UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11906
MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2378738
---------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
710 ROUTE 46 EAST, SUITE 206, FAIRFIELD, NEW JERSEY 07004
---------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(973) 808-3020
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act ).
Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 12,648,250 shares of
common stock, no par value per share, at February 2, 2004.
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) . . . . . 3
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) . . . . . . . . . . 4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(UNAUDITED). 6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) . . . . . 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED) . . . 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . 29
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . 31
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 31
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. . . . . . . . . . . . . . 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 34
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2
ITEM 1. FINANCIAL STATEMENTS
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
----------------------------------------------------
2003 2002 2003 2002
----------------------------------------------------
Net sales $ 31,869 $ 28,351 $ 86,469 $ 84,376
Cost of goods sold 17,823 17,211 47,527 54,643
----------------------------------------------------
Gross profit 14,046 11,140 38,942 29,733
----------------------------------------------------
Operating expenses (income):
Selling, general and administrative 8,018 8,807 23,019 26,607
Litigation expense 400 - 400 -
Non-cash equity based compensation 3,046 - 4,954 -
Research and development 850 773 2,610 2,564
Customer funded development - (14) - (360)
Restructuring costs 545 96 545 1,219
----------------------------------------------------
Total operating expenses 12,859 9,662 31,528 30,030
----------------------------------------------------
Operating income (loss) 1,187 1,478 7,414 (297)
Interest expense, net 22 424 322 1,771
Gain on sale of Wafer Fab - - - (109)
Other expense (income) 51 (82) 46 61
----------------------------------------------------
Income (loss) from continuing operations before income tax 1,114 1,136 7,046 (2,020)
Income tax 226 98 772 116
----------------------------------------------------
Income (loss) from continuing operations 888 1,038 6,274 (2,136)
----------------------------------------------------
Discontinued operations:
Income (loss) from discontinued units - - 112 (3,910)
Gain on sale of Terraillon - 570 - 910
----------------------------------------------------
Income (loss) from discontinued units - 570 112 (3,000)
----------------------------------------------------
Net income (loss) $ 888 $ 1,608 $ 6,386 $ (5,136)
====================================================
Income (loss) per common share - Basic
Income (loss) from continuing operations $ 0.07 $ 0.08 $ 0.51 $ (0.18)
Income (loss) from discontinued units - 0.05 0.01 (0.25)
----------------------------------------------------
Net income (loss) $ 0.07 $ 0.13 $ 0.52 $ (0.43)
----------------------------------------------------
Income (loss) per common share - Diluted
Income (loss) from continuing operations $ 0.06 $ 0.08 $ 0.45 $ (0.18)
Income (loss) from discontinued units - 0.05 0.01 (0.25)
----------------------------------------------------
Net income (loss) $ 0.06 $ 0.13 $ 0.46 $ (0.43)
----------------------------------------------------
Weighted average shares outstanding - Basic 12,402,445 11,912,958 12,234,849 11,908,336
====================================================
Weighted average shares outstanding - Diluted 14,004,490 12,230,213 13,905,942 11,908,336
====================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, MARCH 31,
2003 2003
----------------------------------------------------------- ------------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,503 $ 2,694
Accounts receivable, trade, net of allowance for doubtful
accounts of $413, and $1,038 respectively 15,126 10,549
Inventories 12,906 14,275
Prepaid expenses and other current assets 2,032 1,885
------------- ----------
Total current assets 35,567 29,403
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PROPERTY AND EQUIPMENT, NET 10,888 11,818
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OTHER ASSETS:
Goodwill 4,191 4,191
Other assets 581 756
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4,772 4,947
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Total assets $ 51,227 $ 46,168
============= ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, MARCH 31,
2003 2003
--------------------------------------------------------------------- -------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ - $ 3,260
Accounts payable 8,101 9,846
Accrued compensation 2,551 1,207
Accrued expenses and other current liabilities 6,165 5,744
Accrued litigation expenses 1,425 3,550
-------------- -----------
Total current liabilities 18,242 23,607
OTHER LIABILITIES:
Long-term debt--related party - 2,000
Other liabilities 1,666 1,615
-------------- -----------
Total liabilities 19,908 27,222
-------------- -----------
SHAREHOLDERS' EQUITY
Serial preferred stock; 221,756 shares authorized; none outstanding
Common stock, no par; 20,000,000 shares authorized; 12,466,950
and 11,922,958 shares issued and outstanding, respectively 5,502 5,502
Additional paid-in capital 49,185 43,197
Accumulated deficit (23,297) (29,683)
Accumulated other comprehensive loss (71) (70)
-------------- -----------
Total shareholders' equity 31,319 18,946
-------------- -----------
$ 51,227 $ 46,168
============== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Additional Other
Common paid-in Accumulated Comprehensive Comprehensive
stock capital Deficit Loss Total Income (Loss)
--------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 2002 $ 5,502 $ 42,346 $ (20,586) $ (435) $26,827
Net loss - - (5,136) - (5,136) $ (5,136)
Currency translation adjustment - - - 374 374 374
---------------
Comprehensive income - - - - - $ (4,762)
===============
Warrants issued for professional services - 153 - - 153
Warrants issued for debt 452 452
Proceeds from exercise of stock options - 117 - - 117
--------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 5,502 43,068 (25,722) (61) 22,787
--------------------------------------------------------------
Net loss - - (3,961) - (3,961) $ (3,961)
Currency translation adjustment - - - (9) (9) (9)
---------------
Comprehensive income - - - - - $ (3,970)
===============
Warrants issued for professional - 112 - - 112
services
Proceeds from exercise of - 17 - - 17
stock options
--------------------------------------------------------------
BALANCE, APRIL 1, 2003 5,502 43,197 (29,683) (70) 18,946
--------------------------------------------------------------
Net income - - 6,386 - 6,386 $ 6,386
Currency translation adjustment - - - (1) (1) (1)
---------------
Comprehensive income - - - - - $ 6,385
===============
Warrants issued for non-cash - 4,954 - - 4,954
equity based compensation
Proceeds from exercise of stock options - 440 - - 440
Tax benefit from stock options - 90 - - 90
Proceeds from exercise of - 504 - - 504
stock warrants
--------------------------------------------------------------
BALANCE, DECEMBER 31, 2003 $ 5,502 $ 49,185 $ (23,297) $ (71) $31,319
==============================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31,
--------------------------------------
2003 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 6,386 $ (5,136)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities income:
Income from discontinued operations - 3,910
Depreciation and amortization 2,124 2,622
Assets write-off 175 668
Deferred rent (20) -
Warrants issued for professional services - 153
Amortization of debt discount - 304
Provision for bad debt 161 42
Non-cash equity based compensation 4,954 -
Gain on sale of Wafer Fab - (159)
Tax benefit from stock options 90
Gain on disposition of discontinued units - (910)
Net changes in operating assets and liabilities:
Accounts receivable, trade (4,738) (2,383)
Inventories 1,368 717
Prepaid expenses and other current assets (147) (646)
Other assets 175 (30)
Accounts payable (1,744) (1,460)
Accrued litigation costs (2,125) -
Accrued expenses and other liabilities 1,836 1,969
----------------- ------------------
Net cash ( used in) provided by operating activities 8,495 (339)
----------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,369) (1,149)
Proceeds from sale of Wafer Fab - 3,300
Proceeds from sale of Terraillon - 16,668
Cash received from receiver - 892
----------------- ------------------
Net cash (used in) provided by investing activities (1,369) 19,711
----------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under bank line of credit agreement 3,000 2,450
Borrowing under bridge loan - 8,848
Repayment of capital lease obligations - (162)
Repayments of debt (8,260) (31,512)
Warrants issued for debt - 452
Proceeds from exercise of options and warrants 944 117
----------------- ------------------
Net cash used in financing activities (4,316) (19,807)
----------------- ------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS, CONTINUING OPERATIONS 2,810 (435)
Effect of exchange rates (1) 374
Cash used for discontinued operations - (1,246)
Cash and cash equivalents, beginning of period 2,694 3,760
----------------- ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,503 $ 2,453
================= ==================
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 335 $ 2,240
Income taxes $ 260 $ -
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATIONS:
Interim financial statements:
These interim financial statements were prepared pursuant to accounting
principles for interim financial information, the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X of the Rules and Regulations of the Securities and
Exchange Commission, and have not been audited. Accordingly, while they conform
to the measurement and classification provisions of accounting principles
generally accepted in the United States, they do not include the footnote
information required by accounting principles generally accepted in the United
States for annual financial statements. Preparation of these financial
statements requires management to make estimates and assumptions, which affect
the amounts reported. Actual results could differ from those estimates. In the
opinion of management, these financial statements include all normal and accrual
adjustments necessary for a fair presentation. Reference is made to the annual
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 2003. Operating results for the three and nine
months ended December 31, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending March 31, 2004. These
statements have been prepared on a basis that is substantially consistent with
the accounting principles applied in our annual report on Form 10-K for the
fiscal year ended March 31, 2003.
The following information is unaudited. This report should be read in
conjunction with the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 2003.
Description of business:
Measurement Specialties, Inc., a New Jersey corporation ("MSI" or the
"Company"), is a designer and manufacturer of sensors and sensor-based consumer
products. The Company produces a wide variety of sensors that use advanced
technologies to measure precise ranges of physical characteristics, including
pressure, motion, force, displacement, tilt / angle, flow and distance. The
Company has a Sensor segment and a Consumer Products segment. The 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 and accelerometers. The Consumer
Products segment designs and manufactures sensor-based consumer products that we
sell to retailers and distributors in both the United States and Europe.
Consumer products include bathroom and kitchen scales, tire pressure gauges and
distance estimators.
Liquidity and Going Concern:
The Company is currently the defendant in several lawsuits, including a class
action lawsuit. The Company is also the subject of a formal investigation being
conducted by the Division of Enforcement of the United States Securities and
Exchange Commission. Further, the United States Attorney for the District of New
Jersey is conducting an inquiry into the matters being investigated by the SEC.
(See Note 10)
The Company's cash and amounts available under the revolving credit facility may
not be available or adequate to fund the amounts, if any, to be paid in
settlement of, or for judgments related to, the Company's pending legal
proceedings. Under the terms of its credit agreement, the Company is prohibited
from making any cash payment in settlement of any litigation unless, after
giving effect to such payment and for a period of 30 consecutive days prior
thereto, availability under the credit facility is not less than $1,500.
