MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		September 30,			March 31,
(Dollars in thousands)		2006			2006
ASSETS
Current assets:
Cash and cash equivalents		$	10,473		$	9,166
Accounts receivable, trade, net of allowance for
doubtful accounts of $548 and $447, respectively			30,361			19,381
Inventories, net			34,397			25,099
Deferred income taxes, net			2,556			1,510
Prepaid expenses and other current assets			2,574			1,821
Other receivables			857			3,409
Other receivable due from joint venture partner			723			-
Current portion of promissory note receivable			1,869			1,900
Current assets of discontinued operations			-			1,111
Total current assets			83,810			63,397
Property and equipment, net			25,036			22,086
Goodwill			75,913			41,848
Acquired intangible assets, net			19,229			11,250
Deferred income taxes, net			7,948			10,785
Promissory note receivable, net of current portion			497			1,397
Other assets			1,963			1,542
Assets of discontinued operations			-			119
Total Assets		$	214,396		$	152,424

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		September 30,			March 31,
(Dollars in thousands)		2006			2006
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of promissory notes payable		$	600		$	1,000
Current portion of deferred acquisition payments			2,049			3,972
Short-term debt			139			3,777
Current portion of long-term debt			2,172			2,553
Accounts payable			16,433			11,337
Accrued expenses			2,933			2,190
Accrued compensation			4,760			3,116
Income taxes payable			1,466			789
Current portion of capital lease obligation			243			606
Other current liabilities			2,540			1,731
Current liabilities of discontinued operations			512			1,266
Total current liabilities			33,847			32,337
Revolver			49,410			-
Promissory notes payable, net of current portion			-			100
Long-term debt, net of current portion			18,777			16,794
Deferred acquisition payments, net of current portion			1,914			-
Contingency consideration provision			-			3,517
Capital lease obligation, net of current portion			2,061			2,180
Other liabilities			545			1,999
Total liabilities			106,554			56,927
Minority Interest			1,336			-
Shareholders' equity:
Serial preferred stock; 221,756 shares authorized; none outstanding			-			-
Common stock, no par; 20,000,000 shares authorized; 14,123,583
and 13,970,033 shares issued and outstanding, respectively			-			-
Additional paid-in capital			69,559			66,371
Retained earnings			37,045			31,263
Accumulated other comprehensive loss			(98	)		(2,137	)
Total shareholders' equity			106,506			95,497
Total liabilities, minority interest and shareholders' equity		$	214,396		$	152,424

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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MEASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(UNAUDITED)

 

								Accumulated
		Additional						Other
		paid-in			Retained			Comprehensive						Comprehensive
(Dollars in thousands)		capital			Earnings			Income (Loss)			Total			Income
Balance, March 31, 2005		$	61,787			6,729			(500	)	$	68,016
Comprehensive income:
Net income						7,280						7,280		$	7,280
Currency translation adjustment									(1,563	)		(1,563	)		(1,563	)
Comprehensive income														$	5,717
Issuance of common stock for acquisition of												-
Proceeds from exercise of stock options			1,031									1,031
Tax benefit from exercise of stock options			457									457
Balance, September 30, 2005		$	63,275		$	14,009		$	(2,063	)	$	75,221
Balance, March 31, 2006		$	66,371		$	31,263		$	(2,137	)	$	95,497
Comprehensive income:
Net income						5,782						5,782		$	5,782
Currency translation adjustment									2,039			2,039			2,039
Comprehensive income														$	7,821
Non-cash equity based compensation (SFAS 123R)			1,203									1,203
Issuance of common stock for acquisition of BetaTherm			1,000									1,000
Proceeds from exercise of stock options			985									985
Balance, September 30, 2006		$	69,559		$	37,045		$	(98	)	$	106,506

