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, 2005
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.)
1000 LUCAS WAY, HAMPTON, VA 23666
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (757) 766-1500
10 WASHINGTON AVENUE, FAIRFIELD, NEW JERSEY 07004-3877
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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 75 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. No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ X ] No [_]
At March 31, 2005, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $248,000,000
based on the closing price of the registrant's common stock on March 31,
2005.
At May 31, 2005, 13,578,869 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 SEPTEMBER 13,2005 TO BE FILED BY THE REGISTRANT WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NOT LATER
THAN 120 DAYS AFTER THE FISCAL YEAR ENDED MARCH 31, 2005.
MEASUREMENT SPECIALTIES, INC.
FORM 10-K
TABLE OF CONTENTS
MARCH 31, 2005
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
- ------
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . 16
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES. . . . . . . . . . . . . . . . . . . . . . 19
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . 39
ITEM 9A. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . 39
ITEM 9B. OTHER INFORMATION. . . . . . . . . . . . . . . . . . 41
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . . . 41
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 42
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . 43
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . 43
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) 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, force,
position, vibration, humidity and photo optics. We have two businesses, a Sensor
business and a Consumer Products business. We are a New Jersey corporation
organized in 1981 with corporate offices located in Hampton, Virginia.
Our Sensor segment designs and manufactures sensors for original equipment
manufacturers (OEMs) and end users. These sensors are used for automotive,
off-road, medical, industrial, consumer, military, aerospace, test and
measurement and traffic applications. Our sensor products include piezoresistive
pressure sensors and transducers, electromagnetic displacement sensors,
piezoelectric polymer film sensors, tilt sensors, membrane switch panel sensors,
custom microstructures, load cells, humidity sensors, accelerometers, photo
optic components and pulse oximetry sensors.
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 -Accutire(R) pressure gauges, ParkZone(R)
garage parking aids and Accutape(R) distance measurers - as well as those of our
OEM and private label customers.
OUR SENSORS
The majority of our sensors are devices, sense elements and transducers that
convert mechanical information into a proportionate electronic signal for
display, processing, interpretation or control. Sensors are essential to the
accurate measurement, resolution and display of pressure, force, linear or
rotary position, tilt, vibration, motion or humidity. 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.
Each of our two 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 ultrasonic sensors. These technologies
allow our sensors to operate precisely and cost effectively.
We are a global operation with engineering and manufacturing facilities located
in North America, Europe and Asia. By functioning globally, we have been able to
enhance our applications engineering capabilities, increase our geographic
proximity to our customers and leverage our cost structure.
1
RECENT ACQUISITIONS
We have made the following acquisitions which are included in the consolidated
financial statements as of the effective date of acquisition (See Notes 2 and 5
to the Consolidated Financial Statements of the Company included in this Annual
Report on Form 10-K):
ACQUIRED COMPANY EFFECTIVE DATE OF ACQUISITION
COUNTRY
Elekon Industries USA, Inc. ("Elekon") June 24, 2004
USA
Entran Devices, Inc. and Entran SA ("Entran") July 16, 2004
USA and France
Encoder Devices, LLC ("Encoder Devices") July 16, 2004
USA
Humirel, SA ("Humirel") December 1, 2004
France
MWS Sensorik GmbH ("MWS Sensorik") January 1, 2005
Germany
Polaron Components Ltd. ("Polaron") February 1, 2005
United Kingdom
These acquisitions increased our revenues, technology base, share of the
addressable sensor marketplace and presence in Europe. The largest of these
acquisitions was Humirel, a Toulouse, France-based company with a proprietary
technology for measuring relative humidity, a new platform for the company.
Humirel's OEM customers in the automotive, industrial and medical marketplaces
are synergistic with our existing customer base.
Entran, with operations in the United States and France, increased our business
with end users who purchase miniature pressure transducers, accelerometers and
load cells for test and measurement applications. Elekon brought to the company
a new technology platform with photo optic and X-ray sensing as well as an
established customer base for pulse oximetry (SpO2) sensors. Encoder Devices, a
start-up company, offered us an emerging technology platform in magnetic
encoders - a robust, low cost capability well suited to our OEM customer base.
Two smaller acquisitions further added to our capabilities in Europe. MWS
Sensorik had been a distributor and value-added reseller of our piezoresistive
accelerometers and pressure sensors in Germany with a solid customer base in the
auto crash and road test market. We also acquired certain assets of Polaron,
reuniting us with the foil strain gage pressure business formerly owned by
Schaevitz and providing an additional customer base in Europe.
GROWTH STRATEGY
We plan to continue focusing our efforts on aggressively growing our Sensor
segment, which management believes has greater growth potential and higher
returns than the Consumer business. The majority of this growth over the next
year will be organic, the result of several promising proprietary technologies
that are gaining wider adoption in the marketplace. While we do not rule out
additional acquisitions in the future, management is currently focused on
integrating recent acquisitions and leveraging the inherent synergies for sales
and marketing, engineering and manufacturing.
We are building strength in both our OEM and end user business for Sensors.
Historically, our growth has been derived from, and will continue to derive
from, OEM projects with longer development cycles, in which our sensors are
designed into another product. However, some of the recent acquisitions - most
notably Entran, but also MWS and Polaron - serve primarily end user customers.
This new strength, coupled with our traditional Schaevitz linear and rotary
displacement business, provides a solid platform on which to build end user
sales. This market includes test and measurement applications as well as
manufacturing and industrial process control. Devices sold to end users are
packaged products (sensor elements with amplification, compensation and
sometimes value-add assemblies) which carry a higher average selling price.
2
We recently organized our Sensor engineering resources into seven technology
families: pressure, position, force, vibration, humidity, photo optics and
piezo film. This flexible and scalable structure enables us to readily
assimilate acquisitions, prioritize engineering resources and ultimately respond
better to market opportunities in key industries. This new organization gives
our global sales force a clear line of sight to the resources it needs to
qualify and develop promising new OEM projects. The Company continues to
operate under two distinct business segments, Sensor and Consumer, and overall
management within these two segments is aligned geographically between North
America, Europe/Middle East and Asia.
In the Consumer Products segment, our consumer scale business is focused on the
design, development and manufacture of innovative scale products for sale to our
worldwide base of OEM customers. In fiscal year 2004, we exited the retail scale
business by selling our Thinner(R) branded bathroom and kitchen scale business
to Conair Corporation. For digital tire pressure gauges, we design and
manufacture products for OEM customers as well as for sale at retail under the
Accutire(R) brand.