Moreover, the Company is prohibited from making any cash payment in settlement
of the class action lawsuit, the DeWelt litigation or the Hibernia litigation
without the prior written consent of the lender under the Company's revolving
credit facility. The Company settled the Hibernia lawsuit in November 2003, and
made payment after receiving approval from its lender, Fleet Capital
Corporation. (See Note 10).
8
If the Company's cash and amounts available under the Company's revolving credit
facility are not sufficient to satisfy the obligations discussed above, the
Company may need to explore other fund raising alternatives, including the sale
of assets or equity securities. No assurance, however, can be given that the
Company will be able to successfully sell assets or stock, or, even if such
transactions are possible, that they will be on terms reasonable to the Company,
that they will enable the Company to satisfy its obligations or that such
actions will be permitted under the Company's credit agreement. Additionally,
any sale of equity securities will dilute existing shareholders and may be at
prices that are substantially lower than current market prices. If the Company
is unable to satisfactorily resolve its loss contingencies and does not obtain
additional funds, the Company will likely be unable to continue operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements included in this report do not contain
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of MSI and its
wholly-owned subsidiaries (the "Subsidiaries"): Measurement Limited ("ML"),
organized in Hong Kong; Jingliang Electronics ("JL") (Shenzhen) Co. Ltd.,
organized in the People's Republic of China ("China"); IC Sensors Inc. ("IC
Sensors"), a California corporation; Measurement Specialties, U.K. Limited
("Schaevitz UK"), organized in the United Kingdom; and Terraillon Holdings
Limited, organized in Ireland, and its wholly-owned subsidiaries ("Terraillon");
all collectively referred to as the "Company." As discussed in Note 7, the
Company placed Schaevitz UK in receivership in June 2002 and sold Terraillon in
September 2002; accordingly, the results from these operations are reflected as
discontinued operations. All significant intercompany balances and transactions
have been eliminated.
Reclassifications:
The presentation of certain prior year information has been reclassified to
conform with the current year presentation.
Stock Based Compensation:
The Company has three stock-based employee compensation plans. The Company
applies APB Opinion 25, "Accounting for Stock Issued to Employees", and related
Interpretations in accounting for its plans. There was no compensation expense
recognized in the first nine months of the fiscal year ending March 31, 2004 or
in the fiscal year ended March 31, 2003 as a result of options issued with an
exercise price below the underlying stock's market price. The table below
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement 123, "Accounting
for Stock-Based Compensation". The options were valued using the Black-Scholes
option pricing model, using a risk free rate of 2.8% and 4.9%, volatility of
2.06 and 0.90, and an option life of five years for the options granted in
fiscal years 2004 and 2003, respectively.
9
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2002 2003 2002
-------------------------- -------------------------
Net income (loss), as reported $ 888 $ 1,608 $ 6,386 $ (5,136)
add: Stock-based employee compensation expense included
in reported net income, net of related tax effects - - - -
Deduct: Total stock-based employee compensation under
fair value based method for awards granted,
net of related tax effects (277) (371) (332) (456)
-------------------------- -------------------------
Pro forma net income (loss) $ 611 $ 1,237 $ 6,054 $ (5,592)
========================== =========================
Net Income (loss) per share
Basic-as reported $ 0.07 $ 0.13 $ 0.52 $ (0.43)
Basic Proforma 0.05 0.10 0.49 (0.47)
Diluted- as reported 0.06 0.13 0.46 (0.43)
Diluted proforma 0.04 0.10 0.44 (0.47)
Recent Accounting Pronouncements:
On May 15, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"), which requires
that certain financial instruments be presented as liabilities that were
previously presented as equity or as temporary equity. Such instruments include
manditorily redeemable preferred and common stocks and certain options and
warrants. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and is generally effective at the beginning of the
first interim period beginning after June 15, 2003. The Company has evaluated
the requirements of SFAS 150 and has determined that SFAS 150 will not have a
material effect on the Company's financial position.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123"
("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock
Based Compensation" ("SFAS 123") and provides alternative methods for accounting
for a change by registrants to the fair value method of accounting for
stock-based compensation. Additionally, SFAS 148 amends the disclosure
requirements of SFAS 123 to require disclosure in the significant accounting
policy footnote of both annual and interim financial statements of the method of
accounting for stock-based compensation and the related pro-forma disclosures
when the intrinsic value method continues to be used. The statement is effective
for fiscal years beginning after December 15, 2002, and disclosures are
effective for the first fiscal quarter beginning after December 15, 2002. The
Company has elected to continue accounting for stock-based compensation using
the intrinsic value method. However, the Company has adopted the new disclosure
requirements specified under SFAS No. 148.
On July 29, 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"). The statement requires companies to recognize costs associated
with exit or disposal activities when they are incurred, rather than at the date
of a commitment to an exit or disposal plan. Examples of costs covered by the
statement include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operations, plant
closing, or other exit or disposal activity. SFAS 146 is required to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company's previous policy was to accrue restructuring and other costs at the
commitment date of a plan in accordance with the provisions of Emerging Issues
Task Force No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity" and Staff Accounting Bulletin No.
100, "Restructuring and Impairment Charges." Accordingly, the Company has
provided for certain restructuring costs related to exit or disposal activities
initiated prior to December 31, 2002. (See Note 3).
10
3. RESTRUCTURING AND OTHER COSTS:
During the quarter ended March 31, 2002, management and the Board of Directors
approved a plan of reduction of workforce and a reduction of operating capacity
at certain locations. During the fiscal year ended March 31, 2003, the Company
recorded restructuring and other costs of $1,219, consisting of $150 for
severance, $839 for lease termination, and $230 for the write down of fixed
assets. At March 31, 2003, the Company had an accrual of $837 for lease
termination costs. During the quarter ended December 31, 2003, the Company has
reached verbal agreement to settle the Semex litigation and has provided an
additional accrual of $545 to cover the expected cost of this lease termination.
(See Note 10). At December 31, 2003, the Company maintained an accrual of
$1,382 to cover the expected cost of lease termination, which is included in
accrued expenses. The Company did not make any payments during the three and
nine month periods ended December 31, 2003 related to these lease termination
costs.
4. INVENTORIES:
Inventories net, consists of the following:
DECEMBER 31, MARCH 31,
2003 2003
------------- ----------
RAW MATERIALS $ 6,478 $ 6,930
WORK-IN-PROCESS 1,898 2,630
FINISHED GOODS 4,530 4,715
------------- ----------
$ 12,906 $ 14,275
============= ==========
Inventory reserves were $4,607 at December 31, 2003 and $4,996 at March 31,
2003.
5. LONG-TERM DEBT:
Current Revolving Credit Facility
On January 31, 2003, the Company entered into a $15,000 revolving credit
facility with Fleet Capital Corporation ("FCC"). The revolving credit facility
is secured by a lien on substantially all of the Company's assets. Interest
accrues on the principal amount of the Company's borrowings under this facility
at a floating rate per year equal to the lesser of FCC's prime rate for
commercial loans plus one percent (subject to a two percent increase upon the
occurrence of an event of default under the loan agreement) or the maximum rate
permitted by applicable law. As of December 31, 2003, the interest rate
applicable to borrowings under the revolving credit facility was 5.0%. The
amount of borrowing available under the revolving credit facility is determined
in accordance with a formula based on certain of the Company's accounts
receivable and inventory. The revolving credit facility expires on February 1,
2006. As of December 31, 2003, there were no outstanding borrowings and the
Company had the right to borrow $9,846 under the revolving credit facility.
Commitment fees on the unused balance are equal to .375% per annum of the
average monthly amount by which $15,000 exceeds the sum of the outstanding
principal balance of the revolving credit loans. Commitment fees paid during
the three and nine month periods ended December 31, 2003, were approximately $16
and $45, respectively.
The revolving credit agreement requires the Company to meet certain financial
covenants during the term of the revolving credit facility. In addition to
certain affirmative and negative covenants, which include a restriction on the
payment of dividends, the Company was required to maintain a borrowing
availability of at least $2,000 through the filing of its quarterly report on
Form 10-Q for the three months ended June 30, 2003. This covenant expired on
August 7, 2003. In addition, the Company is required to keep a minimum fixed
charge ratio of 1 to 1 at the end of each fiscal quarter. Fixed charge ratio is
defined as operating cash flow, which is EBITDA (earnings before interest,
taxes, depreciation and amortization) minus taxes paid and minus capital
expenditures, divided by the sum of scheduled principal and interest payments
during that period. The Company is currently in compliance with all covenants
in the agreement.
11
For the quarter ended December 31, 2003, the weighted average short-term
interest rate on the revolving credit facility was 5.0%. The Company did not
have any borrowings under this agreement for the period from October 1, 2003
through December 31, 2003. The Company maintains a letter of credit for $34 to
guarantee the lease of its facility in Fairfield, New Jersey.
Bridge Loan
On October 31, 2002, the Company received a $9,300 bridge loan from Castletop
Capital, L.P. ("Castletop"), a limited partnership controlled by Morton Topfer,
Chairman of the Company's Board of Directors. The proceeds from this loan were
used to repay all of the Company's obligations under its previous term loan and
revolving credit facility. The loan was evidenced by a Senior Secured Note
originally due January 31, 2003 and did not include a revolving credit facility.
Interest on the note initially accrued at a rate of 7% per annum (subject to a
2% increase upon the occurrence of an event of default under the note).
Castletop also received a warrant to purchase up to 297,228 shares of the
Company's common stock for an exercise price equal to the average closing price
of the Company's common stock on the American Stock Exchange for the first five
trading days after October 31, 2002 ($1.64 per share). This warrant had a term
of 5 years. On June 26, 2003, Castletop exercised its warrant to purchase
297,228 shares of stock at an exercise price of $1.64.
On October 31, 2002, the relative estimated fair value of the warrant of $452
was recorded as debt discount, and was subsequently charged to interest expense
over the life of the debt, originally due on January 31, 2003.
Amendment to Bridge Loan
The Company used a portion of the proceeds from the FCC revolving credit
facility to reduce the principal amount outstanding under the bridge loan to
$2,000. Also, in connection with the revolving credit facility transaction, the
terms of the bridge loan were amended as follows:
- The maturity date of the Castletop note was extended to January 31,
2005;
- The security interest and rights of Castletop under the bridge loan
agreement were subordinated to those of FCC; and
- The non-default interest rate under the bridge loan was increased to
11%.