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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M EASUREMENT SPECIALTIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the six months ended
		September 30,
(Dollars in thousands)		2006			2005
Cash flows from operating activities:
Net income		$	5,782		$	7,280
Income (loss) from discontinued operations - Consumer			(26	)		3,547
Income from continuing operations			5,808			3,733
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization			4,692			2,474
Gain (loss) on sale of assets			(4	)		-
Provision for doubtful accounts			74			8
Provision for inventory obsolescence			980			1,385
Provision for warranty			220			11
Minority interest			230			-
Non-cash equity based compensation (SFAS 123R)			1,203			-
Deferred income taxes			(10	)		-
Net change in operating assets and liabilities:
Accounts receivable, trade			(4,074	)		(1,889	)
Inventories			(5,283	)		(4,088	)
Prepaid expenses and other current assets			73			(709	)
Other assets			90			(480	)
Accounts payable, trade			3,082			5,673
Accrued expenses and other liabilities			(734	)		(473	)
Income taxes payable			(439	)		2,248
Net cash provided by operating activities from continuing operations			5,908			7,893
Cash flows used in investing activities:
Purchases of property and equipment			(3,415	)		(3,089	)
Proceeds from sale of equipment			77			-
Acquisition of business, net of cash acquired			(46,325	)		(2,735	)
Net cash used in investing activities from continuing operations			(49,663	)		(5,824	)
Cash flows from financing activities:
Borrowing under long-term debt note			21,885			-
Repayments under long-term notes			(18,764	)		(1,788	)
Borrowings under short-term debt, revolver and notes payable			47,646			7,000
Payments under short-term debt, revolver, leases and notes payable			(5,762	)		(6,406	)
Payments under deferred acquisition payments			(2,074	)		(1,400	)
Minority interest			(112	)		-
Tax benefit on exercise of stock options and warrants			-			457
Proceeds from exercise of options and warrants			985			1,031
Net cash provided by (used in) in financing activities from continuing operations			43,804			(1,106	)
Net cash provided by operating activities of discontinued operations			252			896
Net cash provided (used) by investing activities of discontinued operations			945			(300	)
Net cash provided by discontinued operations			1,197			596
Net change in cash and cash equivalents			1,246			1,559
Effect of exchange rate changes on cash			61			12
Cash, beginning of period			9,166			4,402
Cash, end of period		$	10,473		$	5,973

 

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Supplemental Cash Flow Information:
Cash paid during the period for:
Interest		$	3,399		$	932
Income taxes			693			91
Noncash investing and financing transactions:
Deferred acquisition payments			1,787			-
Issuance of stock in connection with acquisition of BetaTherm			1,000			-
Capital lease			-			241

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2006 and 2005

(Dollars in thousands, except share amounts)

1. BASIS OF PRESENTATION

Measurement Specialties, Inc. (the “Company”) sold its business line of consumer products (“Consumer”) during the quarter ended December 31, 2005. As a result, assets, liabilities, and results of operations of the Consumer business have been presented as discontinued operations as of September 30, 2006 and March 31, 2006 and for the three and six month periods ended September 30, 2006 and 2005. In addition, prior year amounts have been reclassified to conform with current year presentation. Except as otherwise noted, the descriptions of our business and results of operations contained in this report reflect only our continuing operations.

Interim Financial Statements:

The information presented as of September 30, 2006 and for the three and six month periods ended September 30, 2006 and 2005 are unaudited, and reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for the fair presentation of the Company’s financial position as of September 30, 2006 and the results of its operations for the three and six month periods and cash flows for the six-month periods ended September 30, 2006 and 2005. The March 31, 2006 balance sheet information was derived from the audited consolidated financial statements for the year ended March 31, 2006, which are included as part of the Company’s Annual Report on Form 10-K.

The condensed consolidated financial statements included herein have been prepared in accordance with U.S. generally accepted accounting principles and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended March 31, 2006, which are included as part of the Company’s Annual Report on Form 10-K.

Description of Business:

Measurement Specialties, Inc. is a global leader in designing and manufacturing sensors for original equipment manufacturers and end users. The Company produces a wide variety of sensors that use advanced technologies to measure precise ranges of physical characteristics including pressure, position, force, vibration, humidity, temperature, and photo-optics. These sensors are used for industrial, automotive, medical, consumer and military/aerospace applications. The Company’s sensor products include pressure and electromagnetic displacement sensors, transducers, piezoelectric polymer film sensors, custom microstructures, load cells, accelerometers, optical sensors, humidity and temperature sensors. Such business line of sensor products shall hereafter be referred to as the Sensor business or Sensor operations.