MARKETS
Many aspects of day-to-day life continue to be profoundly influenced by the
pervasive application of sensors to transportation, energy, security,
communications and medical technologies. Sensor manufacturers are moving toward
more sophisticated sensor packages called "smart sensors" that take advantage of
new lower cost digital based electronics to provide more accurate measurement
and control.
The shift toward sensors utilizing digital signal processing technologies has
enhanced applications in the automotive, industrial, medical, military and
consumer products markets. Examples of our sensor applications include:
- automotive and off-road applications in braking for electronic
stability control, occupant safety, fogging prevention, transmission
fluid level, oil pressure, diesel engine management, off-road
equipment leveling and security sensing;
- industrial sensors for regulating flow in paint sprayers and
agricultural equipment, monitoring pressure in heating, ventilating,
air conditioning & refrigeration compressors, flow measurement,
factory automation, high purity wafer fab flow control, and process
control valves such as those used in turbines for power generation
equipment;
- medical sensors for invasive blood pressure measurement, drug infusion
pump flow monitoring, electronic stethoscopes, vascular health
diagnostics, sleep apnea sensing, and ultrasound bone density, kidney
dialysis, environmental monitoring for patient breathing and body
activity sensor for implantable heart pacemakers;
- military and aerospace applications, which continue to drive sensor
development with new systems requiring small, high performance sensors
for navigation and weapons control systems, pressure monitoring,
hydrophones and traffic collision avoidance systems (TCAS)
- consumer products applications including the measurement of weight,
distance, and movement; digitizing information for electronic white
boards and pen input devices for laptops; acoustic pick-ups for
musical instruments and directional speakers; and load imbalance
sensors for washing machines;
- test and measurement applications including automotive crash
accelerometers, high-accuracy position transducers and miniature
pressure force and acceleration sensors used to verify system design
and performance;
- commercial and building equipment including: flow measurement of
dispensed beverages, gasoline pump monitoring, ATM currency control,
elevator feedback, oxygen systems in hospitals, and security for stand
alone equipment;
- traffic sensors used for real time traffic monitoring,
weigh-in-motion, vehicle speed and red light enforcement and toll
booth collection monitoring.
3
TECHNOLOGY
Measurement Specialties, Inc. has a broad and robust portfolio of technologies
available to solve client sensing needs, some of which are proprietary to the
Company. Our sensor technologies include:
- PIEZORESISTIVE TECHNOLOGY is widely used for the measurement of
pressure, load and acceleration, and its use in these applications is
expanding significantly. Piezoresistive materials, most often silicon,
respond to changes in applied mechanical variables such as stress,
strain, or pressure by changing electrical conductivity (resistance).
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.
- 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 both consumer and new
sensor products because they can be designed to operate from a
relatively small power source and are inexpensive and can improve
system accuracy.
- 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,
microelectromechanical systems allow for the cost-effective
manufacture of small devices with high reliability and superior
performance.
- PIEZOELECTRIC POLYMER TECHNOLOGY. Piezoelectric materials (such as
PVDF) 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 a base substrate
material that will change its electrical properties with induced
stress or strain (such as bulk silicon). 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 is bonded to a sensing element surface which it will monitor.
The gauge operates through a direct conversion of strain to a change
in gauge resistance. This technology is useful for the construction of
reliable pressure and force sensors. The Company also manufactures a
proprietary strain gauge called Microfused(TM) in which the diaphragm
in contact with the media is fused to a silicon sensing element with
glass at high temperatures for a hermetic seal appropriate for harsh
environments.
- 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.
4
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. LVDTs 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. LVDTs are capable of extremely accurate and
repeatable measurements in severe environments.
- HUMIDITY. Humidity technology is based upon variable capacitive
affecting a sensitive polymer layer under changing ambient humidity
conditions. This technology is uniquely designed for applications in
consumer markets, automotive, home appliance and environmental
control.
- PHOTO OPTICS. Photo-Optic sensors use light to measure different
parameters such as position, reflectance, color and many others. At
present our main application is in non-invasive medical sensing,
specifically Pulse-Oximetry.
- 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 our two business segments for the fiscal years ended
March 31, 2005, 2004 and 2003 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, 2005 is presented in the following table. New products acquired or
developed in the last year are highlighted with an asterisk*.
PRODUCT TECHNOLOGY
- --------------------- -----------------------
APPLICATIONS
PRESSURE SENSORS Micro- Disposable catheter blood pressure,
AND TRANSDUCERS Electromechanical altimeter, dive tank pressure, process
Systems (MEMS) instrumentation, fluid level, measurement
and intravenous drug administration
monitoring, racing engine performance
Microfused(TM) Automotive electronic stability control
Piezoresistive Silicon systems, paint spraying machines, fertilizer
Strain Gauge dispensers, hydraulics, refrigeration and
automotive transmission
Foil Strain Gauge Instrumentation-grade aerospace and
weapon control systems, sub-sea
pressure, ship cargo level, steel mills
ACCELEROMETERS Piezoelectric Polymer Cardiac activity sensors, audio speaker
feedback, appliance load balancing
5
Micro- Crash test sensors, anthropomorphic dummy
Electromechanical sensors, road load dynamics, aerospace
Systems (MEMS) traffic alert and collision avoidance systems,
instrumentation
LOAD CELLS Microfused(TM) Automotive occupancy weight sensing,
Piezoresistive Silicon bathroom scales, exercise equipment,
Strain Gauge appliance monitoring, intravenous drug
administration monitoring
LINEAR VARIABLE Inductive Aerospace, machine control systems,
DISPLACEMENT Electromagnetic knitting machines, industrial process
TRANSDUCERS control, hydraulic actuators, instrumentation
(LVDT)
ROTARY POSITION Inductive Machine control systems, instrumentation
TRANSDUCERS AND Electromagnetic
ENCODERS*
Magnetic Encoders* Gas pump , dialysis machine controls
TILT/ANGLE SENSORS Fluid Capacitive Heavy equipment level measurement, auto
security systems, tire balancing,
instrumentation
RELATIVE HUMIDITY & Capacitive Film Auto anti-fogging systems, diesel engine
TEMPERATURE controls, air climate systems, reprography
SENSORS* machines, sleep apnea breathing apparatus
TRAFFIC SENSORS Piezoelectric Polymer Traffic survey, speed and traffic light
enforcement, toll, and truck weigh-in-
motion
CUSTOM PIEZOELECTRIC Piezoelectric Polymer Medical diagnostics, ultrasonic pen
FILM SENSORS digitizers, musical instrument pickups,
electronic stethoscope, security systems,
electronic water meters
PULSE OXIMETRY Photo optic infra-red Reusable and disposable patient blood
SENSORS (SPO2)* light absorption oxygen and pulse sensors
X-RAY DETECTION* X-ray sensor arrays Security systems, medical CT scanners
CONSUMER PRODUCTS. A summary of our sensor-based consumer products as of March
31, 2005 is presented in the following tables. Our scales are sold on an OEM
basis to manufacturers who sell them at retail under their own brand names. Our
tire pressure gauges are sold direct to retailers under our own brand names as
well as to OEMs under their own brand names.