There were no amendments to the warrant issued as part of the bridge loan
transaction.
Second Amendment to Bridge Loan
On April 11, 2003, the Company entered into a second amendment to the bridge
loan to increase the aggregate principal amount of the Subordinated Note in
favor of Castletop from $2,000 to $5,000. No other changes were made to the
note. See Note 10, "Commitments and Contingencies". The additional borrowing
was used to fund the $3,200 renewal premium payable in connection with the
renewal of the Company's Directors and Officers liability insurance coverage
(which renewal premium represents a combination of the market premium for D&O
coverage for the period from April 7, 2003 through April 7, 2004, plus the
Company's contribution toward a potential settlement in the class action
lawsuit). The revolving credit agreement prohibited the Company from prepaying
the bridge loan before September 30, 2003. In September 2003, with
authorization from FCC, the Company retired this facility by repaying the
remaining $5,000 in borrowings to Castletop.
12
6. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
-------------- ----------- -----------------
DECEMBER 31, MARCH 31,
2003 2003 USEFUL LIFE
-------------- ----------- -----------------
Production machinery and equipment $ 14,254 $ 13,800 5-7 years
Tooling costs 3,962 3,579 5-7 years
Furniture and equipment 5,132 4,922 3-10 years
Leasehold improvements 1,799 1,721 Term of the lease
Construction in progress 176 283
---------------------------
Total 25,323 24,305
---------------------------
Less: accumulated depreciation and
amortization (14,435) (12,487)
---------------------------
$ 10,888 $ 11,818
===========================
Depreciation expense was $670 and $2,124 for the three and nine month periods
ended December 31, 2003, and was $725 and $2,622 for the three and nine month
periods ended December 31, 2002, respectively.
7. DISCONTINUED OPERATIONS, ASSETS AND LIABILITIES HELD FOR SALE, AND GAIN OR
LOSS ON SALE OF ASSETS AND DISCONTINUED UNITS:
The Company sold all of the outstanding stock of Terraillon (previously a
component of the Company's Consumer Products segment) in September 2002 and sold
the assets, principally property and equipment, related to its IC Sensors
silicon wafer fab manufacturing operations (previously a component of the
Company's Sensor segment) in July 2002. The amounts for Terraillon on the
consolidated statements of operations for the three and nine months ended
December 31, 2002 have been reclassified as discontinued operations to reflect
the disposal of this operating unit.
The Company placed its United Kingdom subsidiary, Schaevitz UK (previously a
component of the Company's Sensor segment), into receivership on June 5, 2002
pursuant to the terms of a Mortgage Debenture dated February 28, 2001. The
receiver's function was to dispose of Schaevitz UK's business and assets for the
best price possible. The book debt recoveries and sale proceeds were applied in
settlement of the receiver's remuneration, costs and expenses, the preferential
creditors' claims (i.e., the claims of the Inland Revenue, Customs & Excise and
employee claims up to certain statutory limits) and then to (i) claims by the
Company's lenders in accordance with UK insolvency legislation (the Insolvency
Act 1986) and (ii) priority arrangements. Schaevitz UK's landlord has a
potential dilapidations claim of up to 350 Pounds Sterling (approximately $638
United States dollars based on market exchange rates as of January 31, 2004)
against Schaevitz UK that arose on the expiration of the lease of 543/544
Ipswich Road Trading Estate, Slough, Berkshire, England on June 23, 2002. The
results of operations of Schaevitz UK are reflected as discontinued operations
from April 1, 2002 through the June 5, 2002 date of liquidation. During the
fiscal year ended March 31, 2003, the Company incurred approximately $3,511 of
costs and expenses in connection with the liquidation of Schaevitz UK, which
consisted of write-down of prepaid pension costs of $2,309 and receiver and
other costs of $1,202. The amount recovered from the liquidation was
approximately $1,176.
13
In July 2002, the Company sold the assets (principally property and equipment)
related to its 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 the Company's IC
Sensors division. The price paid by SMI for the assets was approximately $5,250,
consisting of approximately $3,370 in cash and $1,880 in prepaid credit for
products and services, subject to reduction under certain circumstances.
Approximately $900 of the cash purchase price was used to satisfy an outstanding
equipment lease obligation. The prepaid credit for products and services, as
utilized, is being accounted for as a reduction to cost of sales. The gain on
this sale was approximately $159, net of tax, and has been reflected in the
Condensed Consolidated Statements of Operations as "Gain on Sale of Wafer Fab"
of $109 for the three months ended September 30, 2002, and an additional $50 for
the three months ended December 31, 2002.
In September 2002, the Company sold all of the outstanding stock of Terraillon
Holdings Limited, a European manufacturer of branded consumer bathroom scales,
to Fukuda S.a.r.l, an investment holding company incorporated in Luxembourg, for
$22,300. On January 24, 2003, the Company received $1,384 of the funds that had
been placed in escrow at the time of closing to secure certain of the Company's
indemnification obligations. The estimated gain at the time of sale was
approximately $340, net of tax, and subject to further adjustments. As a result
of final settlement of escrowed amounts, the Company recorded an additional gain
of $357, as certain amounts previously provided for were no longer required.
FOR THE NINE MONTHS ENDED
DECEMBER 31, 2002
TERRAILLON SCHAEVITZ, TOTAL
UK
-------------------------- --------
Net sales $ 18,678 $ 905 $19,583
Cost of goods sold 13,244 617 13,861
-------------------------- --------
Gross profit 5,434 288 5,722
Operating expenses:
Selling, general and administrative 5,835 149 5,984
Research and development - 68 68
Restructuring costs - 3,577 3,577
-------------------------- --------
Total operating expenses 5,835 3,794 9,629
Operating income (loss) (401) (3,506) (3,907)
Interest income (expense) (25) 2 (23)
Other income 27 (7) 20
-------------------------- --------
(Loss) before income taxes (399) (3,511) (3,910)
Provision for income taxes - - -
-------------------------- --------
Net loss from discontinued operations $ (399) $ (3,511) $(3,910)
========================== ========
14
8. PER SHARE INFORMATION AND STOCK OPTION ISSUED:
Basic per share information is computed based on the weighted average common
shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or conversion
of stock options and warrants, less the shares that may be repurchased with the
funds received from their exercise. Diluted earnings per share are not
presented in fiscal periods for which the results are antidilutive. Excluded
from diluted earnings per share are approximately 183,030 equivalent shares for
the nine month period ended December 31, 2002.
The computation of the basic and diluted net income per share is as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2003 2003
Income Shares Per Share Income Shares Per Share
------- ---------- ---------- ------- ---------- ----------
Income from continuing operations $ 888 12,402,445 $ 0.07 $ 6,274 12,234,849 $ 0.51
Income from discontinued operations - 12,402,445 $ - 112 12,234,849 $ 0.01
Basic EPS:
------- ---------- ------- ----------
Income available to common shareholders $ 888 12,402,445 $ 0.07 $ 6,386 12,234,849 $ 0.52
Effect of dilutive securities:
Warrants 469,151 630,968
Stock options 1,132,894 1,040,125
------- ---------- ------- ----------
Diluted EPS:
Income available to common stockholders
and assumed conversions $ 888 14,004,490 $ 0.06 $ 6,386 13,905,942 $ 0.46
=============================== ===============================
9. SEGMENT INFORMATION:
The Company has two business segments, a Sensor segment and a Consumer Products
segment.
The Company's 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 and
accelerometers.
The Company's Consumer Products segment designs and manufactures sensor-based
consumer products that we sell to retailers and distributors in both the United
States and Europe. Consumer products include bathroom and kitchen scales, tire
pressure gauges and distance estimators. We sold our branded bathroom and
kitchen scale business to Conair Corporation on January 30, 2003 (see Note 12),
and are focusing on selling our Consumer Products in the original equipment
manufacturer market.
Segment data have been presented on a basis consistent with how business
activities are reported internally to management.
The accounting policies of the segments are substantially the same as those
described in Note 2.
The Company has no material intersegment sales.
The following is information related to industry segments:
15
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- --------------------------
2003 2002 2003 2002
--------------------------- --------------------------
Net sales
Consumer Products $ 17,108 $ 14,750 $ 42,697 $ 44,242
Sensor 14,761 13,601 43,772 40,134
--------------------------- --------------------------
Total 31,869 28,351 86,469 84,376
--------------------------- --------------------------
Operating income (loss)
Consumer Products 3,731 2,068 8,524 6,472
Sensor 4,025 4,031 12,312 5,589
--------------------------- --------------------------
Total segment operating income 7,756 6,099 20,836 12,061
Unallocated expenses (6,569) (4,621) (13,422) (12,358)
--------------------------- --------------------------
Total operating income (loss) 1,187 1,478 7,414 (297)
Interest expense, net of interest income 22 424 322 1,771
Other (income) 51 (82) 46 61
Gain on sale of Wafer Fab - - - (109)
--------------------------- --------------------------
Income (loss) from continuing operations
before income tax 1,114 1,136 7,046 (2,020)
Income Tax 226 98 772 116
--------------------------- --------------------------
Income (loss) from continuing operations 888 1,038 6,274 (2,136)
Income (loss) from Discontinued Operations - - 112 (3,910)
Gain on sales of Terraillon - 570 - 910
--------------------------- --------------------------
Net Income(loss) $ 888 $ 1,608 $ 6,386 $ (5,136)
=========================== ==========================
DECEMBER 31, MARCH 31,
2003 2003
------------ ----------
Segment Assets
Consumer Products $ 15,464 $ 11,478
Sensor 33,905 34,391
Unallocated 1,858 299
------------ ----------
Total $ 51,227 $ 46,168
============ ==========
16
10. COMMITMENTS AND CONTINGENCIES:
(Dollars in Thousands)
LITIGATION:
SECURITIES LITIGATION
On March 20, 2002, a class action lawsuit was filed on behalf of purchasers of
the Company's common stock in the United States District Court for the District
of New Jersey against the Company and certain of the Company's present and
former officers and directors. The complaint was subsequently amended to
include the underwriters of the Company's August 2001 public offering as well as
the Company's former auditors. The lawsuit alleges violations of the federal
securities laws. The lawsuit seeks an unspecified award of money damages.
After March 20, 2002, nine additional similar class actions were filed in the
same court. The ten lawsuits have been consolidated into one case under the
caption In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No.