The majority of our sensors are devices, sense elements and transducers that convert mechanical information into a proportionate electronic signal for display, processing, interpretation or control. Sensors are essential to the accurate measurement, resolution and display of pressure, force, linear or rotary position, tilt, vibration, motion or humidity. Our other sensor products are transducers that convert an applied electrical signal into a mechanical motion corresponding to the amplitude and frequency of the electrical input.

The Company's advanced technologies include piezo-resistive silicon sensors, application-specific integrated circuits, micro-electromechanical systems (“MEMS”), piezoelectric polymers, foil strain gauges, force balance systems, fluid capacitive devices, linear and rotational variable differential transformers, electromagnetic displacement sensors, hygroscopic capacitive sensors and ultrasonic sensors. These technologies allow our sensors to operate precisely and cost effectively.

The Company is a global operation with engineering and manufacturing facilities located in North America, Europe and Asia. By functioning globally, the Company has been able to enhance its applications engineering capabilities, increase the Company’s geographic proximity to its customers and leverage its cost structure.

 

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

 

The consolidated condensed financial statements include the accounts of the continuing Sensor operations of Measurement Specialties, Inc., its wholly owned subsidiaries (the “Subsidiaries”), and its joint venture in Japan. The Company sold the Consumer business and, accordingly, the financial statements for the Consumer operations are reported separately as discontinued operations for all periods presented.

The Company has made the following acquisitions which are included in the consolidated financial statements as of the effective date of such acquisition (See Note 6):

 

Acquired Company		Effective Date of Acquisition	Country
Elekon Industries USA, Inc. (‘Elekon’)		June 24, 2004	USA
Entran Devices, Inc. and Entran SA (‘Entran’)		July 16, 2004	USA and France
Encoder Devices, LLC (‘Encoder’)		July 16, 2004	USA
Humirel, SA (‘Humirel’)		December 1, 2004	France
MWS Sensorik GmbH (‘MWS’)		January 1, 2005	Germany
Polaron Components Ltd (‘Polaron’)		February 1, 2005	United Kingdom
HL Planartechnik GmbH (‘HLP’)		November 30, 2005	Germany
Assistance Technique Experimentale (‘ATEX’)		January 19, 2006	France
YSIS Incorporated (‘YSI Temperature’)		April 1, 2006	USA
BetaTherm Group Ltd. (‘BetaTherm’)		April 1, 2006	Ireland and USA

The above companies, except for Encoder and Polaron which were asset purchases, became wholly-owned direct or indirect subsidiaries of the Company, upon consummation of their respective acquisitions.

As of September 1, 2006, pursuant to a restructuring of certain of the Company’s European operations, the Company established two new entities: MEAS Europe and its wholly-owned subsidiary MEAS France. MEAS France is the primary French holding company and is the result of the consolidating and merging of the operations of Entran, Humirel, and ATEX. The reorganization was effected to facilitate improved statutory reporting and there was no effect on the consolidated financial statements as a result of this reorganization.

All significant inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates:

 

The preparation of the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property, plant and equipment, acquired intangibles and goodwill, valuation allowances for receivables, inventories and deferred income tax assets and liabilities, warranties, and valuation of derivative financial instruments. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements:

On September 29, 2006, the Financial Accounting Standards Board (‘FASB’) issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans -- An Amendment of FASB Statements No. 87, 88, 106, and 132R. This new standard requires an employer to: (a) recognize in its statement of financial position an asset for a plan's over-funded status or a liability for a plan's under-funded status; (b) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization. Statement 158 applies to plan sponsors that are public and private companies and nongovernmental not-for-profit organizations. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006, for entities with publicly traded equity securities, and at the end of the fiscal year ending after June 15, 2007, for all other entities. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company is currently quantifying the impact of SFAS No. 158.

In September 2006, the FASB issued No. 157, Fair Value Measurements. This new standard provides guidance for using fair value to measure assets and liabilities. The FASB believes the standard also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. Statement 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.  