PRODUCT TECHNOLOGY TYPES OF PRODUCTS RETAIL PRICE RANGE
- ------- --------------------- --------------------- --------------------
SCALES Piezoresistive, Bathroom Scales $ 5.00-60.00
Application Specific
Integrated Circuits
(ASICs)
Kitchen (Food) Scales $ 3.00-25.00
Sportsmen (Hunting & $ 15.00 - $30.00
Fishing) Scales
6
PRODUCT TECHNOLOGY BRAND NAME TYPES OF PRODUCTS RETAIL PRICE
- ------------- --------------------- ----------- ------------------ ---------------
RANGE
---------------
TIRE PRESSURE Piezoresistive Strain Accutire(R) Digital and $ 1.99-$60.00
GAUGES Gauge Mechanical Tire
Pressure Gauges
DISTANCE Ultrasonic Accutape(R) Interior Distance $ 13.00-22.00
MEASUREMENT Estimator
PRODUCTS
ParkZone(R) Garage Parking $15.00 - $30.00
Distance Estimator
CUSTOMERS
We sell our sensor products throughout the world. Our Sensor business designs,
manufactures and markets sensors for original equipment manufacturer
applications and for end users who use them for instrumentation and test
applications. Our extensive customer base consists of manufacturers of
electronic, automotive, medical, military, industrial and consumer products. One
of our Sensor business customers, a large OEM automotive supplier, accounted for
approximately 10% of our net sales during fiscal 2005, and during 2004 and 2003,
no one customer represented more than 10% of our net sales.
Our Consumer Products business customers are primarily retailers, resellers, or
manufacturers of consumer products in the United States and Europe. With the
sale of our Thinner(R) brand to Conair on January 30, 2004, our volume to Conair
increased to approximately 10% of net sales during fiscal 2005. No other
Consumer Products customer accounted for more than 10% of our net sales during
the last three fiscal years.
SALES AND DISTRIBUTION
We sell our sensor products through a combination of experienced regional sales
managers (typically degreed 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 sale of our Thinner(R) brand to Conair in FY 2004, our
sensor-based consumer bath and kitchen scale products are now sold and marketed
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
international component of our sales has grown with recent acquisitions. In
addition, the growing Asian market represents a significant opportunity for our
business. Sales into foreign countries accounted for 33% of net sales for the
fiscal year ended March 31, 2005, 31.3% of net sales for the fiscal year ended
March 31, 2004, and 24% of net sales for the fiscal year ended March 31, 2003.
SUPPLIERS
We rely on contract manufacturers for a significant portion of our
consumer-finished products and for our photo optic sensors sold in the medical
marketplace. 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 also source our assembly of photo optic products from a single
contract manufacturer, with whom we have a contractual relationship. We procure
components and finished products as needed, through purchase orders. 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.
7
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 2.5% of net sales, for the fiscal year ended March 31, 2005;
$3,468, or 3.1% of net sales, for the fiscal year ended March 31, 2004; and
$3,594, or 3.3% of net sales, for the fiscal year ended March 31, 2003. Research
and development expenses for our Sensor business were $2,130, or 2.3% of net
sales of our Sensor business, for the fiscal year ended March 31, 2005; $2,085,
or 3.5% of net sales of our Sensor business, for the fiscal year ended March 31,
2004; and $2,191, or 4.2% of net sales of our Sensor business, for the fiscal
year ended March 31, 2003. Included in gross research and development was $268 ,
$4 and $367 of customer funded development for the fiscal years ended March 31,
2005, 2004, and 2003, respectively.
Research and development expenses in the Consumer Products business were $1,338,
or 2.7% of net sales for the fiscal year ended March 31, 2005; $1,383, or 2.6%
of net sales for the fiscal year ended March 31, 2004; $1,403, or 2.5% of net
sales for the fiscal year ended March 31, 2003.
COMPETITION
The global market for sensors includes many diverse products and technologies,
is highly fragmented and subject to moderate pricing pressures. Our
piezoresistive, MEMS and Microfused(TM) 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 Danaher, 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 79
United States utility patents, 32 United States design patents, and 45 foreign
patents to protect our rights in certain applications of our core technology. We
have 37 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, sales representatives, 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, sales representatives, 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.
8
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, San Jose, CA, and Torrance, CA, as well as our European facilities
in Toulouse, France, Les Clayes-sous-Bois, France and Pfaffenhofen, Germany.
Additionally, certain key management, sales and engineering activities are
conducted at leased premises in Wayne, PA, Aliso Viejo, CA and in Hong Kong. Our
pulse oximetry sensors are sourced from a single supplier, Opto Circuits India
Limited, ("Opto"), in Karnatake, India. As discussed in Note 10 to the
Consolidated Financial Statements included in this Annual Report on Form 10-K,
Opto is partially owned by Messrs. Thomas Dietiker and Jay Patel, employees of
the Company. Substantially all of 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 Opto or RDL, nor is Opto or RDL obligated
to maintain capacity available for our benefit, though we account for a
significant portion of both Opto and RDL's revenues. Additionally, most of our
products contain key components that are obtained from a limited number of
sources. These concentrations in external and foreign sources of supply present
risks of interruption for reasons beyond our control, including political and
other uncertainties regarding Hong Kong and China.
