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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11906
MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2378738
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
710 ROUTE 46 EAST, SUITE 206, 07004
FAIRFIELD, NEW JERSEY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (973) 808-3020
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ X ] No [ ]
At September 30, 2003, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $166.9 million
based on the closing price of the registrant's common stock on September 30,
2003.
At May 13, 2004, 13,265,724 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM 10-K
IS SET FORTH IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 31, 2004 TO BE FILED BY THE REGISTRANT WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT
1
LATER THAN 120 DAYS AFTER THE FISCAL YEAR ENDED MARCH 31, 2004.
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MEASUREMENT SPECIALTIES, INC.
FORM 10-K
TABLE OF CONTENTS
MARCH 31, 2004
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . . . . . . . 16
EXECUTIVE OFFICERS OF REGISTRANT . . . . . . . . . . . . . . . . . . . . . 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES. . . . . . . . . . . . . . . . . . 18
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 9A CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . 31
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . 32
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . 32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . 32
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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PART I
ITEM 1. BUSINESS
INTRODUCTION
NOTES:
(1) AS MORE FULLY DESCRIBED BELOW UNDER "CHANGES TO OUR BUSINESS," WE
DISCONTINUED CERTAIN OF OUR BUSINESSES DURING THE FISCAL YEAR ENDED MARCH
31, 2003, AND SOLD ASSETS DURING THE FISCAL YEARS ENDED MARCH 31, 2003 AND
2004. EXCEPT AS OTHERWISE NOTED, THE DESCRIPTIONS OF OUR BUSINESS, RESULTS
AND OPERATIONS CONTAINED IN THIS REPORT REFLECT ONLY OUR CONTINUING
OPERATIONS.
(2) AS MORE FULLY DESCRIBED IN OUR ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED MARCH 31, 2002, OUR FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDED MARCH 31, 2001 AND FOR THE FIRST THREE QUARTERS OF THE FISCAL YEAR
ENDED MARCH 31, 2002 WERE RESTATED. ALL AMOUNTS INCLUDED IN THIS ANNUAL
REPORT ON FORM 10-K REFLECT THIS RESTATEMENT.
(3) ALL DOLLAR AMOUNTS IN THIS REPORT ARE IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND PRODUCT PRICES.
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics, including pressure, motion,
force, displacement, tilt / angle, flow, and distance. We have two businesses, a
Sensor business and a Consumer Products business. We are a New Jersey
corporation organized in 1981.
Our Sensor segment designs and manufacturers sensors for original equipment
manufacturers (OEMs). These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. Our sensor products include
piezoresistive pressure sensors, transducers and transmitters, electromagnetic
displacement sensors, piezoelectric polymer film sensors, tilt sensors, membrane
switch panel sensors, custom microstructures, load cells and accelerometers.
Our Consumer Products segment designs and manufactures sensor-based
consumer products. Our sensor-based consumer bath and kitchen scale products are
sold and marketed primarily under the brand names of our original equipment
manufacturer customers. Our tire pressure gauges and distance measurement
products are sold and marketed under our own brand names, as well as those of
our OEM and private label customers.
Each of our businesses benefits from the same core technology base. Our
advanced technologies include piezoresistive silicon sensors,
application-specific integrated circuits, micro-electromechanical systems
(MEMS), piezoelectric polymers, foil strain gauges, force balance systems, fluid
capacitive devices, linear and rotational variable differential transformers,
electromagnetic displacement sensors and ultrasonics. These technologies allow
our sensors to operate precisely and cost effectively. We have a global
operation with facilities located in North America, Europe and Asia. By
functioning globally, we have been able to enhance our applications engineering
capabilities and increase our geographic proximity to our customers.
We are focusing our development efforts in both our Sensor business and
Consumer Products business on the OEM market. In particular, we are focused on
aggressively growing our Sensor segment, which management believes has greater
growth potential. We expect that growth of our Sensor business will come through
a combination of organic growth and acquisitions.
In the Consumer Products segment, having both a branded and OEM consumer
scale business has created channel conflicts. As part of our effort to focus on
the OEM market, we sold certain assets associated with our Thinner branded
bathroom and kitchen scale business to Conair Corporation on January 30, 2004.
We previously sold our Thinner branded scales directly to retailers,
predominately in the U.S. and Canada. On a going-forward basis, we expect to
supply these scales directly to Conair and intend to continue our efforts in the
design, development and manufacture of innovative scale products for sale to our
worldwide base of OEM customers. Although our development focus is on the OEM
market, we intend to continue to develop and manufacture our tire pressure
gauges and distance measurement products for sale to both retail customers and
OEM customers.
Key to executing our strategy is to utilize our expertise in sensor
technologies to target expanding market segments and to develop new products and
applications, thereby increasing demand for our sensors and sensor-based
consumer products. Our global design teams support our production facilities and
engineering resources in the United States and in China. By combining our
manufacturing expertise with our core technology, we strive to provide our
global customers with an advantageous price-value relationship.
OUR SENSORS
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The majority of our sensors are devices, sense elements and transducers
that convert mechanical information into a proportionate electronic signal for
display, processing, interpretation, or control. Sensors are essential to the
accurate measurement, resolution, and display of pressure, motion, force,
displacement, angle, flow, and distance. Our other Sensor products are
transducers that convert an applied electrical signal into a mechanical motion
corresponding to the amplitude and frequency of the electrical input.
MARKETS
Sensor manufacturers are moving toward smart sensors that use digital
intelligence to enhance measurement and control signals. The shift toward
sensors utilizing digital signal processing technologies has enhanced
applications in the automotive, medical, military, and consumer products
markets. Examples of our sensor applications include:
- automotive applications in braking, transmission, fuel pressure,
diesel common rail pressure monitoring, security sensing, and onboard
tire pressure monitoring;
- industrial sensors for regulating flow in industrial paint sprayers
and agricultural equipment, monitoring pressures in refrigeration and
heating/ventilating/air conditioning compressors, controlling valves
in process control and electrical power generation equipment and
traffic monitoring, vehicle speed and traffic light enforcement;
- medical sensors for invasive blood pressure measurement, drug infusion
flow monitoring, electronic stethoscopes, vascular health diagnostics,
sleep disorder sensing, and body activity feedback in heart
pacemakers;
- military applications, which continue to drive sensor development,
with new systems requiring small, high performance sensors for smart
systems such as navigation and weapons control systems, pressure
monitoring, and collision avoidance systems; and
- consumer products applications including the measurement of weight,
distance, and movement, digitizing information for electronic white
boards and pen input devices for laptops, acoustic devices for musical
instruments and speakers, and imbalance sensors for appliances.
TECHNOLOGY
In the rapidly evolving markets for sensors and sensor-based consumer
products, there is an increasing demand for technologies such as:
Piezoresistive Technology. Piezoresistive materials, most often silicon,
respond to changes in applied mechanical variables such as stress, strain, or
pressure by changing electrical conductivity. Changes in electrical conductivity
can be readily detected in circuits by changes in current with a constant
applied voltage, or conversely by changes in voltage with a constant supplied
current. Piezoresistive technology is widely used for the measurement of
pressure, load and acceleration, and its use in these applications is expanding
significantly.
Application Specific Integrated Circuits (ASICs). These circuits convert
analog electrical signals into digital signals for measurement, computation, or
transmission. Application specific integrated circuits are well suited for use
in consumer products because they can be designed to operate from a relatively
small power source and are inexpensive.
Micro-Electromechanical Systems (MEMS). Micro-electromechanical systems and
related silicon micromachining technology are used to manufacture components for
physical measurement and control. Silicon micromachining is an ideal technology
to use in the construction of miniature systems involving electronic, sensing,
and mechanical components because it is inexpensive and has excellent physical
properties. Micro-electromechanical systems have several advantages over their
conventionally manufactured counterparts. For example, by leveraging existing
silicon manufacturing technology, micro-electromechanical systems allow for the
cost-effective manufacture of small devices with high reliability and superior
performance.
Piezoelectric Polymer Technology. Piezoelectric materials convert
mechanical stress or strain into proportionate electrical energy, and
conversely, these materials mechanically expand or contract when voltages of
opposite polarities are applied. Piezoelectric polymer films are also
pyroelectric, converting heat into electrical charge. These polymer films offer
unique sensor design and performance opportunities because they are thin,
flexible, inert, broadband, and relatively inexpensive. This technology is ideal
for applications where the use of rigid sensors would not be possible or
cost-effective.
Strain Gauge Technology. A strain gauge consists of metallic foil that is
impregnated into an insulating material and bonded to a sensing element. The
foil is etched to produce a grid pattern that is sensitive to changes in
geometry, usually length, along the sensitive axis producing a change in
resistance. The gauge operates through a direct conversion of strain to a change
in gauge resistance. This
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technology is useful for the construction of reliable pressure sensors.
Force Balance Technology. A force-balanced accelerometer is a mass
referenced device that under the application of tilt or linear acceleration,
detects the resulting change in position of the internal mass by a position
sensor and an error signal is produced. This error signal is passed to a servo
amplifier and a current developed is fed back into a moving coil. This current
is proportional to the applied tilt angle or applied linear acceleration and
will balance the mass back to its original position. These devices are used in
military and industrial applications where high accuracy is required.
Fluid Capacitive Technology. This technology is also referred to as fluid
filled, variable capacitance. The output from the sensing element is two
variable capacitance signals per axis. Rotation of the sensor about its
sensitive axis produces a linear change in capacitance. This change in
capacitance is electronically converted into angular data, and provides the user
with a choice of ratiometric, analog, digital, or serial output signals. These
signals can be easily interfaced to a number of readout and/or data collection
systems.
Linear Variable Differential Transformers (LVDT). An LVDT is an
electromechanical sensor that produces an electrical signal proportional to the
displacement of a separate movable core. LVDT's are widely used as measurement
and control sensors wherever displacements of a few micro inches to several feet
can be measured directly, or where mechanical input, such as force or pressure,
can be converted into linear displacement. LVDT's are capable of extremely
accurate and repeatable measurements in severe environments.