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Currently, over 40 accounting standards within GAAP require (or permit) entities to measure assets and liabilities at fair value. Prior to Statement 157, the methods for measuring fair value were diverse and inconsistent, especially for items that are not actively traded. The standard clarifies that for items that are not actively traded, such as certain kinds of derivatives, fair value should reflect the price in a transaction with a market participant, including an adjustment for risk, not just the company's mark-to-market value. Statement 157 also requires expanded disclosure of the effect on earnings for items measured using unobservable data.

Under Statement 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, Statement 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity's own data. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy.

The provisions of Statement 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently quantifying the impact of SFAS No. 157.

On July 13, 2006, Financial Accounting Standards Board Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, was issued. FIN 48 clarifies the accounting for uncertainty in income tax recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes (“SFAS No. 109”) . FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.

The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is a recognition process whereby the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Earlier application is permitted as long as the enterprise has not yet issued financial statements, including interim financial statements, in the period of adoption. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of FIN 48. The cumulative effect of applying the provisions of FIN 48 should be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year. The Company is currently quantifying the impact of FIN 48.

On September 13, 2006, the Securities Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) Topic No. 108, “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 addresses how a registrant should evaluate whether an error in its financial statements is material. The SEC staff concludes in SAB 108 that materiality should be evaluated using both the “rollover” and “iron curtain” methods. Registrants are required to comply with the guidance in SAB 108 in financial statements for fiscal years ending after November 15, 2006. Registrants that have evaluated financial statement errors contrary to the views of the SEC staff and have not adopted the provisions of SAB 108 should consider disclosure of same following the guidance in SAB Topic 11M, “Miscellaneous Disclosure — Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period” (SAB 74). The Company is currently quantifying the impact of SAB 108.

 

Recently Adopted Accounting Pronouncements:

In December 2004, the Financial Accounting Standards Board (‘FASB’) issued SFAS No. 123R (Revised 2004), Share-Based Payment. SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements, rather than disclosed in the footnotes to the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The scope of SFAS No. 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Under the effective date provisions included in SFAS No. 123R, registrants were required to implement the Statement’s requirements as of the beginning of the first interim or annual period beginning after June 15, 2005, or June 30, 2006 for the Company. The Company adopted SFAS No. 123R as disclosed in Note 3.

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On November 24, 2004, the FASB issued Statement No. 151, Inventory Cost - An Amendment of ARB No. 43, Chapter 4. This new standard is the result of a broader effort by the FASB to improve financial reporting by eliminating differences between GAAP in the United States and GAAP developed by the International Accounting Standards Board (IASB). As part of this effort, the FASB and the IASB identified opportunities to improve financial reporting by eliminating certain narrow differences between their existing accounting standards. FASB Statement No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, FASB Statement No. 151 requires that allocation of fixed production overheads to conversion costs should be based on normal capacity of the production facilities. The provisions in FASB Statement No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Companies must apply the standard prospectively. The adoption of FASB Statement No. 151 did not have a material effect on the Company’s financial position or results of operations.

 

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections . This new standard replaces APB Opinion No. 20, Accounting Changes , and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and represents another step in the FASB’s goal to converge its standards with those issued by the IASB. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. The adoption of SFAS No. 154 did not have a material effect on the Company’s financial position or results of operations.

3. STOCK BASED COMPENSATION AND PER SHARE INFORMATION

The Company has three active share-based compensation plans. These plans are administered by the compensation committee of the Board of Directors, which approves grants to individuals eligible to receive awards and determines the number of shares and/or options subject to each award, the terms, conditions, performance measures, and other provisions of the award. Terms for stock-option awards include pricing based on the closing price on the award date, and generally vest over four or five years and such awards are granted based on the individual’s performance. Readers should refer to Notes 1 and 15 of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006 and the Registration Statement filed on Form S-8 on September 28, 2006, which registered 1,000,000 shares of common stock for the Measurement Specialties, Inc. 2006 Stock Option Plan, for additional information related to these share-based compensation plans.

 

Effective April 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” utilizing the modified prospective approach. Prior to the adoption of SFAS 123R, the Company accounted for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (the intrinsic value method), and accordingly, recognized no compensation expense for stock option grants to employees.

Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on April 1, 2006, as well as those that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in the six months ended September 30, 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard. As a result of adopting SFAS 123R on April 1, 2006, our income before income taxes for the six months ended September 30, 2006 was lower by $1,203. For the six months ended September 30, 2006, stock compensation expense (after income taxes) decreased net income by $0.07 on a per diluted share basis as compared to if the Company had continued to account for share-based compensation under APB Opinion No. 25 for its stock option grants.

The Company receives a tax deduction for certain stock options and stock option exercises during the period the options are exercised, generally for the excess of the fair value of the stock over the exercise price of the options at the exercise date. Prior to adoption of SFAS 123R, the Company reported all tax benefits resulting from the award of equity instruments as operating cash flows in its condensed consolidated statements of cash flows. In accordance with SFAS 123R, the Company is required to report excess tax benefits from the award of equity instruments as financing cash flows; however, as the Company is currently in a net operating loss carry-forward position, there is no cash flow effect for the excess tax benefits. Excess tax benefits will be recorded when a deduction reported for tax return purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized for financial reporting purposes once the Company is no longer in a net operating loss carry-forward position.

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Net cash proceeds from the exercise of stock options were $985 and $1,031 for the six months ended September 30, 2006 and 2005, respectively, and the income tax benefit realized for the six months ended September 30, 2006 and 2005 from stock option exercises was $0 and $457, respectively.

		Three months ended September 30, 2005			Six months ended September 30, 2005
Net income, as reported:		$	4,345		$	7,280
Add: Share-based employee compensation reported in net income, net of income taxes			-			-
Deduct: Share-based employee compensation under the fair value method for all awards, net of income taxes			320			1,006
Pro forma		$	4,025		$	6,274
Basic net income per share, as reported:		$	0.32		$	0.53
Add: Share-based employee compensation reported in net income, net of income taxes			-			-
Deduct: Share-based employee compensation under the fair value method for all awards, net of income taxes			(0.02	)		(0.07	)
Pro forma		$	0.30		$	0.46
Diluted net income per share, as reported:		$	0.30		$	0.51
Add: Share-based employee compensation reported in net income, net of income taxes			-			-
Deduct: Share-based employee compensation under the fair value method for all awards, net of income taxes			(0.02	)		(0.07	)
Pro forma		$	0.28		$	0.44

 

		Number of shares			Weighted-Average  Grant-Date Fair Value
Non-vested stock options at beginning of period			946,934		$	5.63
Granted			404,000
Exercised			(34,420	)
Vested			(116,720	)
Forfeited and expired			(51,970	)
Non-vested stock options at end of period			1,147,824		$	4.65

Per Share Information:

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. There were approximately 823,653 and 318,703 anti-dilutive weighted shares excluded from the calculation in the periods ended September 30, 2006 and 2005, respectively.

 

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The computation of the basic and diluted net income per share is as follows:

 

		Net income (Numerator)			Weighted Average Shares (Denominator)			Per-Share Amount
Quarter ended September 30, 2006:
Basic per share information		$	3,330			14,096,270		$	0.24
Effect of dilutive securities			-			248,978			(0.01	)
Diluted per-share information		$	3,330			14,345,248		$	0.23
Quarter ended September 30, 2005:
Basic per share information		$	4,345			13,642,981		$	0.32
Effect of dilutive securities			-			650,374			(0.02	)
Diluted per-share information		$	4,345			14,293,355		$	0.30
Six months ended September 30, 2006:
Basic per share information		$	5,782			14,074,592		$	0.41
Effect of dilutive securities			-			328,516			(0.01	)
Diluted per-share information		$	5,782			14,403,108		$	0.40
Six months ended September 30, 2005:
Basic per share information		$	7,280			13,621,764		$	0.53
Effect of dilutive securities			-			671,959			(0.02	)
Diluted per-share information		$	7,280			14,293,723		$	0.51

4. INVENTORIES

Inventories, net of inventory reserves, and inventory reserves for slow moving, obsolete and lower of cost or market exposures at September 30, 2006 and March 31, 2006 are summarized as follows:

 