The Chinese government has continued to pursue economic reforms hospitable to
foreign investment and free enterprise, although the continuation and success of
these efforts is not assured. Our operations could be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation
and currency exchange controls, by the imposition of economic austerity measures
intended to reduce inflation, and by social and political unrest. China became a
member of World Trade Organization (WTO) on December 11, 2001. Such membership
requires China and other members of the WTO to grant one another reciprocal
"Normal Trade Relations" (NTR) status (formerly known as Most Favored Nation).
Accordingly, China's preferred trading status with the United States (and other
WTO members) is no longer subject to annual review and Chinese goods exported to
the United States are subject to a low tariff and receive other favorable
treatment.
The continued stability of political, legal, economic or other conditions in
Hong Kong cannot be assured. No treaty exists between Hong Kong and the United
States providing for the reciprocal enforcement of foreign judgments.
Accordingly, Hong Kong courts may not enforce judgments predicated on the laws
of the United States, whether arising from actions brought in the United States
or, if permitted, in Hong Kong.
Most of our revenues are priced in United States dollars. Most of our costs and
expenses are priced in United States dollars, with the remaining priced in
Chinese renminbi, Euros 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 $68,555, $77,537 and
$81,795, or 48.6%, 68.7% and 76.0% of net sales, for the fiscal years ended
March 31, 2005, 2004 and 2003, respectively. Sales from our foreign facilities
were $72,386, $35,276, and $25,882 or 51.4%, 31.3% and 24.0% of net sales, for
the fiscal years ended March 31, 2005, 2004, and 2003, respectively. We are
exposed to foreign currency transaction and translation losses, which might
result from adverse fluctuations in the value of the Euro, Hong Kong dollar and
Chinese renminbi.
9
At March 31, 2005, we had net assets of $48,009 in the United States. At March
31, 2005, we had net assets of $49 in Europe, subject to fluctuations in the
value of the Euro against the dollar. At March 31, 2005, we had net assets of
$9,503 in Hong Kong subject to fluctuations in the value of the Hong Kong dollar
and net assets of $10,455 in China subject to fluctuations in the value of the
Chinese renminbi. We had net assets of $23,893 and $7,088 in the United States,
at March 31, 2004 and 2003, respectively. At March 31, 2004 and March 31, 2003,
we had no net assets in Europe. At March 31, 2004, we had net assets of $4,836
in Hong Kong subject to fluctuations in the value of the Hong Kong dollar and
net assets in China of $7,330 subject to fluctuations in the value of the
Chinese renminbi. At March 31, 2003, we had net liabilities of $2,045 in Hong
Kong subject to fluctuations in the value of the Hong Kong dollar and net assets
of $13,743 in China subject to fluctuations in the value of the Chinese
renminbi.
Fluctuations in the value of the Hong Kong dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong dollar to that of the United States dollar. However, there can be no
assurance that the value of the Hong Kong dollar will continue to be tied to
that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon. The Chinese government is currently
reevaluating its foreign currency policy, and there have been indications, as
reported widely in the news media, that the Chinese government may in fact allow
the Chinese renminbi to revalue in the foreseeable future. Based on the net
exposure of renminbi to US dollars for the fiscal year ended March 31, 2005, we
estimate a negative operating income impact of $135 for every 1% appreciation in
renminbi against US dollar (assuming no associated cost increases or currency
hedging).
Based on the net exposures of Euros to the US dollars for the fiscal year ended
March 31, 2005, we estimate a positive operating income impact of $95 for every
1% appreciation in Euros relative to the US dollar (assuming no associated cost
increases or currency hedging).
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. We acquired a number of foreign
exchange currency contracts with the purchase of Humirel, as disclosed in Note 5
to the Consolidated Financial Statements in this Annual Report on Form 10-K.
EMPLOYEES
As of March 31, 2005, we had 1,903 employees, including 213 in the United
States, 150 in the European Union, and 1,540 in Asia. As of March 31, 2005,
1,485 employees were engaged in manufacturing, 145 were engaged in
administration, 80 were engaged in sales and marketing and 193 were engaged in
engineering.
Our employees in the U.S. and Asia are not covered by collective bargaining
agreements. The majority of our employees in the European Union are covered by
collective bargaining agreements. We believe our employee relations are
satisfactory.
10
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, 2005, the dollar amount of backlog orders believed to be firm was
approximately $46,069. Acquisitions account for $9,921 of this backlog. 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, 2004, our backlog of unfilled orders was approximately $27,200. All
orders are subject to modification or cancellation by the customer with limited
changes. We believe that backlog may not be indicative of actual sales for the
current fiscal year or any succeeding period.
SEASONALITY
Our Consumer Products sales are seasonal, with highest sales during the second
and third fiscal quarters. There is no significant seasonality to our Sensor
sales.
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 below 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 Europe, Hong Kong and
China;
- The continued decline in the European consumer products market;
- A decline in the United States consumer products market;
11
- 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:
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, quality and cost-effective production; and
- effective marketing.
12
RAPID GROWTH IN THE SENSOR DIVISION BRINGS RISKS AND CHALLENGES ASSOCIATED WITH
GROWTH.
The rapid growth of the Sensor Division through a combination of organic and
acquisitive means creates a unique set of challenges which include:
- managing inventory from acquired companies as well as inventory
required for new programs;
- prioritizing the right engineering programs so new opportunities are
harvested without losing business in smaller, more stable lines of
business;
- managing a growing end user business alongside a robust and larger OEM
business;
- building infrastructure and the management team to support growth of
the business in new geographies, especially Europe;
- maintaining a pipeline of increasingly larger opportunities to achieve
comparable year over year growth rates;
- maintaining a rapidly changing balance sheet to optimize debt to
equity and working capital ratios.
WE HAVE SUBSTANTIAL NET SALES AND OPERATIONS OUTSIDE OF THE UNITED STATES,
INCLUDING SIGNIFICANT OPERATIONS IN CHINA AND EUROPE THAT EXPOSE US TO
INTERNATIONAL RISKS.
Our international sales accounted for approximately 51.4% of our net sales in
the fiscal year ended March 31, 2005 and 31.3 % of our net sales in the fiscal
year ended March 31, 2004. At March 31, 2005, our foreign subsidiaries' total
assets aggregated $53,265, of which, $15,395 was in Hong Kong, $7,149 was in
China and $30,721 was in Europe. 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, 2005, we had
net assets of $9,503 subject to possible fluctuations in the value of the Hong
Kong dollar, net assets of $10,455 subject to fluctuations in the value of the
Chinese renminbi and net assets of $49 subject to fluctuations in the Euro. Our
foreign subsidiaries' operations reflect intercompany transfers of costs and
expenses, including interest on intercompany trade receivables, at amounts
established by us.