1071 (D.N.J.). Plaintiffs filed a Consolidated Amended Complaint on September
12, 2002. The underwriters have made a claim for indemnification under the
underwriting agreement. On September 30, 2003, the court denied the Company's
motion to dismiss this case. The Company is in active settlement discussions
with the plaintiffs, however it cannot predict the ultimate outcome of these
discussions.
The Company has Directors and Officers liability insurance that provides an
aggregate of $10,000 in coverage for the period during which this claim was
filed ($5,000 in primary coverage and $5,000 in excess coverage). The Company's
primary D&O insurance carrier initially denied coverage of this claim, which
position the Company contested. After discussion, the insurer reversed its
previous coverage position and agreed to participate in the defense and
potential settlement of the class action lawsuit (subject to the $5,000 policy
limit). As part of the arrangement, the Company renewed its D&O coverage. The
new policy provides for an aggregate of $6,000 in coverage for the period from
April 7, 2003 through April 7, 2004. The $3,200 renewal premium represents a
combination of the market premium for D&O coverage for this period plus the
Company's contribution toward a potential settlement in the class action
lawsuit. The Company's excess insurance carrier has not accepted coverage for
this claim. No assurance can be given that this insurance will be adequate, or
that the Company's excess insurance coverage will be available or adequate, to
cover losses, if any, arising from this litigation.
In addition, the Company's credit agreement precludes it from making cash
payment in settlement of this litigation without the prior consent of Fleet
Capital Corporation. This litigation is ongoing and the Company cannot predict
its outcome at this time. However, if the Company were to lose this lawsuit,
judgment would likely have a material adverse effect on the Company's
consolidated financial position, results of operations and cash flows.
SEC/U.S. ATTORNEY INVESTIGATION
In February 2002, the Company contacted the staff of the SEC after discovering
that the Company's former chief financial officer had made the misrepresentation
to senior management, the Company's board of directors and the Company's
auditors that a waiver of a covenant default under the Company's credit
agreement had been obtained when, in fact, the Company's lenders had refused to
grant such a waiver. Since February 2002, the Company and a special committee
formed by the Company's board of directors have been cooperating with the staff
of the SEC. In June 2002, the staff of the Division of Enforcement of the SEC
informed the Company that it is conducting a formal investigation relating to
matters reported in the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 2001.
The Company has also learned that the Office of the United States Attorney for
the District of New Jersey is conducting an inquiry into the matters that are
being investigated by the SEC.
The Company is in settlement discussions with the SEC. Based on these
discussions, the Company provided an accrual of $1,000 during the three months
ended December 31, 2003 towards ultimate settlement. However, the Company cannot
predict how long these investigations will continue or their ultimate outcome.
17
ROBERT L. DEWELT
On July 17, 2002, Robert DeWelt, the Company's former acting Chief Financial
Officer and general manager of the Company's Schaevitz Division, filed a lawsuit
against the Company and certain of the Company's officers and directors. Mr.
DeWelt resigned on March 26, 2002 in disagreement with management's decision not
to restate certain of the Company's 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. The Company filed a Motion to Dismiss
this case, which was denied on June 30, 2003. The Company has answered the
complaint and commenced the discovery process. This litigation is ongoing and
the Company cannot predict its outcome at this time.
SERVICE MERCHANDISE COMPANY, INC.
The Company is currently the defendant in a lawsuit filed in March 2001 by
Service Merchandise Company, Inc. ("SMC") and its related debtors (collectively,
the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
The Bankruptcy Court entered a stay of the action in May 2001, which was lifted
in February 2002. The action alleges that the Company received $645 from one or
more of the Debtors during the ninety (90) day period before the Debtors filed
their bankruptcy petitions, that the transfers were to the Company's benefit,
were for or on account of an antecedent debt owed by one or more of the Debtors,
made when one or more of the Debtors were insolvent, and that the transfers
allowed the Company to receive more than the Company would have received if the
cases were cases under Chapter 7 of the United States Bankruptcy Code. The
action seeks to disgorge the sum of $645 from the Company. It is not possible
at this time to predict the outcome of the litigation or estimate the extent of
any damages that could be awarded in the event that the Company is found liable
to the estates of SMC or the other Debtors.
EXETER TECHNOLOGIES, INC.
Exeter Technologies, Inc. ("Exeter") and Michael Yaron have alleged
underpayments of approximately $322 relating to a January 5, 2000 Product Line
Acquisition Agreement. The Company maintains the claim failed to recognize the
Company's rights to certain contractual allowances and offsets. The matter
proceeded to non-binding arbitration. Post-hearing submissions are due in March
2004. The Company has acknowledged that it owed Exeter approximately $128 as of
October 1, 2003.
From time to time, the Company is subject to other legal proceedings and claims
in the ordinary course of business. The Company currently is not aware of any
such legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
business, financial condition, or operating results.
RESOLVED MATTERS
HIBERNIA CAPITAL PARTNERS I, ILP AND HIBERNIA CAPITAL PARTNERS II, ILP.
On or about July 23, 2002, Hibernia Capital Partners I, ilp and Hibernia Capital
Partners II, ilp filed a lawsuit against the Company in the High Court of
Dublin. The Plenary Summons stated that plaintiffs sought a declaration that
the plaintiffs entered into the share purchase agreement on June 7, 2001 for the
sale of their shares in Terraillon Holdings Limited to the Company as a result
of an operative misrepresentation and misstatement. Plaintiffs further sought
damages for misrepresentation and/or breach of contract and/or breach of
warranty and costs of the proceedings. This matter was settled for a $150
payment from the Company to the plaintiffs.
SEMEX, INC.
On October 24, 2002, Semex, Inc. ("Semex") filed a lawsuit against the Company
and Amp Incorporated ("AMP") alleging breaches of the lease for the Company's
former facility in Valley Forge, Pennsylvania. The Company is the assignee of
AMP under the lease. In addition to rent and other charges in the sum of $770,
plaintiff is also sought $1,015 for building cleanup, restoration, failure to
remove alterations and environmental testing of the premises. At a settlement
conference on January 26, 2004, the Company, Semex and AMP reached a verbal
agreement to settle this matter. The settlement was reported to the Court and
settlement documentation is being prepared. As part of the settlement, the
Company has agreed to pay $1,425 to Semex within 30 days in exchange for a
release of all claims and a termination of the litigation.
18
CLARK MATERIAL HANDLING COMPANY
The Company was the defendant (as successor to Lucas Control Systems) in a
lawsuit filed in April 2002 by Clark Material Handling Company and its related
debtors (the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy
proceedings. Plaintiffs asserted that Lucas Control Systems ("Lucas") received
$34 from one or more of the Debtors during the ninety (90) day period before the
Debtors filed their bankruptcy petitions, that the transfers were to Lucas'
benefit, were for or on account of an antecedent debt owed by one or more of the
Debtors, made when one or more of the Debtors were insolvent, and that the
transfers allowed Lucas to receive more than it would have received if the cases
were cases under Chapter 7 of the United States Bankruptcy Code. The action
sought to disgorge the sum of $34 from Lucas. This matter was settled for a $19
payment from the Company to the plaintiffs.
11. RELATED PARTY TRANSACTIONS:
Restructuring Services
In May 2002, the Company retained Corporate Revitalization Partners ("CRP") to
conduct its ongoing operational/financial restructuring efforts. In June 2002,
Frank Guidone, a Managing Director of CRP, became the Company's Chief Executive
Officer (See "Executive Services and Non-Cash Equity Based Compensation" below
for a discussion of the current agreement relating to Mr. Guidone's services as
Chief Executive Officer of the Company). As of December 31, 2003, and as of
February 2, 2004, on a cumulative basis, the Company has incurred $3,514 and
$3,556 respectively, in consulting fees and expenses to CRP (excluding the
success fees described in this paragraph). For the three and nine month periods
ended December 31, 2003, the company incurred $221 and $914, respectively, in
fees to CRP. In addition to consulting fees based on hours billed by CRP
consultants (at hourly rates that range from $175 to $275 and that are capped at
a maximum of 50 hours per consultant each week), CRP earned an aggregate
"success fee" of $138 and warrants exercisable to purchase an aggregate of
120,615 shares of the Company's common stock (at an exercise price of
$2.28/share) as a result of the achievement of certain goals in connection with
the Company's restructuring program. On June 12 and 13, and July 14, 2003, CRP
exercised its warrant to purchase 120,615 shares of stock at an exercise price
of $2.28.
Executive Services and Non-Cash Equity Based Compensation
On April 21, 2003, the Compensation Committee of the Company's Board of
Directors reached a verbal agreement with Frank Guidone regarding his long term
retention as Chief Executive Officer. Definitive agreements memorializing this
arrangement were entered into on July 22, 2003, between the Company and Four
Corners Capital Partners, LP ("Four Corners"), a limited partnership of which
Mr. Guidone is a principal. Pursuant to this arrangement, Four Corners will make
Mr. Guidone available to serve as the Company's Chief Executive Officer for
which it will receive an annual fee of $400 (plus travel costs for Mr. Guidone)
and will be eligible to receive a performance-based bonus. The agreement is for
an indefinite period of time and both parties have the right to terminate the
agreement on sixty day's advance notice. Through December 31, 2003, the Company
paid an aggregate of $232 to Four Corners under this agreement.
In connection with the retention of the services of Mr. Guidone, Four Corners
was also issued a warrant to purchase up to 600,000 shares of the Company's
common stock at an exercise price of $3.16 per share. Subject to the continued
service of Mr. Guidone, the right to purchase the shares vests at a rate of 35%,
30%, 20% and 15%, respectively, in each of the four years following the grant
date of the warrant, with the potential of a reduced vesting period if certain
performance targets are achieved. As a result of the performance of the
Company's common stock, the first 35% of the warrant shares became vested on
September 18, 2003. The other 30% and 20% of the warrant shares also became
vested on October 24, 2003, and November 28, 2003, respectively. The Company
recorded a non-cash equity based compensation charge of $3,046 ($0.22 per share
diluted) and $4,954 ($0.36 per share diluted) during the three month and nine
month periods ended December 31, 2003, respectively, representing the estimated
fair value of the portion of the warrant that vested. For the three months
ended December 31, 2003, the warrant was valued using the Black-Scholes option
pricing model, using a risk free rate of 1.04%, 0.99% and 0.95%, volatility of
0.44, 0.31 and 0.25, and warrant life of five months, four months and three
months, for the periods ended October 31, 2003, November 30, 2003 and December
31, 2003, respectively. The 90,000 remaining warrant shares vested on January
22, 2004, and an additional charge will be recorded in the fourth quarter ended
March 31, 2004. See Note 8 for impact on diluted earnings per share of the
600,000 warrant shares issued to Four Corners.