		September 30,			March 31,
		2006			2006
Raw Materials		$	18,730		$	13,586
Work-in-Process			6,040			4,392
Finished Goods			9,627			7,121
		$	34,397		$	25,099
Inventory Reserves:		$	3,086		$	3,296

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Property, plant and equipment are summarized as follows:

		September 30,			March 31,
		2006			2006			Useful Life
Production equipment & tooling		$	29,446		$	27,156			3-10 years
Building and leasehold improvements			6,952			3,914			39 years or lesser of useful life or remaining term of lease
Furniture and equipment			8,164			7,135			3-10 years
Construction-in-progress			1,709			1,999
Total			46,271			40,204
Less: accumulated depreciation and amortization			(21,235	)		(18,118	)
		$	25,036		$	22,086

 

Total depreciation from continuing operations was $1,239 and $846 for the three months ended September 30, 2006 and 2005, respectively. Total depreciation from continuing operations was $2,542 and $1,659 for the six months ended September 30, 2006 and 2005, respectively. Depreciation expense for discontinued operations for the six months ended September 30, 2006 and 2005 was $0 and $392, respectively. Property and equipment included $2,304 and $2,786 in capital leases at September 30, 2006 and March 31, 2006, respectively.

6. ACQUISITIONS, GOODWILL AND ACQUIRED INTANGIBLES

Recent Acquisitions:

As part of its growth strategy in the Sensors segment, the Company made six acquisitions during the year ended March 31, 2005, two acquisitions during the year ended March 31, 3006, and two acquisitions effective as of April 1, 2006.

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Acquisitions are recorded as of the purchase date, and are included in the consolidated financial statements from the date of acquisition. Adjustments to goodwill relate to new acquisitions, final purchase price allocations and translation adjustments due to changes in foreign currency exchange rates. Goodwill balances presented in the consolidated balance sheets of foreign acquisitions are translated at the exchange rate in effect at each balance sheet date; however, opening balance sheets used to calculate goodwill and acquired intangible assets are based on purchase date exchange rates. The following acquisition summaries represent acquisitions from the beginning of fiscal 2006 forward. Therefore, goodwill for each acquisition presented below does not aggregate to reported amounts. Goodwill recorded as a result of acquisitions was $1,838 and $34,065 for the year ended March 31, 2006 and for the six months ended September 30, 2006, respectively, translated at the exchange rate on each of those dates.

 

Assets:
Accounts receivable		$	3,523
Inventory			1,662
Property and equipment			1,154
Acquired intangible assets			2,013
Goodwill			8,248
Other			1,048
			17,648
Liabilities:
Accounts payable			(835	)
Accrued compensation			(769	)
Minority interest			(1,099	)
Deferred income taxes			(693	)
			(3,396	)
Total Purchase Price		$	14,252
Cash paid		$	14,000
Deferred payment			-
Costs			252
Total Purchase Price		$	14,252

 

With the purchase of YSI Temperature, the Company acquired a 50 percent ownership interest in Nikisso-YSI, a joint venture in Japan. This joint venture is consolidated in the consolidated financial statements of the Company at September 30, 2006 and as part of the purchase accounting as a variable interest entity (“VIE”) as defined by FIN 46(R), “Consolidation of Variable Interest Entities” (revised December 2003), because YSI Temperature is determined to be the primary beneficiary of the VIE. Assets and liabilities of the consolidated VIE at September 30, 2006 totaled $3,495 and $1,078, respectively. Net sales of the consolidated VIE for the three and six months ended September 30, 2006 totaled $1,632 and $2,561, respectively. At September 30, 2006, the joint venture had amounts due from its joint venture partner of $723 which represents funds held by Nikisso, the joint venture partner, in a short-term interest bearing arrangement.