We manufacture or source nearly all of our sensor-based consumer products and
the majority of our 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;
- 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;
13
- 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 the 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, 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, 2005,
the five largest customers of our Consumer Products business represented
approximately 55% of net sales for that business. 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.
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.
14
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.
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.
AS PART OF OUR BUSINESS STRATEGY, WE HAVE ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
AND COSTLY TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR
DIVERT MANAGEMENT'S ATTENTION.
We made several acquisitions during fiscal year 2005. As a part of our business
strategy, we may enter into additional business combinations and acquisitions.
Acquisitions are typically accompanied by a number of risks, including the
difficulty of integrating the operations and personnel of the acquired
companies, the potential disruption of our ongoing business and distraction of
management, expenses related to the acquisition and potential unknown
liabilities associated with acquired businesses. If we are not successful in
completing acquisitions that we may pursue in the future, we may be required to
reevaluate our growth strategy, and we may incur substantial expenses and devote
significant management time and resources in seeking to complete proposed
acquisitions that will not generate benefits for us.
In addition, with future acquisitions, we could use substantial portions of our
available cash as all or a portion of the purchase price. We could also issue
additional securities as consideration for these acquisitions, which could cause
significant stockholder dilution. Our prior acquisitions and any future
acquisitions may not ultimately help us achieve our strategic goals and may pose
other risks to us.
15
As a result of our previous acquisitions, we have added several different
decentralized operating and accounting systems, resulting in a complex reporting
environment. We expect that we will need to continue to modify our accounting
policies, internal controls, procedures and compliance programs to provide
consistency across all our operations, in order to increase efficiency and
operating effectiveness and improve corporate visibility into our decentralized
operations.
ITEM 2. PROPERTIES
As of March 31, 2005, we leased all but one of our properties under operating
leases as follows:
LOCATION PRIMARY USE BUSINESS SQ. FT. LEASE EXPIRATION
- ------------------ -------------------------- -------- ------- ----------------
Fairfield, NJ USA* Light manufacturing, Sensor 20,853 Oct-05
research and development,
sales and marketing
Wayne, PA USA Research and development, Sensor 2,900 Dec-06
Sales and marketing
San Jose, CA USA Manufacturing, research Sensor 4,700 Aug-05
and development, sales and
marketing
Aliso Viejo, CA Research and development, Sensor 2,283 Dec-07
USA and Product Support
Shenzhen, China Sensors principal Asian Sensor 125,860 Sep-07
Manufacturing facility
Shenzhen, China Research and development
product support facility Consumer 12,214 Feb-07
Hampton, VA USA Sensors principal domestic
manufacturing and Sensor 80,725 Jul-11
distribution facility, and
Corporate headquarters
Hampton, VA USA** Distribution and warehouse Consumer 39,275 Jul-11
Torrance, CA Manufacturing, research
and development, sales and Sensor 7,100 May-06
marketing
Plainfield, IL *** Light Manufacturing,
Research and development, Sensor 3,000 May-06
Sales and marketing
Pfaffenhofen, Sales and Marketing Sensor 1,300 Dec-05
Germany
16
Toulouse, France Manufacturing, research
and development, sales and Sensor 20,000 July-07
marketing
Hong Kong, China Trading office Consumer 2,000 Mar-06
Kings Langley,
England**** Sales and marketing Consumer 1,070 Month to Month
Owned Property:
- ---------------
Les Clayes-sous- Manufacturing, sales and
Bois, France marketing Sensor 12,378
*The company acquired the lease of the Fairfield, NJ facility as part of the
Entran acquisition. There will be no activity at this facility after June,
2005. The company is in discussions with the facility landlord to exit the
lease prior to the October, 2005 lease termination date.
**Our Consumer distribution and warehouse space in Hampton, Virginia is
presently vacant due to the Conair transaction, as we no longer sell the Thinner
brand of bath and kitchen scales to retailers. We are presently attempting to
sublease the unused space. Our accounting for the Hampton lease is in accordance
with the requirements for FASB 146, "Accounting for Costs Associated with Exit
or Disposal Activities" whereby we did not record a liability for the lease as
part of the consummation of the transaction with Conair because the Company
still derives economic benefit from the lease.
***The Company elected to exit the lease in Plainfield, IL effective May 31,
2005.
****The Company elected to exit the lease in Kings Langley, England effective
May 31, 2005.
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
Robert L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No.
02-CV-3431. On July 17, 2002, Robert DeWelt, the former acting Chief Financial
Officer and former acting general manager of our Schaevitz Division, filed a
lawsuit against us and certain of our officers and directors in the United
States District Court of 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.
In re Service Merchandise Company, Inc. (Service Merchandise Company, Inc.
v. Measurement Specialties, Inc.), United States Bankruptcy Court for the Middle
District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro. No.
301-0462A. We are currently the defendant in a lawsuit filed in March 2001 by
Service Merchandise Company, Inc. ("SMC") and its related debtors (collectively,
the "Debtors") in the 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
17
(90) day period before the Debtors filed their bankruptcy petitions, that the
transfers were to our benefit, were for or on account of an antecedent debt owed
by one or more of the Debtors, made when one or more of the Debtors were
insolvent, and that the transfers allowed us to receive more than we would have
received if the cases were cases under Chapter 7 of the United States Bankruptcy
Code. The action seeks to disgorge the sum of approximately $645 from us. It is
not possible at this time to predict the outcome of the litigation or estimate
the extent of any damages that could be awarded in the event that we are found
liable to the estates of SMC or the other Debtors.
SEB Patent Issue. On December 12, 2003, Babyliss, SA, a wholly owned
subsidiary of Conair Corporation, received notice from the SEB Group ("SEB")
alleging that certain bathroom scales manufactured by us and sold by Babyliss in
France violated certain patents owned by SEB. On May 19, 2004, SEB issued a Writ
of Summons to Babyliss and us, alleging patent infringement and requesting the
Tribunal de Grande Instance de Paris to grant them unspecified monetary damages
and injunctive relief. Pursuant to the indemnification provisions of the Conair
transaction, we have assumed defense of this matter. After thorough review, we
believe SEB's allegations of patent infringement are without merit and we intend
to defend our position vigorously. On November 9, 2004, we requested of the
Tribunal de Grande Instance de Paris a declaration of non-infringement of the
SEB patent with regard to certain weighing sensor design known as an "M" design
included in certain of our bathroom scales other than those to which SEB has
alleged infringement. On March 14, 2005, we filed pleadings with the Tribunal
seeking nullity of the SEB patent and a ruling of non-infringement of the SEB
patent with respect to the "M" design. At this time, we cannot predict the
outcome of this matter.