19
In addition, in connection with this arrangement, Mr. Guidone entered into a
non-competition agreement and Four Corners was granted registration rights
relating to any shares purchased under the warrant.
See Note 5 for a discussion of the bridge loan from Castletop Capital, L.P., a
limited partnership controlled by Morton L. Topfer, Chairman of the Company's
Board of Directors.
12. SUBSEQUENT EVENT:
On January 30, 2004, the Company signed a definitive asset purchase agreement to
sell assets associated with its Thinner brand bathroom and kitchen scale
business to Conair Corporation for $12,700 (subject to certain escrow, closing
adjustments and offsets).
Under the terms of the agreement, Conair Corporation acquired certain assets
associated with the sale of branded bathroom and kitchen scales, including
worldwide rights to the Thinner brand name and exclusive rights to the Thinner
designs in North America, for $12,700. $1,200 of this purchase price will be
paid subject to the final inventory reconciliation; $1,000 of this purchase
price is being held in escrow and will be released if fiscal year 2004 sales
revenues meet certain minimum thresholds. The Thinner brand business,
representing a portion of the consumer business, totals approximately $14,500 in
annual net sales.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following discussion of our results of operations and financial condition
should be read together with the other financial information, consolidated
financial statements and related notes included in this Quarterly Report on Form
10-Q. 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 2003 or fiscal 2003 refer to the 12-month period from April
1, 2002 through March 31, 2003 and 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.
OVERVIEW
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics including pressure, motion,
force, displacement, tilt/angle, flow and distance. We have two businesses, a
Sensor business and a Consumer Products business.
Our Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. Our sensor products include
pressure and electromagnetic displacement sensors, Piezoelectric polymer film
sensors, panel sensors, custom microstructures, load cells and accelerometers.
Our Consumer Products segment designs and manufactures sensor-based consumer
products that we sell to retailers and distributors in both the United States
and Europe. Consumer products include bathroom and kitchen scales, tire
pressure gauges and distance estimators.
20
The following table sets forth, for the periods indicated, certain items in our
consolidated statements of income as a percentage of net sales:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ---------------------------
2003 2002 2003 2002
(1)
---------------------------------------------------------
Net Sales
Sensor 46.3% 48.0% 50.6% 47.6%
Consumer products 53.7 52.0 49.4 52.4
------------- ------------- ------------ -------------
Total net sales 100.0 100.0 100.0 100.0
Cost of Sales 55.9 60.7 55.0 64.8
------------- ------------- ------------ -------------
Gross profit 44.1 39.3 45.0 35.2
Operating expenses (income)
Selling, general, and administrative 25.2 31.1 26.6 31.5
Litigation expense 1.3 - 0.5 -
Non-cash equity based compensation 9.6 - 5.7 -
Research and development 2.7 2.7 3.0 3.0
Customer funded development - - - (0.4)
Restructuring costs 1.7 0.3 0.6 1.4
Interest expense, net 0.1 1.5 0.4 2.1
Gain on sale of wafer fab - - - (0.1)
Other expenses 0.1 (0.3) - 0.1
------------- ------------- ------------ -------------
40.7 35.3 36.8 37.6
Income (loss) from continuing operations
before income taxes 3.4 4.0 8.2 (2.4)
Income Tax Provision 0.7 0.3 0.9 0.1
Income (loss) from discontinued units - 2.0 0.1 (3.6)
------------- ------------- ------------ -------------
Net income (loss) 2.7% 5.7% 7.4% (6.1)%
============= ============= ============ =============
(1)The consolidated financial statements for the nine months ended December 31, 2002 include the results
of the ongoing operations of Measurement Specialties, Inc. As a result of our restructuring plan, we sold
all of the outstanding stock of Terraillon in September 2002 and placed Schaevitz UK into receivership in
June 2002. Accordingly, Terraillon and Schaevitz UK are classified as discontinued operations in the
consolidated financial results for all periods presented. The comparisons above exclude the results of
these discontinued operations, except for "Income (loss) from discontinued units," and "Net income
(loss)."
Our Development/Growth Strategy
21
Development Strategy. We are focusing our development efforts in both our
Sensor business and Consumer Products business on the original equipment
manufacturers (OEM) market. In the Consumer Products business, having both a
branded and OEM consumer scale business has created some channel conflicts
historically. As part of this focus, we sold certain assets associated with our
Thinner branded bathroom and kitchen scale business to Conair Corporation on
January 30, 2004. We previously sold our Thinner branded scales directly to
retailers, predominately in the U.S. and Canada. On a going-forward basis, we
expect to supply these scales directly to Conair and intend to continue our
efforts in the design, development and manufacture of innovative scale products
for sale to our worldwide base of OEM customers. Although our development focus
is on the OEM market, we intend to continue to develop and manufacture our tire
pressure gauges, which are sold directly to retail customers. As OEM margins
have historically been lower than margins on sales to retail customers, we
expect our Consumer Products segment margins will decline as a result of this
transaction. See Note 12 to the condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q for a more detailed description
of the Conair transaction.
Growth Strategy. We are focused on aggressively growing our Sensor
segment. We expect that this growth will come through a combination of organic
growth and the acquisition of sensor businesses. We currently do not have any
definitive agreements or understandings regarding any potential acquisitions.
In order to finance any potential acquisitions, we would consider loans from
financial institutions, the sale of equity securities, or the sale of existing
Company assets, including assets in our Consumer Products segment.
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 recorded when products are shipped and title passes to the customer.
Certain consumer products may be sold with a provision allowing the customer to
return a portion of the products. Upon shipment, we provide for allowances for
returns based upon historical and estimated return rates. The amount of actual
returns could differ from our estimate. Changes in estimated returns would be
accounted for in the period of change.
We utilize manufacturing representatives as sales agents for certain of our
products. Such representatives do not receive orders directly from customers,
take title to or physical possession of products, or invoice customers.
Accordingly, revenue is recognized upon shipment to the customer.
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. We are not responsible for the ultimate sale to third party
customers and therefore record revenue upon shipment to the distributor.
ACCOUNTS RECEIVABLE:
The majority of the accounts receivable are due from retailers and manufacturers
of electronic, automotive, military and industrial products. Credit is extended
based on evaluation of a customer's financial condition and, generally,
collateral is not required. Accounts receivable are generally due within 30 to
90 days and are stated as amounts due from customers net of allowances for
doubtful accounts and other sales allowances. Accounts outstanding longer than
the contractual payment terms, are considered past due. We determine our
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, our previous loss history, the customer's
current ability to pay its obligation to us and the condition of the general
economy and the industry as a whole. We write-off accounts receivable when we
determine they are uncollectible; 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.
22
INVENTORIES:
We make purchasing decisions principally based upon firm sales orders from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown in customer
demand, customer delay in the issuance of sales orders, miscalculation of
customer requirements, technology changes that render raw materials and finished
goods obsolete, loss of customers and/or cancellation of sales orders. We
establish reserves for our inventories to recognize estimated obsolescence and
unusable items on a continual basis. Market conditions surrounding products are
also considered periodically to determine if there are any net realizable
valuation matters which would require a write-down of any related inventories.
If market or technological conditions change, it may result in additional
inventory reserves and write-downs which would be accounted for in the period of
change.
GOODWILL IMPAIRMENT:
Management assesses goodwill for impairment at the reporting unit level on an
annual basis or more frequently under certain circumstances. Such circumstances
include: (i) significant adverse change in legal factors or in the business
climate; (ii) an adverse action or assessment by a regulator; (iii)
unanticipated competition; (iv) a loss of key personnel; (v) a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of; and (vi) recognition
of an impairment loss in a subsidiary that is a component of a reporting unit.
Management must make assumptions regarding estimating the fair value of our
reporting units. If these estimates or related assumptions change in the future,
we may be required to record an impairment charge. Impairment charges would be
included in general and administrative expenses in our statements of operations,
and would result in reduced carrying amounts of the goodwill.
LONG LIVED ASSETS:
Management assesses the recoverability of long-lived assets, which consist
primarily of fixed assets and intangible assets whenever events or changes in
circumstance indicate that the carrying value may not be recoverable. The
following factors, if present, may trigger an impairment review: (i) significant
underperformance relative to historical or projected future operating results;
(ii) significant negative industry or economic trends; (iii) significant decline
in our stock price for a sustained period; and (iv) a change in our market
capitalization relative to net book value. If the recoverability of these assets
is unlikely because of the existence of one or more of the above-mentioned
factors, an impairment analysis is performed using a projected discounted cash
flow method. Management must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of these assets. If these
estimates or related assumptions change in the future, we may be required to
record an impairment charge. Impairment charges would be included in general and
administrative expenses in our statements of operations, and would result in
reduced carrying amounts of the related assets on our balance sheets.
INCOME TAXES:
We file income tax returns in every jurisdiction in which we have reason to
believe that we are subject to tax. Historically, we have been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that our filing position regarding one or more of our transactions
is contrary to that jurisdiction's laws or regulations.
We have provided a valuation allowance against deferred tax assets since we
believe uncertainty exists regarding the realizability of our deferred tax
assets due to potential loss contingencies related to our pending litigation.
Realization of a deferred tax asset is dependent on generating future taxable
income. See Note 10 to the condensed consolidated financial statements included
in this Quarterly Report on Form 10-Q for further discussion of contingencies
and litigation.
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:
23
Our sensor and consumer products generally are marketed under warranties to end
users of up to ten years. Factors affecting our warranty liability include the
number of products sold and historical and anticipated rates of warranty claims
and cost per claim. We provide for estimated product warranty obligations at the
time of sale, based on our historical warranty claims experience and assumptions
about future warranty claims. This estimate is susceptible to changes in the
near term based on introductions of new products, product quality
improvements/declines and changes in end user application and/or behavior.