Ultrasonic Technology. Ultrasonic sensors measure distance by calculating
the time delay between transmitting and receiving an acoustic signal that is
inaudible to the human ear. This technology allows for the quick, easy, and
accurate measurement of distances between two points without physical contact.
BUSINESS SEGMENTS
Our financial results by business segment for the fiscal years ended March
31, 2004, 2003 and 2002 are presented in Note 16 to the consolidated financial
statements included in this Annual Report on Form 10-K.
PRODUCTS
Sensors. A summary of our Sensor business product offerings as of March 31,
2004 is presented in the following table:
PRODUCT TECHNOLOGY BRAND NAME APPLICATIONS
- ---------------- ------------------ ------------ ---------------------------------------
Pressure Sensors Micro- IC Sensors Disposable catheter blood pressure,
Electromechanical altimeter, dive tank pressure, process
Systems (MEMS) instrumentation, fluid level,
measurement and intravenous drug
administration monitoring
- -------------------------------------------------------------------------------------------
Piezoresistive microFused Fertilizer and paint spraying, diesel
engine control, hydraulics,
refrigeration and
automotive power train
- -------------------------------------------------------------------------------------------
Strain Gauge Schaevitz Instrumentation-grade aerospace and
weapon control systems, sub-sea
pressure, ship cargo level, and steel
mills
- -------------------------------------------------------------------------------------------
Accelerometers Piezoelectric PiezoSensors Transportation shipment monitoring,
Polymer audio speaker feedback, appliance
imbalance and consumer
exercise monitoring
- -------------------------------------------------------------------------------------------
Micro- IC Sensors Traffic alert and collision avoidance
Electromechanical systems, railroad, tilt, and
Systems (MEMS) instrumentation
- -------------------------------------------------------------------------------------------
Force Balance Schaevitz Aerospace, weapon fire control,
inertial navigation, angle, and tilt
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- -------------------------------------------------------------------------------------------
Rotary Linear and Rotary Schaevitz Aerospace, machine control systems,
Displacement Variable knitting machines, industrial process
Sensors Displacement control, and hydraulic actuators
Transducer
- -------------------------------------------------------------------------------------------
Tilt/Angle Fluid Capacitive Schaevitz Tire balancing, heavy equipment level
Sensors measurement, and consumer
electronic level measurement
- -------------------------------------------------------------------------------------------
Traffic Sensors Piezoelectric PiezoSensors Traffic survey, speed and traffic light
Polymer enforcement, toll, and in-motion
vehicle weight measurement
- -------------------------------------------------------------------------------------------
Custom Piezofilm Piezoelectric PiezoSensors Medical diagnostics, ultrasound,
Sensors Polymer consumer electronic, electronic
stethoscope, and sonar
- -------------------------------------------------------------------------------------------
Custom Micro- IC Sensors Atomic force microscopes, optical
Microstructures Electromechanical switching, hydrogen and humidity
Systems (MEMS) sensors
Consumer Products. A summary of our sensor-based consumer products as of
March 31, 2004 is presented in the following table:
PRODUCT TECHNOLOGY BRAND NAMES(1) TYPES OF PRODUCTS PRICE RANGE
- ------------- --------------- ---------------- ------------------ ------------
Scales Piezoresistive, Thinner (2) Bathroom Scales $ 5.00-60.00
Application Health-o-meter,
Specific Laica,
Integrated Salter, Weight
Circuits Watchers and
Babyliss
Portion Power Kitchen Scales $ 3.00-25.00
- -------------------------------------------------------------------------------------------
Tire Pressure Piezoresistive Accutire Digital and $ 0.50-35.00
Gauges Mechanical Tire
Pressure Gauges
- -------------------------------------------------------------------------------------------
Distance Ultrasonic Accutape Interior Distance $13.00-22.00
Measurement Estimator
Products
Park-Zone Distance Estimator $10.00-25.00
for Parking
(1) Health-o-Meter, Laica, Salter, Babyliss, and Weight Watchers are
trademarks, trade names, or service marks of our customers and are not owned by
us.
(2) On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner branded bathroom and kitchen scale business, and now owns worldwide rights
to the Thinner brand name and exclusive rights to the Thinner designs in North
America. We previously sold our Thinner branded scales directly to retailers,
predominately in the U.S. and Canada. On a going-forward basis, we agreed to
supply these scales directly to Conair on an OEM basis.
CUSTOMERS
We sell our sensor products throughout the world. Our Sensor business
designs, manufactures, and markets sensors for original equipment manufacturer
applications. Our extensive customer base consists of manufacturers of
electronic, automotive, medical, military, and industrial products. None of our
Sensor business customers accounted for more than 10% of our net sales during
the last three fiscal years. Our key Sensor customers during fiscal 2004
included:
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- Alaris Medical - Allison Transmission - Ingersol Rand
- Argon Medica l - Badger Meter - Graco
- Smtek - St. Jude Medical - Texas Instruments
Our Consumer Products business customers are primarily retailers,
resellers, or manufacturers of consumer products in the United States and
Europe. No Consumer Products customer accounted for more than 10% of our net
sales during the last three fiscal years.
Our key Consumer Products customers during fiscal 2004 included:
- Bed Bath & Beyond * - Conair - Beurer
- Sears - Sunbeam - OBH
- Linens N Things * - Target - Babyliss
- Sharper Image * - Victor - Sam's
- Laica - Martex - Canadian Tire
* As a result of the Conair transaction, we no longer sell bath or
kitchen scales directly to these customers.
SALES AND DISTRIBUTION
We sell our sensor products through a combination of experienced direct
sales engineers, distributors and generally exclusive sales relationships with
outside sales representatives throughout the world. Our engineering teams work
directly with our global customers to tailor our sensors to meet their specific
application requirements.
As a result of the Conair transaction, our sensor-based consumer bath and
kitchen scale products are now sold and marketed primarily under the brand names
of our original equipment manufacturer customers. Our tire pressure gauges and
distance measurement products are sold and marketed under our own brand names,
as well as those of our OEM and private label customers.
We sell our products primarily in North America and Western Europe. The
growing Asian market is a significant target of opportunity for our business.
International sales accounted for 31.3% of net sales of our business for the
fiscal year ended March 31, 2004, 24.0% of net sales of our business for the
fiscal year ended March 31, 2003 and 27.8% of net sales of our business for the
fiscal year ended March 31, 2002.
SUPPLIERS
We rely on contract manufacturers for a significant portion of our
consumer-finished products. The majority of our sensor-based consumer products
are assembled by a single contract manufacturer located in China. We utilize
alternative manufacturers located in China to assemble additional sensor-based
consumer products. We procure components and finished products as needed,
through purchase orders, and do not have long-term contracts with any of our
suppliers. We believe that the components we utilize could be obtained from
alternative sources, or that our products could be redesigned to use alternative
suppliers' components, if necessary.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on expanding our core
technologies, improving our existing products, developing new products, and
designing custom sensors for specific customer applications. To maintain and
improve our competitive position, our research, design, and engineering teams
work directly with customers to design custom sensors for specific applications.
Our gross research and development expenses, including customer funded projects,
were $3,468, or 3.1% of net sales, for the fiscal year ended March 31, 2004,
$3,594, or 3.3% of net sales, for the fiscal year ended March 31, 2003, $7,596 ,
or 7.8% of net sales, for the fiscal year ended March 31, 2002. Research and
development expenses for our Sensor business were $2,085, or 3.5% of net sales
of our Sensor business, for the fiscal year ended March 31, 2004, $2,191, or
4.2% of net sales of our Sensor business, for the fiscal year ended March 31,
2003, and $5,312, or 10.9% net sales of our Sensor business, for the fiscal year
ended March 31, 2002. Included in gross research and development was $4, $367,
and $1,784 of customer funded development for the fiscal years ended March 31,
2004, 2003, and 2002, respectively. The primary cause of the reduction in
customer-funded development was the sale of the IC Sensors wafer fab in July
2002. See Note 6 to the consolidated financial statements included in this
Annual Report on Form 10-K for a discussion of the sale of the IC Sensor wafer
fab.
Research and development expenses in the Consumer Products business, which
are historically lower than Sensor business research and development expenses,
were $1,383, or 2.6% of net sales of our Consumer Products business, for the
fiscal year ended March 31, 2004, $1,403, or 2.5% of net sales of our Consumer
Products business, for the fiscal year ended March 31, 2003, and $673, or 1.4%
net sales of our Consumer Products business, for the fiscal year ended March 31,
2002.
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COMPETITION
The global market for sensors includes many diverse products and
technologies and is highly fragmented and subject to low to moderate pricing
pressures.
Our piezoresistive, MEMS and microFused pressure sensing technologies
compete directly within the largest and fastest growing segments in the global
market for industrial pressure sensors. Most of our Sensor business competitors
are small companies or divisions of large corporations such as Emerson,
Motorola, Siemens, General Electric and Honeywell. The principal elements of
competition in the sensor market are production capability, price, quality,
service, and the ability to design unique applications to meet specific customer
needs.
The market for sensor-based consumer products is characterized by frequent
introductions of competitive products and pricing pressures. Recently, a number
of brand name scale companies have been acquired by larger brand name companies
or by Asian original equipment manufacturers. The principal elements of
competition in the sensor-based consumer products market are price, quality and
the ability to introduce new and innovative products.
Although we believe that we compete favorably in our Sensor and Consumer
Products businesses, new product introductions by our competitors could cause a
decline in sales or loss of market acceptance for our existing products. If
competitors introduce more technologically advanced products, the demand for our
products would likely be reduced.
INTELLECTUAL PROPERTY
We rely in part on patents to protect our intellectual property. We own 60
United States utility patents, 37 United States design patents, and 40 foreign
patents to protect our rights in certain applications of our core technology. We
have 20 United States patent applications pending, including provisionals. These
patent applications may never result in issued patents. Even if these
applications result in patents being issued, taken together with our existing
patents, they may not be sufficiently broad to protect our proprietary rights,
or they may prove unenforceable. We have not obtained patents for all of our
innovations, nor do we plan to do so.