From time to time, we are subject to other legal proceedings and claims in
the ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
Settled Litigation
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.
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
caption In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No.
1071 (D.N.J.). Plantiffs 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. On July 20, 2004, the court approved the settlement agreement.
18
Pursuant to the agreement, the case has been settled as to all defendants in
exchange for payments of $7,500 from the company and $590 from Arthur Anderson,
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.
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 was conducting a
formal investigation relating to matters reported in our Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001.
On June 28, 2004, the Company reached a definitive settlement agreement with the
SEC which resolved the SEC's investigation of the Company. On June 30, 2004,
the court approved the settlement agreement. Pursuant to the definitive
settlement agreement, the Company paid one dollar in disgorgement and $1,000 in
civil penalties.
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 year 2005.
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, 2005
Quarter ended June 30, 2004 $22.82 $18.65
Quarter ended September 30, 2004 25.85 19.74
Quarter ended December 31, 2004 26.98 23.75
Quarter ended March 31, 2005 28.06 23.00
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
19
(B) Approximate Number of Holders of Common Stock
At May 27, 2005, there were approximately 112 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. We intend to
retain earnings to support our growth strategy and we do not anticipate paying
cash dividends in the foreseeable future.
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.
(D) Securities Authorized for Issuance Under Equity Compensation Plans
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.
(AMOUNTS IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,
2005 2004 2003 2002 2001
Results of operations:
Net sales $140,941 $112,813 $107,676 $ 97,273 $ 97,033
Income (loss) from continuing operations $ 14,826 $ 21,374 $ (6,323) $(24,234) $ 2,462
Net income (loss) $ 14,826 $ 21,586 $ (9,097) $(29,047) $ 1,197
Net cash provided by (used in):
Operating activities $ 11,377 $ 10,405 $ 3,047 $ (6,077) $ (4,123)
Investing activities $(48,322) $ 9,687 $ 21,113 $(12,070) $(19,287)
Financing activities $ 22,100 $ (3,508) $(24,178) $ 27,344 $ 27,539
Income (loss) from continuing operations
per common share:
Basic $ 1.11 $ 1.73 $ (0.53) $ (2.30) $ 0.30
Diluted $ 1.05 $ 1.53 $ (0.53) $ (2.30) $ 0.27
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 $ 1.11 $ 1.75 $ (0.76) $ (2.76) $ 0.15
Diluted $ 1.05 $ 1.54 $ (0.76) $ (2.76) $ 0.13
Cash dividends declared per common share None None None None None
As of March 31,
20
Total assets $126,004 $ 77,000 $ 46,168 $ 89,612 $ 67,685
Long-term debt, net of current maturities $ 20,028 $ - $ 2,000 $ - $ -
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.
Our fiscal year begins on April 1 and ends on March 31. References in this
report to the year 2004 or fiscal 2004 refer to the 12-month period from April
1, 2003 through March 31, 2004 and references in this report to the year 2005 or
fiscal 2005 refer to the 12-month period from April 1, 2004 through March 31,
2005.
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, position,
force, vibration, humidity and photo optics. We have two segments, the Sensor
and Consumer Products.
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
pressure and electromagnetic displacement sensors, piezoelectric polymer film
sensors, panel sensors, custom microstructures, load cells, accelerometers,
optical sensors and humidity sensors.
Our Consumer Products segment designs and manufactures sensor-based consumer
products that we sell to original equipment manufacturers, retailers and
distributors in both the United States and Europe. Consumer products include
bathroom and kitchen scales, tire pressure gauges and distance estimators.
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,
-----------------------------------
2005 2004 2003
----------- -------- ------------
Net Sales
Sensors 65.5% 53.4% 48.6%
Consumer products 34.5 46.6 51.4
----------- -------- ------------
Total net sales 100.0 100.0 100.0
Cost of Sales 57.9 55.4 64.7
----------- -------- ------------
Gross profit 42.1 44.6 35.3
Operating expenses (income)
Selling, general, and administrative 25.4 27.0 31.8
Non-cash compensation - 5.7 -
Litigation expense - 1.3 3.3
Research and development 2.5 3.1 3.3
Customer funded development (0.2) - (0.3)
21
Amortization of acquired intangibles 0.5 - -
Restructuring costs - 0.4 1.1
Interest expense, net 0.5 0.3 1.9
Other expenses (income) (0.1) (1.3) (0.4)
----------- -------- ------------
28.6 36.5 40.7
Income/(loss) from continuing operations before
income taxes 13.5 8.1 (5.4)
Income tax benefit (expense) (3.0) 10.8 (0.4)
Loss from operations of discontinued units - 0.2 (3.6)
Gain on disposition of discontinued units - - 1.0
----------- -------- ------------
NET INCOME (LOSS) 10.5 % 19.1 % (8.4) %
=========== ======== ============
EXECUTIVE SUMMARY
Measurement Specialties has seen a significant amount of change over the last
several years. 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. In fiscal year 2005, the
Company embarked on an ambitious growth strategy for the sensor division, to be
achieved through acquisition and organic growth. The result was six acquisitions
during FY 05: Elekon Industries, Inc., Entran Devices, Inc. and Entran SA,
Encoder Devices, LLC, Humirel SA, MWS Sensorik GMBH, and Polaron Components Ltd.
(the "Acquisitions") (See Notes 2 and 5 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K). Our focus remains 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. We also have a substantial end user business for high quality "off
the shelf" sensors and transducers used for test, instrumentation and process
control. A key to our manufacturing strategy is leveraging the significant
infrastructure we now have in Shenzhen, China. This infrastructure has enabled
us to reduce costs and improve financial performance while continuing to provide
our customers with low cost, highly reliable products.
OUR STRATEGY
DEVELOPMENT STRATEGY. We focus 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 created some channel conflicts historically. As part of
this focus, we sold certain assets associated with our Thinner(R) branded
bathroom and kitchen scale business to Conair Corporation on January 30, 2004.