CONTINGENCIES AND LITIGATION:
We periodically assess the potential liabilities related to any lawsuits or
claims brought against us. While it is typically very difficult to determine the
timing and ultimate outcome of these actions, we use our best judgment to
determine if it is probable that we will incur an expense related to a
settlement or judgment 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. See Note 10 to the condensed
consolidated financial statements included in this Quarterly Report on Form 10-Q
for further discussion of contingencies and litigation.
NON-CASH EQUITY BASED COMPENSATION:
We have issued warrants, under an agreement for the services of our Chief
Executive Officer, to a limited partnership (LP). The LP is partially
controlled by our chief executive officer. The warrant agreement allows the LP
to purchase a certain number of shares of our stock, at an agreed-upon exercise
price. The warrant shares vest at 35%, 30%, 20% and 15% each year over a
four-year period, with the potential of a reduced vesting period if certain
targets are achieved. We record non-cash equity based compensation expense on
the warrants as the shares vest. The warrants are valued using the
Black-Scholes option pricing model, using an appropriate risk free interest
rate, volatility factor, and an estimated warrant life.
RESULTS OF OPERATIONS
THE FOLLOWING TABLE SETS FORTH CERTAIN ITEMS IN OUR CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2003:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, % DECEMBER 31, %
-------------------------- --------------------------
2003 2002 CHANGE 2003 2002 CHANGE
-------------------------- --------------------------
Net Sales $31,869 $28,351 12.4 $86,469 $84,376 2.5
Sensor 14,761 13,601 8.5 43,772 40,134 9.1
Consumer products 17,108 14,750 16.0 42,697 44,242 (3.5)
Gross profit 14,046 11,140 26.1 38,942 29,733 31.0
Selling, general and 8,018 8,807 (9.0) 23,019 26,607 (13.5)
administrative
Litigation expense 400 - * 400 - *
Non-cash equity based 3,046 - * 4,954 - *
compensation
Research and development 850 773 10.0 2,610 2,564 1.8
Customer Funded Development - (14) (100.0) - (360) (100.0)
Restructuring costs 545 96 467.7 545 1,219 (55.3)
Interest expense, net 22 424 (94.8) 322 1,771 (81.8)
Income taxes 226 98 130.6 772 116 565.5
Income (loss) from discontinued
units - - - 112 (3,910) 102.9
Gain on sale of Terraillon - 570 (100.0) - 910 (100.0)
Net income (loss) 888 1,608 (44.8) 6,386 (5,136) 224.3
24
* A percentage change has not been included where there was no corresponding expense in
the same period of the prior fiscal year.
THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2002
The consolidated financial statements for the three and nine month periods
ended December 31, 2003 and December 31, 2002 include the results of the ongoing
operations of Measurement Specialties, Inc. As a result of our restructuring
plan, we sold all of the outstanding stock of Terraillon in September 2002 and
placed Schaevitz UK into receivership in June 2002. Accordingly, Terraillon and
Schaevitz UK are classified as discontinued operations in the consolidated
financial results for all periods presented.
Net Sales.
Sensor Business. The increase in net sales for our Sensor business during
the three months ended December 31, 2003 is due to both increased ICS product
line sales and increased Microfused product line sales as compared to the same
period in the prior fiscal year. The improved ICS product line sales is a
result of increased demand from existing customers, as well as, the introduction
of new products. The improved Microfused product line sales are primarily due
to expanded demand for automotive pressure sensors and sales of certain newly
released products. These increases were partially offset by decreased
PiezoSensor sales in the three months ended December 31, 2003 primarily as a
result of our decision to stop doing business with a customer due to
collectability issues
Consumer Products Business. Increased tire gauge sales in the U.S.
consumer market accounted for $2,121 of the $2,358 increase in net sales of our
Consumer Products business for the three months ended December 31, 2003 as
compared to the same period in the prior fiscal year. We supplied one tire
gauge promotion offered by a warehouse club customer in the three months ended
December 31, 2003. We did not supply any tire gauge promotions in the three
months ended December 31, 2002.
Gross Margin.
Gross margin as a percent of sales for the three months ended December 31,
2003 increased to 44.1% from 39.3% for the three months ended December 31, 2002.
Sensor Business. Gross margin as a percent of sales for our Sensor business
increased to 54.7% for the three months ended December 31, 2003 from 46.7% for
the three months ended December 31, 2002. The continued improvement of our
Sensor margin is primarily due to more efficient manufacturing operations and
decreased materials and freight costs. Our increased efficiency in manufacturing
operations was the result of our production planning and restructuring efforts.
We have reduced material costs by purchasing raw materials in China. Our
emphasis on the effective management of freight costs has also resulted in lower
costs.
Consumer Products Business. Gross margin as a percent of sales in our
Consumer Products business increased to 33.8% for the three months ended
December 31, 2003 from 30.5% for the three months ended December 31, 2002. Gross
margin in our U.S. consumer division decreased slightly by 0.5% and gross margin
in our Asian consumer division increased by 5.0%. The overall increase in gross
margin for our Consumer Products business in the three months ended December 31,
2003, as compared to the same period in the prior fiscal year, is primarily due
to improved margins on our sales to original equipment manufacturers. The
margins on sales to original equipment manufacturers improved as a result of
improved product mix, lower freight costs and a reduction in material costs due
to our concentration on the more efficient use of raw materials in the
manufacturing process. The margin on our retail customer sales declined slightly
as compared to the quarter ended December 31, 2002 mainly due to a shift in
sales to lower margin products.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling ,General and Administrative. The decrease in selling, general and
administrative expenses is primarily due to lower legal and professional fees
incurred during the three months ended December 31, 2003 as compared to the same
quarter in prior fiscal year. These legal and professional fees decreased
approximately $1,678 in the three months ended December 31, 2003 as compared to
the three months ended December 31, 2002. The higher professional fees in the
fiscal 2003 period as compared to
25
the fiscal 2004 period were due to defaults under our credit agreement and
restatement of our financial statements, as well as a higher level of
professional activity with respect to the pending class action lawsuit and SEC
investigation. In addition, costs have decreased in the Sensor business due to
consolidation of certain support services. Offsetting these declines is an
increase to the employee profit sharing accrual as a result of the improvement
in our company performance.
Litigation Expense. We recorded a net charge of $400 during the three months
ended December 31, 2003 relating to the SEC investigation and the Hibernia
Capital Partners litigation. This net charge represents the combination of a
$1,000 charge relating to the SEC investigation offset by the reversal of $600
from the prior accrual upon the favorable settlement of the Hibernia lawsuit.
See Note 10 to the condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q.
Non-Cash Equity Based Compensation. During the three months ended December 31,
2003, we recorded a non-cash equity based compensation charge of $3,046, or
$0.22 per share diluted, for the vesting of the warrant issued to Four Corners
Capital Partners LP, a limited partnership of which Mr. Guidone is a principal.
The 90,000 remaining warrant shares vested on January 22, 2004, and an
additional charge will be recorded in the fourth quarter ended March 31, 2004.
See Note 11 to the condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q for a discussion of non-cash equity based
compensation and the arrangement with Four Corners.
Research and Development We had no customer-funded development for the three
months ended December 31, 2003 compared with $14 for the three months ended
December 31, 2002. On a net basis, research and development costs increased
$77, or 10.1%, to $850 for the three months ended December 31, 2003 from $773
for the three months ended December 31, 2002. This change resulted from
increased research and development efforts in our Sensor business.
Restructuring Costs. During the three months ended December 31, 2003, we
recorded a charge of $545 for additional costs relating to the our restructuring
plan. This charge results from the settlement of litigation related to our
former facility in Valley Forge, Pennsylvania. See Note 3 to the condensed
consolidated financial statements included in this Quarterly Report on Form
10-Q.
Interest Expense, Net. The decrease in interest expense is attributable to a
$7,047 reduction in average debt outstanding from $7,047 for the three months
ended December 31, 2002 to $0 for the three months ended December 31, 2003.
Income Taxes. Our provision for income taxes includes taxes payable by our
foreign subsidiaries. For U.S. tax purposes, we anticipate that our available
net operating loss carry-forwards will offset all current year taxable income.
NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
2002
Net Sales.
Sensor Business. The reasons for the increase in Sensor business sales during
the nine months ended December 31, 2003 as compared to the same period in the
prior fiscal year are described in the three month to three month comparison of
net sales above.
Consumer Products Business. The higher Consumer Products Business sales during
the nine months ended December 31, 2002 as compared to the same period in the
current fiscal year is due to the liquidation of $1,315 in slow moving and
obsolete inventory and higher sales to original equipment manufacturers. Also
contributing to the decline in sales for the nine months ended December 31, 2003
is the loss of placement with a major retailer.
Gross Margin
Gross margin as a percent of sales for the nine months ended December 31, 2003
increased to 45.0% from 35.2% for the nine months ended December 31, 2002.
Sensor Business. Gross margin as a percent of sales for our Sensor business
increased to 55.1% for the nine months ended December 31, 2003 from 41.3% for
the nine months ended December 31, 2002. The reasons for the continued
improvement of our Sensor margin are described in the three month to the three
month comparison of Sensor gross margin above.
Consumer Products Business. Gross margin as a percent of sales for our Consumer
Products business increased to 33.1% for
26
the nine months ended December 31, 2003 from 29.7% for the nine months ended
December 31, 2002. The margin increased for both retail customer sales and sales
to original equipment manufacturers. The reasons for the improvement of our
Consumer Products margin are described in the three month to three month
comparison of Consumer Products gross margin above.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling, General and Administrative. The decrease in selling, general and
administrative expenses is primarily due to lower legal and professional fees
incurred during the nine months ended December 31, 2003 as compared to the same
period in the prior fiscal year. These legal and professional fees decreased
approximately $4,671 in the nine months ended December 31, 2003 as compared to
the nine months ended December 31, 2002. The reasons for the decreased legal
fees are described in the three month to three month comparison of selling,
general and administrative expenses above.
Litigation Expense. The net charge of $400 relating to the SEC investigation
and the Hibernia Capital Partners litigation is described above in the three
month to three month comparison of litigation expense.
Non-Cash Equity Based Compensation. During the nine months ended December 31,
2003, we recorded a non-cash equity based compensation charge of $4,954, or
$0.36 per share diluted, for the vesting of the warrant issued to Four Corners
Capital Partners LP, a limited partnership of which Mr. Guidone is a principal.
The 90,000 remaining warrant shares vested on January 22, 2004, and an
additional charge will be recorded in the fourth quarter ended March 31, 2004.