We also rely on a combination of copyrights, trademarks, service marks,
trade secret laws, confidentiality procedures, and licensing arrangements to
establish and protect our proprietary rights. In addition, we seek to protect
our proprietary information by using confidentiality agreements with certain
employees, consultants, advisors, customers, and others. We cannot be certain
that these agreements will adequately protect our proprietary rights in the
event of any unauthorized use or disclosure, that our employees, consultants,
advisors, customers, or others will maintain the confidentiality of such
proprietary information, or that our competitors will not otherwise learn about
or independently develop such proprietary information.
Despite our efforts to protect our intellectual property, unauthorized
third parties may copy aspects of our products, violate our patents, or use our
proprietary information. In addition, the laws of some foreign countries do not
protect our intellectual property to the same extent as the laws of the United
States. The loss of any material trademark, trade name, trade secret, patent
right, or copyright could harm our business, results of operations and financial
condition.
We believe that our products do not infringe on the rights of third
parties. However, we cannot be certain that third parties will not assert
infringement claims against us in the future or that any such assertion will not
result in costly litigation or require us to obtain a license to third party
intellectual property. In addition, we cannot be certain that such licenses will
be available on reasonable terms or at all, which could harm our business,
results of operations and financial condition.
FOREIGN OPERATIONS
We manufacture the majority of our sensor products, and most of our sensor
subassemblies used in our consumer products, in leased premises located in
Shenzhen, China. Sensors are also manufactured at our U.S. facilities in
Hampton, VA and San Jose, CA. Additionally, certain key management, sales and
support activities are conducted at leased premises in Wayne, PA and in Hong
Kong. Substantially all our consumer products are assembled in China, primarily
by a single supplier, River Display, Ltd. ("RDL"), although we also utilize
alternative assemblers in China. There are no agreements which would require us
to make minimum payments to RDL, nor is RDL obligated to maintain capacity
available for our benefit, though we account for a significant portion of RDL's
revenues. Additionally, most of our products contain key components that are
obtained from a limited number of sources. These concentrations in external and
foreign sources of supply present risks of interruption for reasons beyond our
control, including political and other uncertainties regarding Hong Kong and
China.
9
The Chinese government has continued to pursue economic reforms hospitable
to foreign investment and free enterprise, although the continuation and success
of these efforts is not assured. Our operations could be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation
and currency exchange controls, by the imposition of economic austerity measures
intended to reduce inflation, and by social and political unrest. China became a
member of World Trade Organization (WTO) on December 11, 2001. Such membership
requires China and other members of the WTO to grant one another reciprocal
"Normal Trade Relations" (NTR) status (formerly known as Most Favored Nation).
Accordingly, China's preferred trading status with the United States (and other
WTO members) is no longer subject to annual review and Chinese goods exported to
the United States are subject to a low tariff and receive other favorable
treatment.
The continued stability of political, legal, economic or other conditions
in Hong Kong cannot be assured. No treaty exists between Hong Kong and the
United States providing for the reciprocal enforcement of foreign judgments.
Accordingly, Hong Kong courts may not enforce judgments predicated on the laws
of the United States, whether arising from actions brought in the United States
or, if permitted, in Hong Kong
Most of our revenues are priced in United States dollars. Most of our costs
and expenses are priced in United States dollars, Chinese renminbi and Hong Kong
dollars. Accordingly, the competitiveness of our products relative to products
produced locally (in foreign markets) may be affected by the performance of the
United States dollar compared with that of our foreign customers' currencies.
United States sales were $77,537, $81,794, and $70,278, or 68.7%, 76.0%, and
72.2% of net sales, for the fiscal years ended March 31, 2004, 2003, and 2002,
respectively. Foreign sales were $35,276, $25,882 and 26,995, or 31.3%, 24.0%,
and 27.8% of net sales, for the fiscal years ended March 31, 2004, 2003, and
2002, respectively. While limited, we are exposed to foreign currency
transaction and translation losses, which might result from adverse fluctuations
in the value of the Hong Kong dollar and Chinese renminbi. Based on the net
exposure of renminbi to United State dollars for the fiscal year ended March 31,
2004, we estimated an impact of negative $105 on our operating income for a 1%
appreciation in renminbi against United State dollar.
At March 31, 2004, we had net assets of $23,893 in the United States. At
March 31, 2004, we had net assets of $4,836 subject to fluctuations in the value
of the Hong Kong dollar and net assets of $7,330 subject to fluctuations in the
value of the Chinese renminbi. We had net assets of $7,088 and $1,626 the United
States, at March 31, 2003 and 2002, respectively. At March 31, 2003, we had net
liabilities of $2,045 subject to fluctuations in the value of the Hong Kong
dollar and net assets of $13,743 subject to fluctuations in the value of the
Chinese renminbi. At March 31, 2002, we had net liabilities of $3,680 subject to
fluctuations in the value of the Hong Kong dollar and net assets of $10,864
subject to fluctuations in the value of the Chinese renminbi.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to potential foreign currency,
transaction and translation risks, we may purchase currency exchange forward
contracts, currency options, or other derivative instruments, provided such
instruments may be obtained at suitable prices. However, to date we have not
done so.
EMPLOYEES
As of March 31, 2004, we had 1,353 employees, including 172 in the United
States, 4 in the United Kingdom, 1,173 in Shenzhen, China, 3 in Hong Kong,
China, and 1 in Germany.
As of March 31, 2004, 1,031 employees were engaged in manufacturing, 141
were engaged in administration, 29 were engaged in sales and marketing and 152
were engaged in engineering.
Our employees are not covered by collective bargaining agreements.
ENVIRONMENTAL MATTERS
We are subject to comprehensive and changing foreign, federal, state, and
local environmental requirements, including those governing discharges to the
air and water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
We believe that we are in compliance with current environmental requirements.
Nevertheless, we use hazardous substances in our operations and as is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from our properties, we may be held liable, and may be required to pay the cost
of remedying the condition. The amount of any resulting liability could be
material.
BACKLOG
At March 31, 2004, the dollar amount of backlog orders believed to be firm
was approximately $27,200. We include in backlog orders that have been accepted
from customers that have not been filled or shipped and are supported with a
purchase order. It is expected that the majority of these orders will be shipped
during the next 12 months. At March 31, 2003, our backlog of unfilled orders was
approximately $31,800. All orders are subject to modification or cancellation by
the customer with limited charges. We
10
believe that backlog may not be indicative of actual sales for the current
fiscal year or any succeeding period.
SEASONALITY
Our Consumer Products sales are seasonal, with highest sales during the
second and third fiscal quarters. There is not significant seasonality to our
Sensor sales.
AVAILABLE INFORMATION
We maintain an Internet website at the following address: www.msiusa.com. The
--------------
information on our website is not incorporated by reference into this Annual
Report on Form 10-K.
We make available on or through our website certain reports and amendments to
those reports that we file with or furnish to the Securities and Exchange
Commission (the "SEC") in accordance with the Securities Exchange Act of 1934.
These include our annual reports on Form 10-K, our quarterly reports on Form
10-Q and our current reports on Form 8-K. We make this information available on
our website free of charge as soon as reasonably practicable after we
electronically file the information with, or furnish it to, the SEC.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. Forward looking statements may
be identified by such words or phrases as "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will," "may" and similar expressions. All
statements that address operating performance, events or developments that we
expect or anticipate will occur in the future are forward-looking statements.
The forward-looking statements above are not guarantees of future performance
and involve a number of risks and uncertainties. Factors that might cause actual
results to differ materially from the expected results described in or
underlying our forward-looking statements include:
- Conditions in the general economy and in the markets served by us;
- Competitive factors, such as price pressures and the potential
emergence of rival technologies;
- Interruptions of suppliers' operations or the refusal of our suppliers
to provide us with component materials;
- Timely development, market acceptance and warranty performance of new
products;
- Changes in product mix, costs and yields and fluctuations in foreign
currency exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the European consumer products market;
- A decline in the United States consumer products market;
- The [pending SEC investigation] and other legal proceedings described
below under "Item 3 - Legal Proceedings"; and
- The risk factors listed from time to time in our SEC reports.
This list is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the filing of this Annual Report on Form 10-K, whether as a result of new
information, future events, changes in assumptions or otherwise.
RISK FACTORS
An investment in our common stock is speculative in nature and involves a
high degree of risk. No investment in our common stock should be made by any
person who is not in a position to lose the entire amount of such investment.
In addition to being subject to the risks described elsewhere in this Form
10-K, including those risks described below under "Liquidity and Capital
Resources," an investment in our common stock is subject to the following risks
and uncertainties:
PENDING LITIGATION COULD RESULT IN SIGNIFICANT LIABILITIES.
We are currently the defendant in several pending lawsuits. We are also the
subject of a formal investigation being conducted by the Division of Enforcement
of the United States Securities and Exchange Commission. We could incur
significant additional liabilities as a result of these pending legal
proceedings, which are described below in "Item 3- Legal Proceedings" and in
Note 15 to our consolidated financial statements included in this Annual Report
on Form 10-K.
11
Under the terms of our credit agreement, we are prohibited from making any
cash payment in settlement of litigation unless, after giving effect to such
payment and for a period of 30 consecutive days prior thereto, availability
under the credit facility is not less than $1,500. Moreover, we are prohibited
from making any cash payment in settlement of the securities class action
lawsuit, the DeWelt litigation or the Hibernia litigation without the prior
written consent of the lender under our revolving credit facility. We settled
the Hibernia lawsuit in November 2003, and made payment after receiving approval
from our lender, Bank of America Business Capital ("BOA") (formerly Fleet
Capital Corporation). On April 1, 2004, we reached an agreement in principle to
settle the securities class action lawsuit, and made payment after receiving
approval from BOA. On May 18, 2004, we reached an agreement in principle with
the SEC which would resolve the commission's investigation of the Company. See
Note 15 to the consolidated financial statements included in this Annual Report
on Form 10-K for a detailed discussion on the terms and conditions related to
the pending class action settlement and SEC investigation.
IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, WE MAY NOT
BE ABLE TO MEET THE NEEDS OF OUR CUSTOMERS AND OUR NET SALES MAY DECLINE.
Our success depends upon our ability to develop and introduce new sensor
products, sensor-based consumer products, and product line extensions. If we are
unable to develop or acquire new products in a timely manner, our net sales will
suffer. The development of new products involves highly complex processes, and
at times we have experienced delays in the introduction of new products. Since
many of our sensor products are designed for specific applications, we must
frequently develop new products jointly with our customers. We are dependent on
the ability of our customers to successfully develop, manufacture and market
products that include our sensors. Successful product development and
introduction of new products depends on a number of factors, including the
following:
- accurate product specification;
- timely completion of design;
- achievement of manufacturing yields;
- timely and cost-effective production; and
- effective marketing.
SUCCESSFUL INTEGRATION OF FUTURE ACQUISITIONS IS CRITICAL TO ACHIEVING OUR
FUTURE GROWTH AND PROFITIBILITY GOALS.
We have embarked on a growth strategy that includes acquisitions. Our
future performance is dependent, in part, on the successful integration of those
transactions.
WE HAVE SUBSTANTIAL NET SALES AND OPERATIONS OUTSIDE OF THE UNITED STATES,
INCLUDING SIGNIFICANT OPERATIONS IN CHINA, THAT EXPOSE US TO INTERNATIONAL
RISKS.
Our international sales accounted for approximately 31.3% of our net sales
in the fiscal year ended March 31, 2004 and 24.0% of our net sales in the fiscal
year ended March 31, 2003. At March 31, 2004, our foreign subsidiaries' total
assets aggregated $24,132, $8,807 was in Hong Kong and $15,325 was in China. We
are subject to the risks of foreign currency transaction and translation losses,
which might result from fluctuations in the values of the Hong Kong dollar and
Chinese renminbi. At March 31, 2004, we had net assets of $4,836 subject to
possible fluctuations in the value of the Hong Kong dollar and net assets of
$7,330 subject to fluctuations in the value of the Chinese renminbi. Our foreign
subsidiaries' operations reflect intercompany transfers of costs and expenses,
including interest on intercompany trade receivables, at amounts established by
us.
We manufacture or source nearly all of our sensor-based consumer products
and the majority of our sensor products in China. Our China subsidiary is
subject to certain government regulations, including currency exchange controls,
which limit the subsidiary's ability to pay cash dividends or lend funds to us.
The inability to operate in China or the imposition of significant restrictions,
taxes, or tariffs on our operations in China would impair our ability to
manufacture products in a cost-effective manner and could reduce our
profitability significantly.
Risks specific to our international operations include:
- political conflict and instability in the relationships among Hong
Kong, Taiwan, China, the United States and in our target international
markets;
12
- political instability and economic turbulence in Asian markets;
- changes in United States and foreign regulatory requirements resulting
in burdensome controls, tariffs and import and export restrictions; -
difficulties in staffing and managing international operations;
- changes in foreign currency exchange rates, which could make our
products more expensive as stated in local currency, as compared to
competitive products priced in the local currency;
- enforceability of contracts and other rights or collectability of
accounts receivable in foreign countries due to distance and different
legal systems;
- delays or cancellation of production and delivery of our products due
to the logistics of international shipping, which could damage our
relationships with our customers;
- a recurrence of last year's outbreak of SARS and the associated risks
to our operations in China and Hong Kong; and
- tax policy change in China, which could affect the profitability of
our operations in China. On January 1, 2004, China adopted a new Value
Added Tax (VAT) export refund rate, which has dropped from 17% to 13%,
with the intention of reducing their trade surplus and increasing
pressure on local currency.
COMPETITION IN THE MARKETS WE SERVE IS INTENSE AND COULD REDUCE OUR NET SALES
AND HARM OUR BUSINESS.
Highly fragmented markets and high levels of competition characterize our
Sensor business. Despite recent consolidations, including the acquisition of
several smaller competitors of ours by larger competitors like General Electric,
Honeywell, and Danaher Corporation, the sensor industry remains highly
fragmented. The Consumer Products business is also highly competitive and is
becoming more competitive as a result of the emergence of new scale
manufacturers and enhanced product lines from existing competitors. We cannot
assure that our original equipment manufacturer customers, who are also
competitors, will not develop their own production capability or locate
alternative sources of supply, and discontinue purchasing products from us. In
addition, the barriers to entry are being reduced in the scale industry due to
the emergence of low cost, commercially available electronics and load cells.
Some of our competitors and potential competitors may have a number of
significant advantages over us, including:
- greater financial, technical, marketing, and manufacturing resources;
- preferred vendor status with our existing and potential customer base;
- more extensive distribution channels and a broader geographic scope;
- larger customer bases; and
- a faster response time to new or emerging technologies and changes in
customer requirements.
A SUBSTANTIAL PORTION OF OUR NET SALES IS GENERATED BY A SMALL NUMBER OF LARGE
CUSTOMERS. IF ANY OF THESE CUSTOMERS REDUCE OR POSTPONE ORDERS, OUR NET SALES
AND EARNINGS WILL SUFFER.
Historically, a relatively small number of customers have accounted for a
significant portion of our net sales. For the fiscal year ended March 31, 2004,
the five largest customers of our Consumer Products business represented
approximately 40% of net sales for that business. One customer accounted for
14.7% of our net sales in the Consumer products business for the fiscal year
ended March 31, 2004. Looking forward, as a result of the Conair transaction
(see Item I - "Business", above), Conair is expected to represent approximately
25% of net sales for the Consumer Products business in the fiscal year ending
March 31, 2005. In addition, the top five Consumer Products customers are
expected to account for over 45% of net sales of our Consumer Products business
in the fiscal year ending March 31, 2005. Because we have no long-term volume
purchase commitments from any of our significant customers, we cannot be certain
that our current order volume can be sustained or increased. The loss of or
decrease in orders from any major customer could significantly reduce our net
sales and profitability.
OUR TRANSFER PRICING PROCEDURES MAY BE CHALLENGED, WHICH MAY SUBJECT US TO
HIGHER TAXES AND ADVERSELY AFFECT OUR EARNINGS.
13
Transfer pricing refers to the prices that one member of a group of related
companies charges to another member of the group for goods, services, or the use
of intellectual property. If two or more affiliated companies are located in
different countries, the laws or regulations of each country generally will
require that transfer prices be the same as those charged by unrelated companies
dealing with each other at arm's length. If one or more of the countries in
which our affiliated companies are located believes that transfer prices were
manipulated by our affiliate companies in a way that distorts the true taxable
income of the companies, the laws of countries where our affiliated companies
are located could require us to redetermine transfer prices and thereby
reallocate the income of our affiliate companies in order to reflect these
transfer prices. Any reallocation of income from one of our companies in a lower
tax jurisdiction to an affiliated company in a higher tax jurisdiction would
result in a higher overall tax liability to us. Moreover, if the country from
which the income is being reallocated does not agree to the reallocation, the
same income could be subject to taxation by both countries.
We have adopted transfer-pricing procedures with our subsidiaries to
regulate intercompany transfers. Our procedures call for the transfer of goods,
services, or intellectual property from one company to a related company at
prices that we believe are arm's length. We have established these procedures
due to the fact that some of our assets, such as intellectual property developed
in the United States, are transferred among our affiliated companies. If the
United States Internal Revenue Service or the taxing authorities of any other
jurisdiction were to successfully require changes to our transfer pricing
practices, we could become subject to higher taxes and our earnings would be
adversely affected. Any determination of income reallocation or modification of
transfer pricing laws can result in an income tax assessment of the portion of
income deemed to be derived from the United States or other taxing jurisdiction.
WE RELY ON PROMOTIONAL PROGRAMS FOR A SIGNIFICANT PORTION OF OUR CONSUMER
PRODUCTS REVENUES. ANY REDUCTION IN CUSTOMER PROMOTIONS MAY RESULT IN A LOSS OF
NET SALES.
Promotional programs by our Consumer Products customers resulted in net
sales of $1,593 for the fiscal year ended March 31, 2004, net sales of $3,336
for the fiscal year ended March 31, 2003 and net sales of $2,568 for the fiscal
year ended March 31, 2002. These promotional programs result in significant
orders by customers who do not carry our products on a regular basis.
Promotional programs often involve special pricing terms or require us to spend
funds to have our products promoted. We cannot assure you that promotional
purchases by our retail industry customers will be repeated regularly, or at
all. These promotional sales could cause our quarterly results to vary
significantly. Any reduction in customer promotions may result in a loss of net
sales.
PRESSURE BY OUR CUSTOMERS TO REDUCE PRICES AND TO AGREE TO LONG-TERM SUPPLY
ARRANGEMENTS MAY CAUSE OUR NET SALES OR PROFIT MARGINS TO DECLINE.
Our customers are under pressure to reduce prices of their products.
Therefore, we expect to experience pressure from our customers to reduce the
prices of our products. Our customers frequently negotiate supply arrangements
with us well in advance of delivery dates, thereby requiring us to commit to
price reductions before we can determine if we can achieve the assumed cost
reductions. We believe that we must reduce our manufacturing costs and obtain
larger orders to offset declining average sales prices. If we are unable to
offset declining average sales prices, our gross profit margins will decline.