We previously sold our Thinner(R) branded scales directly to retailers,
predominantly 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, which are sold directly to retail customers under the Accutire(R) brand.
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.
22
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
the acquisition of sensor businesses. To that end, since March 31, 2004, the
Company has made six Acquisitions referenced above. To finance the Acquisitions,
we entered into an expanded $35 million credit facility (See Note 7 to the
Consolidated Financial Statements included in this Annual Report on Form 10-K).
To finance additional acquisitions, we would consider additional borrowings, the
sale of equity securities, or the sale of existing Company assets, including
assets in our Consumer Products segment. The results of operations of these
acquisitions are included in our consolidated statement of operations as of and
since their respective dates of purchase.
ESTABLISHMENT OF OFFSHORE HOLDING COMPANIES. In the quarter ended June 30,
2004, the Company reorganized its Asian operations under an offshore holding
company, Kenabell Holding Limited, a British Virgin Island Company ("Kenabell
Holding BVI"). As part of the reorganization, a new entity was formed under
Kenabell Holding BVI in the Cayman Islands, Measurement Limited ("ML Cayman"). A
significant portion of the Consumer business in Asia was transferred into ML
Cayman during the quarter ended June 30, 2004. These holding companies were
formed as part of a foreign tax planning restructuring, and to facilitate any
potential future sale of assets of our Consumer Products business.
MSI Sensors (Asia) Limited (formerly named Measurement Limited, organized in
Hong Kong) owns all of the shares of MSI Sensors (China) Ltd. (formerly named
Jingliang Electronics (Shenzhen) Co. Ltd, organized in the Peoples Republic of
China). Kenabell Holding BVI owns all of the shares of MSI Sensors (Asia)
Limited and ML Cayman. All the companies are included in the consolidated
financial statements of the group.
In the quarter ended March 31,2005, as part of a foreign tax planning
restructuring, the Company completed the reorganization of its European
subsidiaries, which includes Entran SA and Humirel SA . This reorganization
involved transferring ownership of these subsidiaries to a Cyprus holding
company under Kenabell Holding BVI, named Acalon Holding Limited. In
conjunction with this reorganization, the ownership of Kenabell Holding BVI was
also transferred to Measurement Specialties Foreign Holdings Corporation, a
Delaware corporation.
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. As a result of this growth strategy,
we anticipate pursuing high volume sensor business that will carry lower gross
margins than our traditional averages, which may influence our overall sensor
gross margins. Accordingly, we anticipate average gross margins in the sensor
division to decline to 47% from 50% for the fiscal year ending March 31, 2006.
Consumer Products Business: As a result of the Conair transaction, we now supply
bath and kitchen scales solely to OEM manufacturers for sale under their labels.
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 22% - 24% range for the fiscal year ending March 31, 2006.
Please refer to Item 1 Business in this report for additional details regarding
the basis of the trends described above.
CHANGES IN OUR BUSINESS
DISCONTINUED OPERATIONS:
23
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(R) UK"), into receivership on June 5, 2002
pursuant to the terms of a Mortgage Debenture dated February 28, 2001. Certain
assets of Schaevitz(R) UK related to the foil strain gauge sensor business were
reacquired during FY05 in the acquisition of Polaron Components, LTD.
Our consolidated financial statements for the fiscal years ended March 31, 2005,
2004, and 2003 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, 2005, 2004
and 2003 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(R) branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner(R) brand name and exclusive rights to the Thinner(R)
designs in North America. Assets sold to Conair included, among other things,
all inventories of finished scales, open customer purchase orders, and patents.
We previously sold our Thinner(R) 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.
Our San Jose research and design center (the former IC Sensors division)
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 continues 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.
RECENT ACQUISITIONS:
As a result of the recent acquisition discussed in Part I, Item I, "Recent
Acquisitions" of this Annual Report on Form 10-K, the financial statements are
not comparable.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123R (Revised 2004), Share-Based Payment. The new FASB rule
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements, rather than disclosed in the footnotes to
the financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. The scope of Statement 123R includes
a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123R replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. FASB Statement 123, as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However,
24
that statement permitted entities the option of continuing to apply the guidance
in Opinion 25, as long as the footnotes to the financial statements disclosed
what net income would have been had the preferable fair-value-based method been
used. Under the effective date provisions included in Statement 123R,
registrants would have been required to implement the Statement's requirements
as of the beginning of the first interim or annual period beginning after June
15, 2005, or after December 15, 2005 for small business issuers. The new rule
allows registrants to implement Statement 123R at the beginning of their next
fiscal year, instead of the next interim period, that begins after June 15,
2005, or December 15, 2005 for small business issuers. The Company will be
required to apply FASB 123R beginning with the quarter ending June 30, 2006.
The Company is currently quantifying the impact of FASB 123R, however, the
Company does believe the adoption of FASB Statement 123R will have a material
effect on its financial position and results of operations consistent with the
pro-forma disclosures.
On November 24, 2004, the FASB issued FASB Statement No. 151, Inventory Costs -
An amendment of ARB No. 43, Chapter 4. This new standard is the result of a
broader effort by the FASB to improve financial reporting by eliminating
differences between GAAP in the United States and GAAP developed by the
International Accounting Standards Board ("IASB"). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. Statement 151 clarifies that abnormal amounts of idle facility
expense, freight, handling costs and spoilage should be expensed as incurred and
not included in overhead. Further, Statement 151 requires that allocation of
fixed production overheads to conversion costs should be based on normal
capacity of the production facilities. The provisions in Statement 151 are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Companies must apply the standard prospectively. The Company does not
believe the adoption of FASB Statement 151 will have a material effect on its
financial position or results of operations.
On December 17, 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29. This new standard is
the result of a broader effort by the FASB to improve financial reporting by
eliminating differences between GAAP in the United States and GAAP developed by
the International Accounting Standards Board (IASB). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. Statement 153 amends APB Opinion No. 29, Accounting for Nonmonetary
Transactions, that was issued in 1973. The amendments made by Statement 153 are
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary
assets that do not have "commercial substance." Previously, Opinion 29 required
that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. The
provisions in Statement 153 are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Early application is
permitted and companies must apply the standard prospectively. The Company does
not believe the adoption of FASB Statement 153 will have a material effect on
its financial position or results of operations.