See Note 11 to the condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q for a discussion of non-cash equity based
compensation and the arrangement with Four Corners.
Research and Development We had no customer-funded development for the nine
months ended December 31, 2003 as compared to $360 of customer funded
development for the nine months ended December 31, 2002. On a net basis,
research and development costs increased $46, or 1.8%, to $2,610 for the nine
months ended December 31, 2003 from $2,564 for the nine months ended December
31, 2002. The primary cause of the reduction in customer-funded development was
the sale of the IC Sensors wafer fab in July 2002. We do not expect significant
customer funded research and development for the remainder of fiscal 2004.
Restructuring Costs. The $545 charge related to our restructuring plan is
described above in the three month to three month comparison of restructuring
costs See Note 3 to the condensed consolidated financial statements included in
this Quarterly Report on Form 10-Q.
Interest Expense, Net. The decrease in interest expense is attributable to a
$17,338 reduction in average debt outstanding from $20,476 in the nine months
ended December 31, 2002 to $3,138 in the nine months ended December 31, 2003.
Income Taxes. Our provision for income taxes includes taxes payable by our
foreign subsidiaries. For U.S. tax purposes, we anticipate that all current
year taxable income will be offset by our available net operating loss
carry-forwards.
Discontinued Operations. As a result of our restructuring plan, we sold all of
the outstanding stock of Terraillon in September 2002 and placed Schaevitz UK
into receivership in June 2002. We had a net loss of $3,000 for the nine months
ended December 31, 2002 from these discontinued operations. A gain of $112 was
recorded in the nine months ended December 31, 2003 as additional funds were
received from the liquidation of Schaevitz UK.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) increased by $4,953 from $14,978 as of March 31, 2003 to $19,931 as of
December 31, 2003. The increase was attributable to an increase in accounts
receivable of $4,577 from $10,549 at March 31, 2003 to $15,126 at December 31,
2003, a decrease in accounts payable of $1,745 from $9,846 at March 31, 2003 to
$8,101 at December 31, 2003, and offset by an decrease in inventory of $1,369
from $14,275 at March 31, 2003 to $12,906 at December 31, 2003. The increase in
accounts receivable is attributable to the seasonal nature of sales for our
Consumer Products segment. The decrease in accounts payable was primarily the
result of our continued efforts in managing expenses. The decrease in inventory
is attributable to the seasonal nature of our business and our continued
inventory management efforts.
Cash provided by operating activities was $8,495 for the nine months ended
December 31, 2003 as compared to $339 used for the nine months ended December
31, 2002. This increase was as a result of the company's overall performance
improvement
27
and reduced selling, general and administrative spending. Included in cash
provided from operations for the nine month period ended December 31, 2003 is
$2,800 of costs paid to our insurance carrier related to the D&O insurance
policy renewal (See Note 5 to the condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q.) Excluding this payment to our
insurance carrier, cash provided from operations would have been $11,295.
Capital spending increased to $1,369 for the nine months ended December 31, 2003
from $1,149 for the nine months ended December 31, 2002. The increase in
capital spending is primarily attributable to investment in revenue generating
projects at our Shenzen, China facility. Financing activities for the nine
months ended December 31, 2003 utilized $4,316, primarily due to the repayment
of all outstanding indebtedness to Castletop Capital, L.P., and repayment of
company debt under our revolving credit facility. Financing activities for the
nine months ended December 31, 2003 also reflect $944 in proceeds from the
exercise of stock options and warrants.
Revolving Credit Facility
On January 31, 2003, we entered into a $15,000 revolving credit facility with
Fleet Capital Corporation ("FCC"). The revolving credit facility is secured by
a lien on substantially all of our assets. Interest accrues on the principal
amount of our borrowings under this facility at a fluctuating rate per year
equal to the lesser of FCC's prime rate for commercial loans plus one percent
(subject to a two percent increase upon the occurrence of an event of default
under the loan agreement) or the maximum rate permitted by applicable law. As of
December 31, 2003, the interest rate applicable to borrowings under the
revolving credit facility was 5.0%. The amount of borrowing available under the
revolving credit facility is determined in accordance with a formula based on
certain of our accounts receivable and inventory. The revolving credit facility
expires on February 1, 2006.
Our revolving credit agreement requires us to meet certain financial covenants
during the term of the revolving credit facility. In addition to certain
affirmative and negative covenants, which include a restriction on the payment
of dividends, we were required to maintain a borrowing availability of at least
$2,000 through the filing of our quarterly report on Form 10-Q for the three
months ended June 30, 2003. This covenant expired on August 7, 2003. In
addition, beginning in the fiscal quarter ended June 30, 2003, we are required
to keep a minimum fixed charge ratio of 1 to 1 at the end of each fiscal
quarter. Fixed charge ratio is defined as operating cash flow, which is EBITDA
(earnings before interest, taxes, depreciation and amortization) minus cash
taxes paid and minus capital expenditures, divided by the sum of scheduled
principle payments and interest expense during that period. We are currently in
compliance with all covenants in the agreement. As of December 31, 2003, there
were no outstanding borrowings and the Company had the right to borrow $9,846
under the revolving credit facility.
Bridge Loan
See Note 5 to the condensed consolidated financial statements included in this
quarterly report on Form 10-Q for a discussion of the $9,300 bridge loan from
Castletop Capital L.P. (Castletop), a limited partnership controlled by Morton
Topfer, Chairman of our Board of Directors, and the amendments thereto. We
repaid all amounts owed to Castletop in September 2003.
Liquidity
At February 2, 2004, we had approximately $20,489 of available cash and $8,276
of borrowing capacity under our revolving credit facility. Our ongoing capital
needs and other obligations include the payment of:
- Substantial professional fees that are being incurred as the result of
the class action lawsuits and SEC investigation; and
- Any judgments, settlement payments or penalties arising from the class
action lawsuit, SEC investigation or other matters described under
"Legal Proceedings."
Our cash and amounts available under our revolving credit facility may not be
available or adequate to fund amounts, if any, to be paid in settlement of our
pending legal proceedings. Under the terms of the credit agreement, we are
prohibited from making any cash payment in settlement of any litigation unless,
after giving effect to such payment and for a period of 30 consecutive days
prior thereto, availability under the credit facility is not less than $1,500.
Moreover, we are prohibited from making any cash payment in settlement of the
class action lawsuit, the DeWelt litigation or the Hibernia litigation without
the prior written consent of FCC. In November 2003, we settled the Hibernia
lawsuit with the approval of FCC., See "Legal Proceedings" below for a
discussion of this settlement.
Our cash and amounts available under our revolving credit facility may not be
sufficient to satisfy the obligations
28
discussed above. If we are unable to satisfy these obligations, we may need to
explore other fund raising alternatives, including the sale of assets or equity
securities. No assurance, however, can be given that we will be able to
successfully sell assets or stock, or, even if such transactions are possible,
that they will be on terms reasonable to us, that they will enable us to satisfy
our obligations or that such actions will be permitted under our credit
agreement. Additionally, any sale of equity securities will dilute existing
shareholders and may be at prices that are substantially lower than current
market prices. If we are unable to satisfy our loss contingencies and do not
obtain additional funds, we will likely be unable to continue operations.
Dividends
We have not declared cash dividends on our common equity. Additionally, the
payment of dividends is prohibited under our credit agreement. If permitted
under applicable law and consented to by our lenders, we may, in the future,
declare dividends under certain circumstances.
At present, there are no material restrictions on the ability of our Hong Kong
subsidiary to transfer funds to us in the form of cash dividends, loans,
advances, or purchases of materials, products, or services. Chinese laws and
regulations, including currency exchange controls, restrict distribution and
repatriation of dividends by our China subsidiary.
Seasonality
Our sales of consumer products are seasonal, with highest sales during the
second and third fiscal quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in Thousands)
Foreign Currency Exchange Risk
We are exposed to a certain level of foreign currency exchange risk.
The majority of our net sales are priced in United States dollars. Our costs and
expenses are priced in United States dollars, Hong Kong dollars and Chinese
renminbi. Accordingly, the competitiveness of our products relative to products
produced domestically (in foreign markets) may be affected by the performance of
the United States dollar compared with that of our foreign customers'
currencies. Additionally, we are exposed to the risk of foreign currency
transaction and translation losses, which might result from adverse fluctuations
in the values of the Hong Kong dollar and the Chinese renminbi. At December 31,
2003, we had net assets of approximately $303 subject to fluctuations in the
value of the Hong Kong dollar and net liabilities of approximately $17,457
subject to fluctuations in the value of the Chinese renminbi. At December 31,
2002, we had net liabilities of approximately $2,360 subject to fluctuations in
the value of the Hong Kong dollar and net assets of approximately $13,327
subject to fluctuations in the value of Chinese renminbi. At March 31, 2003, we
had net liabilities of approximately $2,000 subject to fluctuations in the value
of the Hong Kong dollar and the net assets of approximately $13,700 subject to
fluctuations in the value of Chinese renminbi.
Fluctuations in the value of the Hong Kong dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong dollar to that of the United States dollar. However, there can be no
assurance that the value of the Hong Kong dollar will continue to be tied to
that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to foreign currency and
translation risks, we may purchase currency exchange forward contracts, currency
options, or other derivative instruments, provided such instruments may be
obtained at suitable prices. However, to date we have not done so.
Interest Rate Risk
Interest on our revolving credit facility accrues on the principal amount of our
borrowings under the facility at a fluctuating rate per year equal to the lesser
of FCC's prime rate for commercial loans plus one percent (subject to a two
percent increase upon the occurrence of an event of default under the loan
agreement) or the maximum rate permitted by applicable law.
29
Our results will be adversely affected by any increase in interest rates. For
example, for every $1,000 of debt outstanding, an annual interest rate increase
of 100 basis points would increase interest expense and thus decrease our after
tax profitability by $10.
We do not hedge this interest rate exposure.
CAUTIONARY STATEMENT
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. Forward looking statements may be
identified by such words or phrases as "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will," "may" and similar expressions. All
statements that address operating performance, events or developments that we
expect or anticipate will occur in the future are forward-looking statements.