ITEM 2. PROPERTIES
As of March 31, 2004, we leased all of our properties under operating leases as follows:
LOCATION PRIMARY USE BUSINESS SQ. FT. LEASE EXPIRATION
- ---------------------- -------------------------- ------------ ------- --------------------
Fairfield, NJ USA Corporate headquarters Consumer and 6,500 November 2004**
Corporate
Headquarters
Wayne, PA USA Research and development, Sensor 2,900 December 2004
sales and marketing
San Jose, CA USA Manufacturing, research Sensor 4,700 August 2005
and development, sales and
marketing
Shenzhen, China Sensors principal Asian Sensor 125,860 Between August 2003
manufacturing and February 2005
facility
14
Shenzhen, China Research and development Consumer 12,214 February 2005
product support facility
Hampton, VA USA Sensors principal domestic Sensor 80,725 July 2011
manufacturing and
distribution facility
Hampton, VA Distribution and warehouse Consumer 39,275 July 2011
USA *
Hong Kong, China Trading office Consumer 2,000 March 2006
Kings Langley, England Sales and marketing Consumer 1,070 Month to Month
*Our Consumer distribution and warehouse space in Hampton, Virginia is
presently vacant due to the Conair transaction., as we no longer sell the
Thinner branded of bath and kitchen scales to retailers. We are presently
attempting to sublease the unused space.
**The company elected to exercise an early termination clause in its
Fairfield, NJ lease. As a result, the lease which originally expired in November
2007 will terminate in November 2004.
Our sensor manufacturing facilities located in China and Virginia are ISO
9001 certified. We believe that these premises are suitable and adequate for our
present operations.
ITEM 3. LEGAL PROCEEDINGS
Pending Matters
U.S. Attorney Investigation
We have learned that the Office of the United States Attorney for the
District of New Jersey is conducting an inquiry into the matters described below
under the caption "SEC Investigation". We cannot predict how long this
investigation will continue or its ultimate outcome.
Robert L. DeWelt v. Measurement Specialties, Inc. et al. On July 17, 2002,
Robert DeWelt, the former acting Chief Financial Officer and general manager of
our Schaevitz Division, filed a lawsuit against the company and certain of our
officers and directors in the United States District Court for the District of
New Jersey. Mr. DeWelt resigned on March 26, 2002 in disagreement with
management's decision not to restate certain of our financial statements. The
lawsuit alleges a claim for constructive wrongful discharge and violations of
the New Jersey Conscientious Employee Protection Act. Mr. DeWelt seeks an
unspecified amount of compensatory and punitive damages. We filed a Motion to
Dismiss this case, which was denied on June 30, 2003. We have answered the
complaint and are engaged in the discovery process. This litigation is ongoing
and we cannot predict its outcome at this time.
Service Merchandise Company, Inc. v. Measurement Specialties, IncWe are
currently the defendant in a lawsuit filed in March 2001 by Service Merchandise
Company, Inc. ("SMC") and its related debtors (collectively, the "Debtors") in
the United States District Court for the Middle District of Tennessee in the
context of the Debtors' Chapter 11 bankruptcy proceedings. The Bankruptcy Court
entered a stay of the action in May 2001, which was lifted in February 2002. On
March 30, 2004, the court entered an order allowing written discovery in the
form of interrogatories and requests for production of documents to begin. All
other discovery remains stayed. The action alleges that we received
approximately $645 from one or more of the Debtors during the ninety (90) day
period before the Debtors filed their bankruptcy petitions, that the transfers
were to our benefit, were for or on account of an antecedent debt owed by one or
more of the Debtors, made when one or more of the Debtors were insolvent, and
that the transfers allowed the company to receive more than the company would
have received if the cases were cases under Chapter 7 of the United States
Bankruptcy Code. The action seeks to disgorge the sum of approximately $645 from
the company. It is not possible at this time to predict the outcome of the
litigation or estimate the extent of any damages that could be awarded in the
event that we are found liable to the estates of SMC or the other Debtors.
From time to time, we are subject to other legal proceedings and claims in
the ordinary course of business. We currently are not aware of any such legal
proceedings or claims that the we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
15
Pending Settlements
Measurement Specialties, Inc. Securities Litigation. On March 20, 2002, a
class action lawsuit was filed on behalf of purchasers of our common stock in
the United States District Court for the District of New Jersey against the
company and certain of our present and former officers and directors. The
complaint was subsequently amended to include the underwriters of our August
2001 public offering as well as our former auditors.
The lawsuit alleged violations of the federal securities laws. The lawsuit
sought an unspecified award of money damages. After March 20, 2002, nine
additional similar class actions were filed in the same court. The ten lawsuits
were consolidated into one case under the caption In re: Measurement
Specialties, Inc. Securities Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs
filed a Consolidated Amended Complaint on September 12, 2002. The underwriters
made a claim for indemnification under the underwriting agreement.
On April 1, 2004, we reached an agreement in principle to settle this class
action lawsuit. Pursuant to the agreement, the case will be settled as to all
defendants in exchange for payments of $7,500 from the company and $590 from
Arthur Andersen, our former auditors. Both our primary and excess D&O insurance
carriers initially denied coverage for this matter. After discussion, our
primary D&O insurance carrier agreed to contribute $5,000 and our excess
insurance carrier agreed to contribute $1,400 to the settlement of this case. As
part of the arrangement with our primary carrier, we agreed to renew our D&O
coverage for the period from April 7, 2003 through April 7, 2004. The $3,200
renewal premium represented a combination of the market premium for an aggregate
of $6,000 in coverage for this period plus a portion of our contribution toward
the settlement.
The settlement agreement is subject to court approval and can be terminated
by plaintiffs or defendants, under certain circumstances.
SEC Investigation
In February 2002, we contacted the staff of the SEC after discovering that
our former chief financial officer had made the misrepresentation to senior
management, our board of directors and our auditors that a waiver of a covenant
default under our credit agreement had been obtained when, in fact, our lenders
had refused to grant such a waiver. Since February 2002, the company and a
special committee formed by our board of directors have been cooperating with
the staff of the SEC. In June 2002, the staff of the Division of Enforcement of
the SEC informed the company that it is conducting a formal investigation
relating to matters reported in our Quarterly Report on Form 10-Q for the
quarter ended December 31, 2001.
On May 18, 2004, we reached an agreement in principle with the SEC which
would resolve the commission's investigation of the company. Pursuant to the
agreement, we will pay $1,000 in disgorgement and civil penalties. The
settlement agreement is subject to court approval.
As of March 31, 2004, we have provided an accrual of $2,100 associated with
certain of the legal matters discussed above. However, there can be no assurance
that additional amounts may not be required to dispose of such matters.
Settlement
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration). Exeter Technologies, Inc. ("Exeter") and Michael Yaron
alleged underpayments of approximately $322 relating to a January 5, 2000
Product Line Acquisition Agreement. We maintained the claim failed to recognize
our rights to certain contractual allowances and offsets. In March 2004, the
parties settled this matter for a $300 payment by the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter of fiscal 2004.
16
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers as of March 31, 2004 were as follows:
NAME AGE POSITION
Frank Guidone 39 President, Chief Executive Officer and Director
Morton L. Topfer 67 Chairman of the Board
John P. Hopkins 43 Chief Financial Officer
Mark W. Cappiello 50 Vice President and General Manager of the
Consumer Products Division
J. Victor Chatigny 53 Vice President and General Manager of the
Sensors Products Division
Morton L. Topfer has been a director since January 2002 and was appointed
Chairman of the Board in January 2003. Mr. Topfer is Managing Director of
Castletop Capital, an investment firm. He previously served at Dell Computer
Corporation as Counselor to the Chief Executive Officer, from December 1999 to
February 2002, and Vice Chairman, from June 1994 to December 1999. Mr. Topfer
was a member of the Board of Directors of Dell from December 1999 to July 2004.
Prior to joining Dell, Mr. Topfer served for 23 years at Motorola, Inc. where he
held several executive positions, last serving as Corporate Executive Vice
President and President of the Land Mobile Products Sector. Mr. Topfer was
conferred the Darjah Johan Negeri Penang State Award in July 1996 by the
Governor of Penang for contributions to the development of the electronics
industry in Malaysia. He serves as a director for Staktek Technologies. Mr.
Topfer also serves on the advisory board of Singapore Technologies.
Frank Guidone has served as Chief Executive Officer since June 2002 and a
Director since December 2002. Mr. Guidone remains a principal of Corporate
Revitalization Partners (CRP), a Dallas-based turnaround/crisis management
consulting firm. Mr. Guidone has been a Managing Director/Principal of CRP since
2000. Mr. Guidone is also a partner/co-founder of Four Corners Capital Partners,
a boutique private investment and consulting firm founded in 1999. Prior to Four
Corners, Mr. Guidone spent 13 years in management consulting with Andersen
Consulting and George Group, Inc. Mr. Guidone has worked with numerous solvent
and insolvent companies, focusing on operational and financial restructurings.
Mr. Guidone received a B.S. in mechanical engineering from The University of
Texas at Austin.
John P. Hopkins was appointed Chief Financial Officer in July 2002. Prior
to joining Measurement Specialties, he was Vice President, Finance from April
2001, and was Vice President and Controller from January 1999 to March 2001,
with Cambrex Corporation, a provider of scientific products and services to the
life sciences industry. From 1988 to 1998, he held various senior financial
positions with ARCO Chemical Company, a manufacturer and marketer of specialty
chemicals and chemical intermediates. Mr. Hopkins is a Certified Public
Accountant and was an Audit Manager for Coopers & Lybrand prior to joining ARCO
Chemical. Mr. Hopkins holds a B.S. in Accounting from West Chester University,
and an M.B.A. from Villanova University.
Mark W. Cappiello was appointed Vice President and General Manager of our
Consumer Products Division in June 2002. Mr. Cappiello was our Vice President of
Sales and Marketing from January 1988 until June 2002. Mr. Cappiello has over
twenty-five years of experience in international consumer products marketing,
over twenty of which have been in the scale industry. From January 1985 to
October 1987, Mr. Cappiello was employed by Terraillon S.A., a French
manufacturer and distributor of scales and balance products. Mr. Cappiello
received a B.A. in business from the University of Connecticut.
