiscal years
beginning after December 15, 2002 and disclosures are effective for the first
fiscal quarter beginning after December 15, 2002. We have elected to continue
accounting for stock-based compensation using the intrinsic method. However, we
have adopted the new disclosure requirements specified under SFAS No. 148 (See
Note 2 to our consolidated financial statements included in this Annual Report
on Form 10-K.)
On July 29, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred, rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. We
will apply SFAS 146 prospectively to exit or disposal activities initiated after
December 31, 2002. We have no current exit or disposal activities that fall
under the provision of SFAS 146.
Prior to December 31, 2002, our policy was to accrue restructuring and
other costs at commitment date of a plan in accordance with the provisions of
Emerging Issues Task Force No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity" and Staff Accounting
Bulletin No. 100, "Restructuring and Impairment Charges." Accordingly, we have
provided for certain restructuring costs during the years ended March 31, 2003
and 2002. (See Notes 7 and 12 to our consolidated financial statements
included in this Annual Report on Form 10-K).
In 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS 145 rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, when material, classified as an
extraordinary item net of related income tax effect. SFAS No. 145 also amends
FASB Statement 13 to require that certain lease modifications having economic
effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. This standard is effective for fiscal
years beginning after May 15, 2002. We do not expect that this standard will
have a material effect on our financial position or results of operations. We
will implement SFAS No. 145 in the fiscal quarter ending June 30, 2003.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This standard addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated assets' retirement costs. We are required to
implement SFAS No. 143 on April 1, 2003. We do not expect this standard to have
a material impact on our consolidated financial position or results of
operations.
In November 2002, FASB Interpretation 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45), was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation
undertaken in issuing the guarantee. We previously did not record a liability
when guaranteeing obligations unless it became probable that we would have to
perform under the guarantee. FIN 45 applies prospectively to guarantees we
issue or modify subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December 15,
2002. Our guarantees have historically consisted of warranty provisions and we
do not anticipate FIN 45 will have a material effect on our financial statements
for the year ended March 31, 2004. Disclosures required by FIN 45 are included
in the accompanying financial statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
"Consolidation of Variable Interest Entities". FIN 46 clarifies the application
of Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
25
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable
interest entities within the scope of FIN 46 will be required to be consolidated
by their primary beneficiary. The primary beneficiary of a variable interest
entity is determined to be the party that absorbs a majority of the entity's
expected losses, receives a majority of its expected returns, or both. FIN 46
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
We are in the process of determining what impact, if any, the adoption of the
provisions of FIN 46 will have upon our financial condition or results of
operations, but do not believe that this statement will have a material effect
on our financial condition or results of operations.
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. We have not determined the effect of adoption of EITF 00-21
on our financial statements or the method of adoption we will use.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the periods reported. The following accounting policies involve a
"critical accounting estimates" because they are particularly dependent on
estimates and assumptions made by management about matters that are highly
uncertain at the time the accounting estimates are made. In addition, while we
have used our best estimates based on facts and circumstances available to us at
the time, different estimates reasonably could have been used in the current
period, or changes in the accounting estimates we used are reasonably likely to
occur from period to period which may have a material impact on the presentation
of our financial condition and results of operations. We review these estimates
and assumptions periodically and reflect the effects of revisions in the period
that they are determined to be necessary.
REVENUE RECOGNITION:
Revenue is recorded when products are shipped, at which time title
generally passes to the customer. Certain consumer products may be sold with a
provision allowing the customer to return a portion of products. Upon shipment,
we provide for allowances for returns based upon historical and estimated return
rates. The amount of actual returns could differ from our estimate. Changes in
estimated returns would be accounted for in the period of change.
We utilize manufacturing representatives as sales agents for certain of our
products. Such representatives do not receive orders directly from customers,
take title to or physical possession of products, or invoice customers.
Accordingly, revenue is recognized upon shipment to the customer.
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. We are not responsible for the ultimate sale to third party
customers and therefore record revenue upon shipment to the distributor.
ACCOUNTS RECEIVABLE:
The majority of the our accounts receivable are due from retailers and
manufacturers of electronic, automotive, military, and industrial products.
Credit is extended based on evaluation of a customer's financial condition and,
generally, collateral is not required. Accounts receivable are generally due
within 30 to 90 days and are stated as amounts due from customers net of
allowances for doubtful accounts, and other sales allowances. Accounts
outstanding longer than the contractual payment terms are considered past due.
We determine our allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, our previous loss
history, the customer's current ability to pay its obligation to us, and the
condition of the general economy and the industry as a whole. We write-off
accounts receivable when we determine they are uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Actual uncollectible accounts could exceed our estimates and
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changes to our estimates will be accounted for in the period of change.
INVENTORIES:
We make purchasing decisions principally based upon firm sales orders from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown in customer
demand, customer delay in the issuance of sales orders, miscalculation of
customer requirements, technology changes that render raw materials and finished
goods obsolete, loss of customers and/or cancellation of sales orders. We
establish reserves for our inventories to recognize estimated obsolescence and
unusable items on a continual basis. Market conditions surrounding products are
also considered periodically to determine if there are any net realizable
valuation matters, which would require a write-down of any related inventories.
If market or technological conditions change, it may result in additional
inventory reserves and write-downs, which would be accounted for in the period
of change.
GOODWILL IMPAIRMENT:
Management assesses goodwill for impairment at the reporting unit level on
an annual basis or more frequently under certain circumstances. Such
circumstances include (i) significant adverse change in legal factors or in the
business climate, (ii) an adverse action or assessment by a regulator, (iii)
unanticipated competition, (iv) a loss of key personnel, (v) a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of, and (vi) recognition
of an impairment loss in a subsidiary that is a component of a reporting unit.
Management must make assumptions regarding estimating the fair value of our
reporting units. If these estimates or related assumptions change in the future,
we may be required to record an impairment charge. Impairment charges would be
included in general and administrative expenses in our statements of operations,
and would result in reduced carrying amounts of the goodwill.
LONG LIVED ASSETS:
Management assesses the recoverability of long-lived assets, which consist
primarily of fixed assets and intangible assets whenever events or changes in
circumstance indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (i) significant
underperformance relative to expected historical or projected future operating
results; (ii) significant negative industry or economic trends; (iii)
significant decline in our stock price for a sustained period; and (iv) a change
in our market capitalization relative to net