The forward-looking statements above are not guarantees of future performance
and involve a number of risks and uncertainties. Factors that might cause actual
results to differ materially from the expected results described in or
underlying our forward-looking statements include:
- Conditions in the general economy and in the markets served by us;
- Competitive factors, such as price pressures and the potential
emergence of rival technologies;
- Interruptions of suppliers' operations or the refusal of our suppliers
to provide us with component materials;
- Timely development, market acceptance, and warranty performance of new
products;
- Changes in product mix, costs, yields and fluctuations in foreign
currency exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the European consumer products market;
- The class action lawsuits filed against us and the pending SEC
investigation; 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 Quarterly Report on Form 10-Q, whether as a result of new
information, future events, changes in assumptions or otherwise.
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ITEM 4. CONTROLS AND PROCEDURES
The company's management, with the participation of the company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the company's disclosure controls and procedures as of December 31, 2003.
Based on this evaluation, the company's Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures are effective for gathering, analyzing and disclosing the information
the company is required to disclose in the reports it files under the Securities
Exchange Act of 1934, within the time periods specified in the SEC's rules and
forms. Such evaluation did not identify any change in the company's internal
control over financial reporting that occurred during the quarter ended December
31, 2003 that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(DOLLARS IN THOUSANDS)
SECURITIES LITIGATION (CLASS ACTION LAWSUIT)
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 us 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 alleges
violations of the federal securities laws. The lawsuit seeks an unspecified
award of money damages. After March 20, 2002, nine additional similar class
actions were filed in the same court. The ten lawsuits have been consolidated
into one case under the caption In re: Measurement Specialties, Inc. Securities
Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs filed a Consolidated Amended
Complaint on September 12, 2002. The underwriters have made a claim for
indemnification under the underwriting agreement. On September 30, 2003, the
court denied our motion to Dismiss this case. We are in active settlement
discussions with the plaintiffs, however we cannot predicate the ultimate
outcome of these discussions.
We have Directors and Officers liability insurance that provides an aggregate of
$10,000 in coverage for the period during which this claim was filed ($5,000 in
primary coverage and $5,000 in excess coverage). Our primary D&O insurance
carrier initially denied coverage of this claim, which position we contested.
After discussion, the insurer reversed its previous coverage position and agreed
to participate in the defense and potential settlement of the class action
lawsuit (subject to the $5,000 policy limit). As part of the arrangement, we
renewed our D&O coverage. The new policy provides for an aggregate of $6,000 in
coverage for the period from April 7, 2003 through April 7, 2004. The $3,200
renewal premium represents a combination of the market premium for D&O coverage
for this period plus our contribution toward a potential settlement in the class
action lawsuit. Our excess insurance carrier has not accepted coverage for this
claim. No assurance can be given that this insurance will be adequate, or that
our excess insurance coverage will be available or adequate, to cover losses, if
any, arising from this litigation.
In addition, our credit agreement precludes us from making cash payment in
settlement of this litigation without the prior consent of Fleet Capital
Corporation. This litigation is ongoing and we cannot predict its outcome at
this time. However, if we were to lose this lawsuit, judgment would likely have
a material adverse effect on our consolidated financial position, results of
operations and cash flows.
SEC/U.S. ATTORNEY INVESTIGATION
In February 2002, we contacted the staff of the SEC after discovering that our
former chief financial officer had made the misrepresentation to senior
management, our board of directors and our auditors that a waiver of a covenant
default under our credit agreement had been obtained when, in fact, our lenders
had refused to grant such a waiver. Since February 2002, we and a special
committee formed by our board of directors have been cooperating with the staff
of the SEC. In June 2002, the staff of the Division of Enforcement of the SEC
informed us that it is conducting a formal investigation relating to matters
reported in our Quarterly Report on Form 10-Q for the quarter ended December 31,
2001.
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We have has also learned that the Office of the United States Attorney for the
District of New Jersey is conducting an inquiry into the matters that are being
investigated by the SEC.
We cannot predict how long these investigations will continue or their outcome.
ROBERT L. DEWELT
Robert L. DeWelt v. Measurement Specialties, Inc. et al., United States District
Court for the District of New Jersey, Civil Action No. 02-CV-3431. On July 17,
2002, Robert DeWelt, the former acting Chief Financial Officer and general
manager of the Schaevitz Division, filed a lawsuit against us and certain of our
officers and directors. Mr. DeWelt resigned on March 26, 2002 in disagreement
with management's decision not to restate certain of our financial statements.
The lawsuit alleges a claim for constructive wrongful discharge and violations
of the New Jersey Conscientious Employee Protection Act. Mr. DeWelt seeks an
unspecified amount of compensatory and punitive damages. We have filed a Motion
to dismiss this case, which was denied on June 30, 2003. We have answered the
complaint and commenced the discovery process. This litigation is ongoing and
we cannot predict its outcome at this time.
SERVICE MERCHANDISE COMPANY, INC.
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. 399-02549, Adv. Pro. No.
301-0462A. We are currently the defendant in a lawsuit filed in March 2001 by
Service Merchandise Company, Inc. ("SMC") and its related debtors (collectively,
the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
The Bankruptcy Court entered a stay of the action in May 2001, which was lifted
in February 2002. The action alleges that we received $645 from one or more of
the Debtors during the ninety (90) day period before the Debtors filed their
bankruptcy petitions, that the transfers were to our benefit, were for or on
account of an antecedent debt owed by one or more of the Debtors, made when one
or more of the Debtors were insolvent, and that the transfers allowed us to
receive more than we would have received if the cases were cases under Chapter 7
of the United States Bankruptcy Code. The action seeks to disgorge the sum of
$645 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.
EXETER TECHNOLOGIES, INC. (ARBITRATION)
Exeter Technologies, Inc. ("Exeter") and Michael Yaron have alleged
underpayments of approximately $322 relating to a January 5, 2000 Product Line
Acquisition Agreement. We maintain the claim failed to recognize our rights to
certain contractual allowances and offsets. The matter proceeded to non-binding
arbitration. Post-hearing submissions are due in March 2004. We have
acknowledged that we owed Exeter approximately $128 as of October 1, 2003.
From time to time, we are subject to other legal proceedings and claims in the
ordinary course of business. We are currently 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.
RESOLVED MATTERS
HIBERNIA CAPITAL PARTNERS I, ILP AND HIBERNIA CAPITAL PARTNERS II, ILP.
Measurement Specialties Inc. v. Hibernia Capital Partners I, ilp and Hibernia
Capital Parnters II, ilp. On or about July 23, 2002, Hibernia Capital Partners
I, ilp and Hibernia Capital Partners II, ilp filed a lawsuit against us in the
High Court of Dublin. The Plenary Summons stated that plaintiffs sought a
declaration that the plaintiffs entered into the share purchase agreement on
June 7, 2001 for the sale of their shares in Terraillon Holdings Limited to us
as a result of an operative misrepresentation and misstatement. Plaintiffs
further sought damages for misrepresentation and/or breach of contract and/or
breach of warranty and costs of the proceedings. This matter was settled for a
$150 payment from us to the plaintiffs.
SEMEX, INC.
Semex Inc. v. Measurement Specialties, Inc. and AMP Incorporated Court of Common
Pleas of Montgomery County Pennsylvania, Docket Number NO. 02-23609. On October
24, 2002, Semex, Inc. ("Semex") filed a lawsuit against us and Amp Incorporated
("AMP") alleging breaches of the lease for our former facility in Valley Forge,
Pennsylvania. We are the
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assignee of AMP under the lease. In addition to rent and other charges in the
sum of $770, plaintiff also sought $1,015 for building cleanup, restoration,
failure to remove alterations and environmental testing of the premises. At a
settlement conference on January 26, 2004, we reached a verbal agreement to
settle this matter with Semex and AMP. The settlement was reported to the Court
and settlement documentation is being prepared. As part of the settlement, we
have agreed to pay $1,425 to Semex within 30 days in exchange for a release of
all claims and a termination of the litigation.
CLARK MATERIAL HANDLING COMPANY (ARBITRATION)
We were the defendant (as successor to Lucas Control Systems) in a lawsuit filed
in April 2002 by Clark Material Handling Company and its related debtors (the
"Debtors") in the context of the Debtors' Chapter 11 bankruptcy proceedings.
Plaintiffs asserted that Lucas Control Systems ("Lucas") received $34 from one
or more of the Debtors during the ninety (90) day period before the Debtors
filed their bankruptcy petitions, that the transfers were to Lucas' benefit,
were for or on account of an antecedent debt owed by one or more of the Debtors,
made when one or more of the Debtors were insolvent, and that the transfers
allowed Lucas to receive more than it would have received if the cases were
cases under Chapter 7 of the United States Bankruptcy Code. The action sought
to disgorge the sum of $34 from Lucas. This matter was settled for a $19
payment from us to the plaintiffs.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with the retention of the services of Mr. Guidone, Four Corners
Capital Partners LP, a limited partnership of which Mr. Guidone is a principal,
was issued a warrant to purchase up to 600,000 shares of our common stock at an
exercise price of $3.16 per share. Subject to the continued service of Mr.
Guidone, the right to purchase the shares vests at a rate of 35%, 30%, 20% and
15%, respectively, in each of the four years following the grant date of the
warrant, with the potential of a reduced vesting period if certain targets are
achieved. As a result of the performance of our common stock, the first 35% of
the warrant shares became vested on September 18, 2003. The other 30% and 20%
of the warrant shares also became vested on October 24, 2003 and November 28,
2003, respectively. The warrant was issued in reliance upon the exemption from
registration under Section 4(2) of the Securities Act or 1933, as a transaction
not involving a public offering.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Exhibit Index.
(B) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed during the three months ended
December 31, 2003:
On November 8, 2003, we filed a current report on Form 8-K pursuant to Item 12
(Results of Operations and Financial Condition) to attach a press release
reporting results for our second fiscal quarter ended September 30, 2003.
On October 20, 2003, we filed a current report on Form 8-K pursuant to Item 5
(Other Events and Required FD Disclosure) to attach a press release reporting a
change in the membership of our Board of Directors.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEASUREMENT SPECIALTIES, INC.
(Registrant)
/s/ John P. Hopkins
---------------------------------------------------------------------------
Date: February 4, 2004 John P. Hopkins
Chief Financial Officer
(authorized officer and
principal financial officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of Frank D. Guidone required by Rule 13a-14(a) or Rule
15d-14(a)
31.2 Certification of John P. Hopkins required by Rule 13a-14(a) or Rule
15d-14(a)
32.1 Certification of Frank D. Guidone and John P. Hopkins required by Rule
13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350
36