J. Victor Chatigny has been Vice President and General Manager of our
Sensors Division since June 2002. Mr. Chatigny joined Measurement Specialties
through our 1998 acquisition of PiezoSensors from AMP Incorporated, where he
served as Director of Sales, Marketing and Research and Development since 1993.
He held management positions in PiezoSensors since 1982, and, previously, in the
Electronics Division of Corning International from 1978. Mr. Chatigny served in
US Army Corps of Engineers where he was Captain, 11th Engineering Battalion. He
holds B.S. and M.S. degrees in industrial engineering and management from
Clarkson University, and a M.B.A. (finance) from The American University.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
(A) Market Price
Our common stock, no par value, is traded on the American Stock Exchange
(AMEX) under the symbol MSS. The following table presents high and low sales
prices of our common stock as reported on the AMEX for the periods indicated:
HIGH LOW
------ ------
YEAR ENDING MARCH 31, 2004
Quarter ended June 30, 2003 $ 5.65 $ 2.96
Quarter ended September 30, 2003 13.50 5.15
Quarter ended December 31, 2003 22.10 11.85
Quarter ended March 31, 2004 23.55 18.36
YEAR ENDED MARCH 31, 2003
Quarter ended June 30, 2002 $ 3.25 $ 1.00
Quarter ended September 30, 2002 2.91 2.06
Quarter ended December 31, 2002 3.20 1.35
Quarter ended March 31, 2003 3.26 1.95
The trading of our common stock was suspended by the AMEX on February 15,
2002 because of delays in the filing of our quarterly report on Form 10-Q for
the three months ended December 31, 2001. Trading of the stock resumed on June
5, 2002. Trading of the stock was subsequently suspended from July 15, 2002
until November 1, 2002 as a result of our failure to timely file our Annual
Report on Form 10-K for the fiscal year ended March 31, 2002.
(B) Approximate Number of Holders of Common Stock
At May 13, 2004, there were approximately 129 shareholders of record of our
common stock.
(C) Dividends
We have not declared cash dividends on our common equity. Additionally, the
payment of dividends is prohibited under our credit agreement.
At present, there are no material restrictions on the ability of our Hong
Kong subsidiary to transfer funds to us in the form of cash dividends, loans,
advances, or purchases of materials, products or services. Chinese laws and
regulations, including currency exchange controls, restrict distribution and
repatriation of dividends by our China subsidiary.
See Item 12 for information about our equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements and the related notes to the consolidated
financial statements included in this Annual Report on Form 10-K.
YEARS ENDED MARCH 31,
($IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2004 2003 2002 2001 2000
Results of operations:
Net sales $112,813 $107,676 $ 97,273 $ 97,033 $ 59,997
Income (loss) from continuing operations $ 21,374 $ (6,323) $(24,234) $ 2,462 $ 5,531
Net income (loss) $ 21,586 $ (9,097) $(29,047) $ 1,197 $ 5,531
Net cash provided by (used in):
Operating activities $ 7,405 $ 3,047 $ (6,077) $ (4,123) $ 8,129
18
Investing activities $ 9,687 $ 21,113 $(12,070) $(19,287) $(15,999)
Financing activities $ (3,508) $(24,178) $ 27,344 $ 27,539 $ 7,041
Income (loss) from continuing operations
per common share:
Basic $ 1.73 $ (0.53) $ (2.30) $ 0.30 $ 0.73
Diluted $ 1.53 $ (0.53) $ (2.30) $ 0.27 $ 0.64
Loss per common share from discontinued
operations
Basic $ 0.02 $ (0.23) $ (0.43) $ (0.15) $ -
Diluted $ 0.01 $ (0.23) $ (0.43) $ (0.14) $ -
Net Income (loss) per common share:
Basic $ 1.75 $ (0.76) $ (2.76) $ 0.15 $ 0.73
Diluted $ 1.54 $ (0.76) $ (2.76) $ 0.13 $ 0.64
Cash dividends declared per common share None None None None None
As of March 31,
Total assets $ 77,000 $ 46,168 $ 89,612 $ 67,685 $ 39,647
Long-term debt, net of current maturities (1) $ - $ 2,000 $ - $ - $ 9,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our results of operations and financial condition
should be read together with the other financial information and consolidated
financial statements and related notes included in this Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of factors.
OVERVIEW
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics including pressure, motion,
force, displacement, tilt/angle, flow and distance. We have two businesses, a
Sensor business and a Consumer Products business.
Our Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. Our sensor products include
piezoresistive pressure sensors, transducers and transmitters, electromagnetic
displacement sensors, piezoelectric polymer film sensors, tilt sensors, membrane
switch panel sensors, custom microstructures, load cells and accelerometers.
Our Consumer Products segment designs and manufactures sensor-based
consumer products. Our sensor-based consumer bath and kitchen scale products are
now sold and marketed primarily under the brand names of our original equipment
manufacturer customers; previously they were also sold directly to retailers.
Our tire pressure gauges and distance measurement products are sold and marketed
under our own brand names, as well as those of our OEM and private label
customers.
The following table sets forth, for the periods indicated, certain items in
our consolidated statements of income as a percentage of net sales:
FISCAL YEAR ENDED MARCH 31,
---------------------------------
2004 2003 2002
----------- -------- ----------
Net Sales
Sensors 53.4% 48.6% 50.3%
Consumer products 46.6 51.4 49.7
----------- -------- ----------
Total net sales 100.0 100.0 100.0
Cost of sales 55.4 64.7 71.5
----------- -------- ----------
Gross profit 44.6 35.3 28.5
Operating expenses (income)
Selling, general, and administrative 27.0 31.8 36.7
Litigation expense 1.3 3.3
19
Research and development 3.1 3.3 7.8
Customer funded development - (0.3) (1.8)
Non-cash equity based compensation 5.7 - -
Goodwill and Other Impairments - - 4.5
Restructuring costs 0.4 1.1 1.0
Interest expense, net 0.3 1.9 2.4
Other expenses (income) (1.3) (0.4) 0.2
----------- -------- ----------
36.5 40.7 50.8
Income(loss) from continuing operations before income
taxes and cumulative effect of accounting change 8.1 (5.4) (22.3)
Income tax benefit (expense) 10.8 (0.4) (2.6)
Loss from operations of discontinued units 0.2 (3.6) (4.7)
Gain on disposition of discontinued units - 1.0
Cumulative effect of accounting change - - (0.3)
----------- -------- ----------
NET INCOME (LOSS) 19.1% (8.4)% (29.9)%
=========== ======== ==========
OUR DEVELOPMENT /GROWTH STRATEGY
Development Strategy. We are focusing our development efforts in both our
Sensor business and Consumer Products business on the original equipment
manufacturers (OEM) market. In the Consumer Products business, having both a
branded and OEM consumer scale business has historically created channel
conflicts. As part of our effort to focus on the OEM market, we sold certain
assets associated with our Thinner branded bathroom and kitchen scale business
to Conair Corporation on January 30, 2004. We previously sold our Thinner
branded scales directly to retailers, predominately in the U.S. and Canada. On a
going-forward basis, we expect to supply these scales directly to Conair and
intend to continue our efforts in the design, development and manufacture of
innovative scale products for sale to our worldwide base of OEM customers. As
OEM margins have historically been lower than margins on sales to retail
customers, we expect our Consumer Products segment margins will decline as a
result of this transaction. Although our development focus is on the OEM market,
we intend to continue to develop and manufacture our tire pressure gauges, which
are sold directly to retail customers. See Note 6 to the consolidated financial
statements included in this Annual Report on Form 10-K for a more detailed
description of the Conair transaction.
Growth Strategy. We are focused on aggressively growing our Sensor segment.
We expect that this growth will come through a combination of organic growth and
acquisitions of sensor businesses. In order to finance any potential
acquisitions, we would consider using available cash, loans from financial
institutions, the sale of equity securities, or the sale of existing Company
assets, including assets in our Consumer Products segment.
Trends.
Sensor Business: The sensors market is highly fragmented with hundreds of
niche players. While the worldwide sensors market that we serve is expected to
have a 5% Compound Annual Growth Rate (CAGR), we expect to gain share and grow
our Sensor business in excess of the market.
Consumer Products Business: As a result of the Conair transaction, we are
now solely an OEM manufacturer of bath and kitchen scales. As OEM margins
historically have been lower than retail margins, including the effect of the
amortized gain related to the Conair transaction (see Note 6 to the consolidated
financial statements included in this Annual Report on Form 10-K), we anticipate
gross margins in the Consumer Products business to be in the 28% - 30% range for
the fiscal year ending March 31, 2005.
CHANGES IN OUR BUSINESS
DISCONTINUED OPERATIONS:
In September 2002, we sold all of the outstanding stock of Terraillon
Holdings Limited (referred to herein as Terraillon), a European manufacturer of
branded consumer bathroom and kitchen scales, to Fukuda (Luxembourg) S.a.r.l.,
an investment holding company incorporated in Luxembourg.
We placed our United Kingdom subsidiary, Measurement Specialties UK Limited
(referred to herein as Schaevitz UK), into
20
receivership on June 5, 2002 pursuant to the terms of a Mortgage Debenture dated
February 28, 2001.
Our consolidated financial statements for the fiscal years ended March 31,
2004, 2003, and 2002 include the results of our ongoing operations. As a result
of placing Schaevitz UK into receivership and selling Terraillon, these entities
have been classified as discontinued operations in the consolidated financial
results for all periods presented. Accordingly, all comparisons in Management's
Discussion and Analysis for each of the fiscal years ended March 31, 2004, 2003
and 2002 exclude the results of these discontinued operations except for "Loss
from discontinued units", "Cumulative effect of accounting change, net of tax",
and "Net income (loss)."