BetaTherm

Effective April 1, 2006, the Company completed the acquisition of all of the capital stock of BetaTHERM Group Ltd., a sensor company headquartered in Galway, Ireland (“BetaTHERM”), for $37,248 ($33,741 in cash at closing, $1,787 deferred acquisition payments, $1,000 in Company shares and $720 in acquisition costs). Established in 1983, BetaTHERM manufactures precision thermistors used for temperature sensing in aerospace, biomedical, automotive, industrial and consumer goods applications. BetaTHERM conducts business through operations located in Massachusetts and in northern China. The transaction was financed with borrowings under the Company’s Amended Credit Facility provided by a syndicate of lending institutions (See Note 7). The Company’s preliminary purchase price allocation related to the BetaTHERM acquisition follows:

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Assets:
Cash		$	2,388
Accounts receivable			3,180
Inventory			2,521
Property and equipment			3,552
Acquired intangible assets			8,947
Goodwill			25,209
Other			226
			46,023
Liabilities:
Accounts payable			(2,729	)
Debt			(3,737	)
Deferred income taxes			(2,309	)
			(8,775	)
Total Purchase Price		$	37,248
Cash paid		$	33,741
Deferred payment			1,787
MEAS shares			1,000
Costs			720
Total Purchase Price		$	37,248

Acquired Intangibles

In connection with current and previous acquisitions, the Company acquired certain identifiable intangible assets, including customer relationships, proprietary technology, patents, trade-names, order backlogs and covenants not to compete. The gross amounts and accumulated amortization, along with the range of amortizable lives, is as follows:

					September 30, 2006									March 31, 2006
		Life in years			Gross Amount			Accumulated Amortization			Net			Gross Amount			Accumulated Amortization			Net
Amortizable intangible assets:
Customer relationships			5-15		$	15,872		$	(2,097	)	$	13,775		$	8,193		$	(922	)	$	7,271
Patents			5-19.5			2,433			(344	)		2,089			2,642			(422	)		2,220
Tradenames			1.5-3			923			(315	)		608			570			(135	)		435
Backlog			1			1,624			(1,061	)		563			654			(542	)		112
Covenants not-to-compete			3			903			(673	)		230			903			(523	)		380
Proprietary technology			5-15			2,231			(267	)		1,964			989			(157	)		832
					$	23,986		$	(4,757	)	$	19,229		$	13,951		$	(2,701	)	$	11,250

 

Annual amortization expense is expected to be as follows:

 

		Amortization
Year		Expense
1		$	3,739
2			2,831
3			2,678
4			2,856
5			2,408
Thereafter			4,717
		$	19,229

 

Deferred Acquisition Payments

In connection with the acquisitions, following is a summary of the deferred acquisition payments outstanding at September 30, 2006:

		Current			Long-term			Total
Entran		$	179		$	-		$	179
Humirel			1,870			-			1,870
BetaTHERM			-			1,914			1,914
		$	2,049		$	1,914		$	3,963

 

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Pro forma Financial Data

The following represents the Company’s pro forma consolidated results of continuing operations for the quarter ended September 30, 2005, assuming all the above acquisitions occurred as of April 1, 2005, giving effect to purchase accounting adjustments. The pro forma data is for informational purposes only and may not necessarily reflect results of operations had all the acquired companies been operated as part of the Company since April 1, 2005.

		Three months ended September 30, 2005			Six months ended September 30, 2005
Net sales		$	41,384		$	79,053
Loss from continuing operations			($140	)		($206	)
Loss from continuing operations per common share:
Basic			($0.01	)		($0.01	)
Diluted			($0.01	)		($0.01	)

 

7. LONG-TERM DEBT

To support the financing of the acquisitions of YSI Temperature and BetaTHERM (See Note 6), on April 3, 2006, the Company entered into an Amended and Restated Credit Agreement (“Amended Credit Facility”) which, among other things, increased the Company’s existing credit facility to $75,000 and lowered the applicable LIBOR or Index Margin from 4.50% and 2.75%, respectively, to LIBOR and Index Margins of 2.75% and 1%, respectively. The term portion of the Amended Credit Facility totaled $20,000, and the revolver totaled $55,000 at applicable LIBOR and Index Rates (as defined in the Amended Credit Facility). Beginning on September 30, 2006, the applicable margins may be adjusted quarterly on a prospective basis if the total Senior Debt to the trailing twelve month EBITDA (Earnings before Interest Taxes, Depreciation and Amortization) is less than 2.00 to 1, to an Index Margin of .5% and a LIBOR Margin of 2.25%. The term loan is payable in $500 quarterly installments plus interest beginning June 1, 2006 through March 1, 2011, with a final payment of $10,500 payable on April 3, 2011. Borrowings under the line are subject to certain financial covenants and restrictions on indebtedness, dividend payments, financial guarantees, annual capital expenditures, and other related items. The availability of the revolving credit facility is not based on any borrowing base requirements, but borrowings may be limited by certain financial covenant limitations. The Company has provided a security interest in substantially all of the Company’s U.S. based assets as collateral for the Amended Credit Facility.