In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and
Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle, unless it is impracticable to do so. Statement 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005. The Company does not believe the
adoption of FASB Statement 151 will have a material effect on its financial
position or results of operations.
25
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP
109-1"),"Application of SFAS No. 109, "Accounting for Income Taxes", to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." FSP 109-1, which is effective immediately, states that
the tax deduction of qualified domestic production activities, which is provided
by the American Jobs Creation Act of 2004 (the "Jobs Act"), will be treated as a
special deduction as described in SFAS No. 109. Consequently, the impact of the
deduction, which is effective January 1, 2005, will be reported in the period in
which the deduction is claimed on the Company's income tax returns. The Company
does not expect FSP 109-1 to have a material effect on its financial statements.
In December 2004, the FASB issued FASB Staff Position No. 109-2 ("FSP
109-2"),"Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004". FSP 109-2
provides accounting and disclosure guidance related to the Jobs Act provision,
which addresses the limited time 85% dividends received deduction on the
repatriation of certain foreign earnings. Although adoption is effective
immediately, FSP 109-2 states that a company is allowed time beyond the
financial reporting period to evaluate the effect of the Jobs Act on its plan
for reinvestment or repatriation of foreign earnings. The Company is evaluating
the impact of the repatriation provisions of the Jobs Act and will complete its
review by December 31, 2005. However, it is not expected that these provisions
will have a material impact on the Company's financial statements. Accordingly,
as provided for in FSP 109-2, the Company has not adjusted its tax expense or
net deferred tax assets to reflect the repatriation provisions of the Jobs Act.
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 "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 recognized when earned, which occurs when the following four
conditions are met: 1. persuasive evidence of an arrangement exists; 2. delivery
has occurred or services have been rendered; 3. the price to the buyer is fixed
or determinable; and 4. collectability is reasonably assured. Certain consumer
products may be sold with a provision allowing the customer to return a portion
of products. 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.
26
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(R) branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner(R) brand name and exclusive rights to the Thinner(R)
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, and industrial products and retailers. Credit
is extended based on evaluation of a customer's financial condition and,
generally, collateral is not required. Accounts receivable are generally due
within 30 to 90 days and are stated as amounts due from customers net of
allowances for doubtful accounts, and other sales allowances. Accounts
outstanding longer than the contractual payment terms are considered past due.
We determine our allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, our previous loss
history, the customer's current ability to pay its obligation to us, and the
condition of the general economy and the industry as a whole. We write off
accounts receivable when we determine they are uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Actual uncollectible accounts could exceed our estimates and
changes to our estimates will be accounted for in the period of change.
INVENTORIES:
Inventories are valued at the lower of cost or market ("LCM"). For purposes of
analyzing the LCM, market is current replacement cost. Market cannot exceed the
net realizable value (i.e., estimated selling price in the ordinary course of
business less reasonably predicted costs of completion and disposal) and market
shall not be less than net realizable value reduced by an allowance for an
approximately normal profit margin. In evaluating LCM, management also
considers, if applicable, other factors as well, including known trends, market
conditions, currency exchange rates and other such issues. If the utility of
goods is impaired by damage, deterioration, obsolescence, changes in price
levels or other causes, a loss shall be charged as cost of sales in the period
which it occurs.
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.
Products that have existed in inventory for one calendar year with no usage and
that have no current demand or no expected demand, will be considered obsolete
and fully reserved. Obsolete inventory approved for disposal is written-off
against the reserve. Furthermore, consideration is given to ultimate
circumstances when recording inventory reserves and the disposal of inventory
considered obsolete. 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. The level
of inventory reserves reflects the nature of our industry whereby technological
and other changes, such as customer buying requirements, result in impairment of
inventory.
27
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.
ACQUISITIONS:
In all acquisitions, the purchase price of the acquired business is allocated to
the assets acquired and liabilities assumed at their fair values on the date of
the acquisition. The fair values of these items were based upon management's
estimates. Certain of the acquired assets are intangible in nature, including
customer relationships, patented and proprietary technology, covenants not to
compete, trade names and order backlog. The excess purchase price over the
amounts allocated to the assets is recorded as goodwill.
All such valuation methodologies, including the determination of subsequent
amortization periods, involve significant judgments and estimates. Different
assumptions and subsequent actual events could yield materially different
results.
LONG LIVED ASSETS:
The Company accounts for the impairment of long-lived assets in accordance with
FAS 142, "Accounting for Goodwill and Other Intangible Assets" and FAS 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets". Long-lived
assets, such as property, plant, and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
Management assesses the recoverability of long-lived assets whenever events or
changes in circumstance indicate that the carrying value may not be recoverable.
The following factors, if present, may trigger an impairment review:
(i) Significant underperformance relative to expected historical or
projected future operating results;
(ii) Significant negative industry or economic trends;
(iii) Significant decline in stock price for a sustained period; and
(iv) A change in 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 at the appropriate level (lowest
level at which cash flows is identifiable).
Management must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of these assets. Other factors could
include, among other things, quoted market prices, or other valuation techniques
considered appropriate based on the circumstances. If these estimates or related
assumptions change in the future, an impairment charge may need to be recorded.
Impairment charges would be included in our statements of operations, and would
result in reduced carrying amounts of the related assets on our balance sheet.
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 15 to the
consolidated financial statements included in this Annual Report on Form 10-K
for a discussion of our pending litigation), we have concluded that this
valuation allowance against the deferred tax assets is no longer necessary, and
have reversed the allowance against the provision for taxes in the fiscal year
ended March 31, 2004. (See Note 12 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K for a further discussion of our
taxes.)
The income tax provision is based upon the proportion of pretax profit in each
jurisdiction in which we operate. The income tax rates in Hong Kong and China
are less than those in the United States. Deferred income taxes are not provided
on our subsidiaries' earnings which are expected to be reinvested. Distribution,
in the form of dividends or otherwise, would subject our subsidiaries' earnings
to United States income taxes, subject to an adjustment for foreign tax credits.
Determination of the amount of unrecognized deferred United States income tax
liability is not practicable because of the complexities associated with its
hypothetical calculation.
WARRANTY RESERVE:
Our sensor and consumer products generally are marketed under warranties to end
users of up to five 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.
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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, 2005 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2004
(in thousands, except percentages)
ANALYSIS OF CONSOLIDATED STATEMENTS OF INCOME
PERCENTAGE