SALE OF ASSETS:
On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner brand name and exclusive rights to the Thinner designs in
North America. We previously sold our Thinner branded scales directly to
retailers, predominately in the U.S. and Canada. On a going-forward basis, we
expect to supply these scales directly to Conair and intend to continue our
efforts in the design, development and manufacture of innovative scale products
for sale to our worldwide base of OEM customers
In July 2002, we sold the assets, principally property and equipment,
related to our silicon wafer fab manufacturing operation in Milpitas, CA to
Silicon Microstructures, Inc. (SMI), a wholly-owned subsidiary of Elmos
Semiconductor AG. The wafer fab operation was formerly part of our IC Sensors
division.
IC Sensors continues to design and sell all, and manufacture most, of the
product lines it produced prior to the sale, including custom wafers and die,
pressure sensors, accelerometers and custom MEMS components, and to outsource to
SMI the manufacturing of silicon chips used in these products. This sale is
reflected in the results of operations of the Sensors segment.
EXECUTIVE SUMMARY
Measurement Specialties has seen a significant amount of change over the
last several years. There were considerable challenges encountered in
integrating the acquisition of the Piezo polymer division of AMP (acquired in
August 1998), the IC Sensor division of Perkin-Elmer (acquired in February,
2000), and the Schaevitz division of TRW (acquired in August 2000) into the
Sensors business. As a result, we experienced very poor historical margin
performance due mainly to under-absorption of the acquired overhead structure.
In May 2002, we embarked upon an aggressive restructuring effort to improve the
operating performance of the company. A key component of this restructuring was
the elimination of underutilized facilities to consolidate our operations in
Shenzhen, China and Hampton, Virginia. Having completed this restructuring,
Measurement Specialties is now a global sensor solutions company with a broad
range of technologies and capabilities. Our focus is engineered solutions where
we can use our engineering and manufacturing talent and depth of knowledge and
experience in sensors to provide a complete solution to our customers. A key to
our manufacturing strategy is leveraging the significant infrastructure we now
have in Shenzhen, China. As more fully described below, this infrastructure has
enabled us to reduce costs and improve financial performance while continuing to
provide our customers with low cost, highly reliable products.
NEW ACCOUNTING STANDARDS
On May 15, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"), which requires
that certain financial instruments be presented as liabilities that were
previously presented as equity or as temporary equity. Such instruments include
mandatory redeemable preferred and common stock, and certain options and
warrants. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and is generally effective at the beginning of the
first interim period beginning after June 15, 2003. We do not believe that this
statement will have a material effect on our consolidated financial position or
results of operations.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), and
amended April 2004, FIN46 (R)-4"Consolidation of Variable Interest Entities".
FIN 46 (R)-4 clarifies the application of Accounting Research Bulletin 51,
"Consolidated Financial Statements", for certain entities that do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties or in which equity
investors do not have the characteristics of a controlling financial interest
("variable interest entities"). Variable interest entities within the scope of
FIN 46 (R)-4 will be required to be consolidated by their primary beneficiary.
The primary beneficiary of a variable interest entity is determined to be the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected returns, or both. FIN 46 (R)-4 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company is in the
process of determining what impact, if any, the adoption of the provisions of
FIN 46 (R)-4 will have upon its financial condition or results of operations.
The Company does not believe that the adoption of FIN46(R)-4 will have a
material effect on its financial position or results of operations.
21
In November 2002, the Emerging Issues Task Force reached a consensus
opinion on EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The
consensus provides that revenue arrangements with multiple deliverables should
be divided into separate units of accounting if certain criteria are met. The
consideration for the arrangement should be allocated to the separate units of
accounting based on their relative fair values, with different provisions if the
fair value of all deliverables are not known or if the fair value is contingent
on delivery of specified items or performance conditions. Applicable revenue
recognition criteria should be considered separately for each separate unit of
accounting. EITF 00-21 is effective for revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. Entities may elect to report the
change as a cumulative effect adjustment in accordance with APB Opinion 20,
Accounting Changes. On January 30, 2004, Conair Corporation purchased certain
assets of our Thinner branded bathroom and kitchen scale business, and now owns
worldwide rights to the Thinner brand name and exclusive rights to the Thinner
designs in North America. We have accounted for the sale of this business under
the guidance of EITF 00-21. (See Note 6 to the consolidated financial statements
included in this Annual Report on Form 10-K for a discussion of the sale of the
sale of the business to Conair). Except for the Conair transaction, we do not
believe that the adoption of EITF 00-21 will have a material effect on our
financial position or results of operations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the periods reported. The following accounting policies involve a
"critical accounting estimates" because they are particularly dependent on
estimates and assumptions made by management about matters that are highly
uncertain at the time the accounting estimates are made. In addition, while we
have used our best estimates based on facts and circumstances available to us at
the time, different estimates reasonably could have been used in the current
period, or changes in the accounting estimates we used are reasonably likely to
occur from period to period which may have a material impact on the presentation
of our financial condition and results of operations. We review these estimates
and assumptions periodically and reflect the effects of revisions in the period
that they are determined to be necessary.
REVENUE RECOGNITION:
Revenue is recorded when products are shipped, at which time title
generally passes to the customer. Certain consumer products may be sold with a
provision allowing the customer to return a portion of products. Upon shipment,
we provide for allowances for returns based upon historical and estimated return
rates. The amount of actual returns could differ from our estimate. Changes in
estimated returns would be accounted for in the period of change.
We utilize manufacturing representatives as sales agents for certain of our
products. Such representatives do not receive orders directly from customers,
take title to or physical possession of products, or invoice customers.
Accordingly, revenue is recognized upon shipment to the customer.
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. We are not responsible for the ultimate sale to third party
customers and therefore record revenue upon shipment to the distributor.
On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner brand name and exclusive rights to the Thinner designs in
North America. We have accounted for the sale of this business under the
guidance of EITF 00-21. As a significant portion of the proceeds from the sale
was in fact an up-front payment for future lost margins, the majority of the
gain on sale has been deferred and will be amortized into revenues in future
periods over the estimated remaining lives for those products sold to Conair.
(See Note 6 to our consolidated financial statements included in this Annual
Report on Form 10-K for a discussion of the sale of the business to Conair).
ACCOUNTS RECEIVABLE:
The majority of our accounts receivable are due from manufacturers of
electronic, automotive, military, industrial products
22
and retailers. Credit is extended based on evaluation of a customer's financial
condition and, generally, collateral is not required. Accounts receivable are
generally due within 30 to 90 days and are stated as amounts due from customers
net of allowances for doubtful accounts, and other sales allowances. Accounts
outstanding longer than the contractual payment terms are considered past due.
We determine our allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, our previous loss
history, the customer's current ability to pay its obligation to us, and the
condition of the general economy and the industry as a whole. We write off
accounts receivable when we determine they are uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Actual uncollectible accounts could exceed our estimates and
changes to our estimates will be accounted for in the period of change.
INVENTORIES:
We make purchasing decisions principally based upon firm sales orders from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown in customer
demand, customer delay in the issuance of sales orders, miscalculation of
customer requirements, technology changes that render raw materials and finished
goods obsolete, loss of customers and/or cancellation of sales orders. We
establish reserves for our inventories to recognize estimated obsolescence and
unusable items on a continual basis. Market conditions surrounding products are
also considered periodically to determine if there are any net realizable
valuation matters, which would require a write-down of any related inventories.
If market or technological conditions change, it may result in additional
inventory reserves and write-downs, which would be accounted for in the period
of change.
GOODWILL IMPAIRMENT:
Management assesses goodwill for impairment at the reporting unit level on
an annual basis or more frequently under certain circumstances. Such
circumstances include (i) significant adverse change in legal factors or in the
business climate, (ii) an adverse action or assessment by a regulator, (iii)
unanticipated competition, (iv) a loss of key personnel, (v) a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of, and (vi) recognition
of an impairment loss in a subsidiary that is a component of a reporting unit.
Management must make assumptions regarding estimating the fair value of our
reporting units. If these estimates or related assumptions change in the future,
we may be required to record an impairment charge. Impairment charges would be
included in general and administrative expenses in our statements of operations,
and would result in reduced carrying amounts of the goodwill.
LONG LIVED ASSETS:
Management assesses the recoverability of long-lived assets, which consist
primarily of fixed assets and intangible assets whenever events or changes in
circumstance indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (i) significant
underperformance relative to expected historical or projected future operating
results; (ii) significant negative industry or economic trends; (iii)
significant decline in our stock price for a sustained period; and (iv) a change
in our market capitalization relative to net book value. If the recoverability
of these assets is unlikely because of the existence of one or more of the
above-mentioned factors, an impairment analysis is performed using a projected
discounted cash flow method. Management must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of
these assets.
If these estimates or related assumptions change in the future, we may be
required to record an impairment charge. Impairment charges would be included in
general and administrative expenses in our statements of operations, and would
result in reduced carrying amounts of the related assets on our balance sheets.
INCOME TAXES:
We file income tax returns in every jurisdiction in which we have reason to
believe that we are subject to tax. Historically, we have been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that our filing position regarding one or more of our transactions
is contrary to that jurisdiction's laws or regulations.
Deferred tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in financial statements or
tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of existing assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Realization of a deferred tax asset is dependent on generating future
taxable income. During the fiscal year ended March 31, 2002, we provided a
valuation allowance against deferred tax assets since we believed at the time
that enough uncertainty existed regarding the realizability of our deferred tax
assets. However, because of the current and expected future results of the
company, taking into account the current status of our litigation (see Note 13
to the consolidated financial statements included in this Annual
23
Report on Form 10-K for a discussion of our pending litigation), we have
concluded that this valuation allowance against the deferred tax assets is no
longer necessary, and have reversed the allowance against the provision for
taxes in the fiscal year ended March 31, 2004. (See Note 12 to the consolidated
financial statements included in this Annual Report on Form 10-K for a further
discussion of our taxes).
The income tax provision is based upon the proportion of pretax profit in
each jurisdiction in which we operate. The income tax rates in Hong Kong and
China are less than those in the United States. Deferred income taxes are not
provided on our subsidiaries' earnings which are expected to be reinvested.
Distribution, in the form of dividends or otherwise, would subject our
subsidiaries' earnings to United States income taxes, subject to an adjustment
for foreign tax credits. Determination of the amount of unrecognized deferred
United States income tax liability is not practicable because of the
complexities associated with its hypothetical calculation.
WARRANTY RESERVE:
Our sensor and consumer products generally are marketed under warranties to
end users of up to ten years. Factors affecting our warranty liability include
the number of products sold and historical and anticipated rates of warranty
claims and cost per claim. We provide for estimated product warranty obligations
at the time of sale, based on our historical warranty claims experience and
assumptions about future warranty claims. This estimate is susceptible to
changes in the near term based on introductions of new products, product quality
improvements/declines and changes in end user application and/or behavior.
CONTINGENCIES AND LITIGATION:
We periodically assess the potential liabilities related to any lawsuits or
claims brought against us. While it is typically very difficult to determine the
timing and ultimate outcome of these actions, we use our best judgment to
determine if it is probable that we will incur an expense related to a
settlement for such matters and whether a reasonable estimation of such probable
loss, if any, can be made. Given the inherent uncertainty related to the
eventual outcome of litigation, it is possible that all or some of these matters
may be resolved for amounts materially different from any estimates that we may
have made with respect to their resolution.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2003
ANALYSIS OF CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------
(in thousands, except percentages) FISCAL YEAR END ED MARCH 31,
------------------------------- PERCENTAGE
2004 2003 CHANGE
---------------- ------------- -----------
Net Sales 112,813 107,676 4.8%
Sensors 60,247 52,326 15.1%
Consumer products 52,566 55,350 -5.0%
Gross profit 50,300 37,996 32.4%
Selling, general, and administrative 30,448 34,245 -11.1%
Litigation expense 1,500 3,550 -57.7%
Non-Cash Equity Based Compensation 6,483 -
Research and development 3,464 3,227 7.4%
Restructuring costs 506 1,219 -58.5%
Interest expense, net 323 2,057 -84.3%
Income taxes (12,262) 483 -2638.7%
Income (loss) from discontinued units 212 (3,910) -105.4%
24
The consolidated financial statements for the fiscal years ended March 31, 2004,
2003 and 2002 include the results of the ongoing operations of Measurement
Specialties, Inc. As a result of our restructuring plan, we sold all of the
outstanding stock of Terraillon in September 2002 and placed Schaevitz UK into
receivership in June 2002.
Accordingly, Terraillon and Schaevitz UK are classified as discontinued
operations in the consolidated financial results for all periods presented.
Net Sales.
Sensor Business. The increase in net sales of our Sensor business during the
fiscal year ended March 31, 2004 is due to increased IC Sensors and Microfused
product line sales as compared to the same period in the prior fiscal year. The
improved ICS (ICS) product line sales is the result of increased demand from
existing and new customers in the medical field, the introduction of a new line
of instrumentation grade pressure transducers, as well as increased sales in the
European and Asian markets. The improved Microfused product line sales are
primarily due to continued growth in demand in the automotive sector due to the
introduction of new customer platforms, and a general increase in demand for our
Microfused products. The Microfused product line sales increased across multiple
markets including medical, industrial, refrigeration, and flow measurement.
Piezo sales declined due to the loss of a large customer. Schaevitz sales
increased by 3%.
Consumer Products Business. The decrease in net sales of our Consumer Products
business in the fiscal year ended March 31, 2004 is primarily attributable to
lower bath scale and kitchen accessory sales, which were slightly offset by an
increase in tire gauge sales in the U.S. Bath scale sales decreased due to the
Conair transaction, as Conair made virtually no purchases in the month of
February as they assessed the inventory that was acquired as part of the
transaction. In addition, net sales will decline for the portion of the scale
business that was sold to Conair because we are no longer selling at retail
sales prices, which are higher than sales prices to OEM customers. Kitchen
accessory sales decreased during the quarter ended March 31, 2004 compared to
the prior year due to underperformance in this product category. Accordingly, we
have decided to discontinue selling kitchen accessories. Tire gauge sales
improved in the U.S. consumer market due to increases in core business with our
major customers.
Gross Margin.
Gross margin as a percent of sales for the fiscal year ended March 31, 2004
increased to 44.6% from 35.3% for the fiscal year ended March 31, 2003.
Sensor Business. Gross margin as a percent of sales for our Sensor business
increased to 54.2% for the fiscal year ended March 31, 2004 from 41.1% for the
fiscal year ended March 31, 2003. The continued margin improvement in the Sensor
Business is primarily due to more efficient manufacturing operations and
decreased material costs, as more raw materials are purchased in Asia. Our
increased operations efficiency over the prior year was the direct result of our
continued focus on production planning and implementation of our restructuring
plan. Freight costs have continued to fall as a percentage of sales through more
effective management of the freight costs.
Consumer Products Business. Gross margin as a percent of sales in our Consumer
Products business increased to 32.0% for the fiscal year ended March 31, 2004
from 30.7% for the fiscal year ended March 31, 2003. The increase in gross
margin for our Consumer Products business in the fiscal year ended March 31,
2004 is primarily due to improved margins on our sales to original equipment
manufacturers. The margins on sales to original equipment manufacturers improved
as a result of improved product mix, lower freight costs and a reduction in
material costs due to our concentration on the more efficient use of raw
materials in the manufacturing process. The margin on our retail customer sales
increased slightly for the period ended March 31, 2004 as compared to the same
period ended March 31, 2003. This increase was mainly due to lower freight and
material costs, offset slightly by lower margins for the kitchen accessories
product category. We have decided to no longer sell kitchen accessories and
liquidated much of the remaining inventory in the fiscal year ended March 31,
2004 at margins below historical levels.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling ,General and Administrative. The decrease in selling, general and
administrative expenses is primarily due to lower legal and professional fees
incurred during the fiscal year ended March 31, 2004 as compared to the same
period in prior fiscal year. These legal and professional fees decreased
approximately $6,260 in the fiscal year ended March 31, 2004 as compared to the
fiscal year ended March 31, 2003. The higher professional fees in the fiscal
2003 period as compared to the fiscal 2004 period were due to a higher level of
professional activity with respect to the restatement of our financial
statements and the class action lawsuit and SEC
25
investigation. In addition, costs have decreased in the Sensor business due to
consolidation of certain support services. Offsetting these declines is an
overall charge of $2,851 in the fiscal year ended March 31, 2004 for employee
bonus payouts and the employer's match against the employee contributions to the
401-K plan as a result of the improvement in company performance. Our employee
bonus and 401-K plan is 100% variable and is funded based upon performance
against budget. Costs in the fiscal year ended March 31, 2003 decreased due to a
refund of property taxes and a reduction in bonus accruals, as there were no
incentive based bonuses paid in that year. Based upon our current budget for the
fiscal year ended March 31, 2005, we would expect to fund approximately $2,500
for the employee bonus and 401-K match in fiscal 2005.
Litigation Expense. We recorded a net charge of $1,500 during the fiscal year
ended March 31, 2004 relating to the SEC investigation, class action lawsuit,
and the Hibernia Capital Partners litigation. This net charge represents the
combination of a $1,000 charge relating to the SEC investigation, an additional
$1,100 charge relating to the class action lawsuit, offset by the reversal of
$600 from the prior accrual upon the favorable settlement of the Hibernia
lawsuit. (See Note 15 to our consolidated financial statements included in this
Annual Report on Form 10-K.)
Non-Cash Equity Based Compensation. During the fiscal year ended March 31, 2004,
we recorded a non-cash equity based compensation charge of $6,483, or $.46 per
share diluted, for the vesting of the warrant issued to Four Corners Capital
Partners LP, a limited partnership of which Mr. Guidone is a principal. (See
Note 10 to the consolidated financial statements included in this Annual Report
on Form 10-K.) There will be no additional charges resulting from these warrants
issued to Four Corners as all the warrants vested in the fiscal year ended March
31, 2004.
Research and Development We had virtually no customer-funded development for the
fiscal year ended March 31, 2004 compared with $367 for the fiscal year ended
March 31, 2003. On a net basis, research and development costs increased $238,
or 7.4%, to $3,465 for the fiscal year ended March 31, 2004 from $3,227 for the
fiscal year ended March 31, 2003. This change resulted from decreased
customer-funded development which was partially offset by decreased research and
development efforts in our Sensor business.
Restructuring Costs. During the fiscal year ended March 31, 2004, we recorded a
charge of $506 for additional costs relating to our restructuring plan. This
charge resulted from the settlement of litigation related to our former facility
in Valley Forge, Pennsylvania.
Interest Expense, Net. The decrease in interest expense is attributable to a
$14,122 reduction in average debt outstanding from $16,298 for the fiscal year
ended March 31, 2003 to $2,176 for the fiscal year ended March 31, 2004.
Income Taxes. Our provision for income taxes includes taxes payable by our
foreign subsidiaries. For U.S. tax purposes, we anticipate that our available
net operating loss carry-forwards will offset all current fiscal year taxable
income.
During the fiscal year ended March 31, 2002, we provided a valuation allowance
against deferred tax assets since we believed at the time that enough
uncertainty existed regarding the realizability of our deferred tax assets.
However, because of the current and expected future results of the company,
taking into account the status of our current litigation, the company has
concluded that this valuation allowance against the deferred tax assets is no
longer necessary, and has accordingly reversed the allowance against the
provision for taxes in the fiscal year ended March 31, 2004. (See Note 12 to the
consolidated financial statements included in this Annual Report on Form 10-K
for a further discussion on taxes.)
Discontinued Operations. The income from discontinued operations in the fiscal
year ended March 31, 2004 reflects additional proceeds from the receiver
associated with the Schaevitz UK liquidation.
FISCAL YEAR ENDED MARCH 31, 2003 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2002
ANALYSIS OF CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------------------
(in thousands, except percentages) FISCAL YEAR ENDED MARCH 31, PERCENTAGE
-------------------------------
2003 2002 CHANGE
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Net Sales 107,676 97,273 10.7%
Sensors 52,326 48,9