As of September 30, 2006, the Company utilized the LIBOR based rate for approximately $66,910, and the balance utilized the Index based rate. Interest rate applicable to borrowings under the revolving credit facility was 8.14% at September 30, 2006. As of September 30, 2006, the outstanding borrowings on the revolver, which is classified as long-term debt, were $49,410, and the Company had the right to borrow an additional $5,590 under the revolving credit facility. Commitment fees on the unused balance were equal to .375% per annum of the average amount of unused balances.

Promissory Notes

In connection with the acquisition of Elekon, the Company issued unsecured promissory notes (the “Notes”) totaling $3,000, of which $600 and $1,100 were outstanding at September 30, 2006 and March 31, 2006, respectively. At September 30, 2006 and 2005, $600 and $1,000, respectively, were current liabilities. The Notes amortize over a period of three years, are payable quarterly and bear interest at 6%.

 

Short-Term Debt

In connection with the acquisition of Entran, Humirel, HLP, and ATEX, the Company assumed outstanding short-term borrowings. At September 30, 2006 and March 31, 2006, $139 and $277, respectively, of this assumed short-term borrowing remains outstanding and is included in short-term debt in the accompanying condensed consolidated balance sheets. Below is a summary of short-term debt outstanding:

 

		September 30,			March 31,
		2006			2006
Short-term debt:
Revolver		$	-		$	3,500
European short-term borrowings			139			277
		$	139		$	3,777

 

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Long-Term Debt and Promissory Notes

Below is a summary of the long-term debt and promissory notes outstanding at September 30, 2006 and March 31, 2006:

 

		September 30, 2006			March 31, 2006
Prime or LIBOR plus 2.75% or 1% five-year term loan with a final installment due on March 31, 2011		$	19,000		$	17,500
Governmental loans from French agencies at no interest and payable based on R&D expenditures.			727			535
Term credit facility with six banks at an interest rate of 4% payable through 2010.			655			750
Bonds issued at an interest rate of 3% payable through 2009.			444			423
Term credit facility with two banks at interest rates of 3.9%-4.0% payable through 2009.			123			139
		$	20,949		$	19,347
Less current portion of long-term debt			2,172			2,553
		$	18,777		$	16,794
6% promissory notes payable in six quarterly installments through July 1, 2007		$	600		$	1,100
Less current portion of promissory notes payable			600			1,000
		$	-		$	100

The principal payments of long term debt, revolver and promissory notes are as follows:

Year		Term			Other			Subtotal			Notes Payable			Revolver			Total
1		$	1,500		$	672		$	2,172		$	600		$	-		$	2,772
2			2,000			343			2,343			-			-			2,343
3			2,000			705			2,705			-			-			2,705
4			2,000			115			2,115			-			-			2,115
5			11,500			75			11,575			-			49,410			60,985
Thereafter			-			39			39			-			-			39
Total		$	19,000		$	1,949		$	20,949		$	600		$	49,410		$	70,959

 

8. SEGMENT AND GEOGRAPHIC INFORMATION:

As a result of the divesture of the Consumer segment (Note 1), the Company now has one business segment, the Sensor segment.

The following is geographic information related to net sales and long-lived assets of continuing operations. Net sales are specific to the country from which the product is invoiced. Long-lived assets include net property, plant and equipment, but exclude net intangible assets and goodwill, based on the respective locations of the Company’s operations.

 

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		Six months ended September 30,
		2006			2005
Net Sales:
United States		$	52,621		$	33,883
Europe and other			22,663			8,197
Asia			20,818			12,768
Total:		$	96,102		$	54,848

 

		September 30,			March 31,
		2006			2006
Long lived assets:
United States		$	5,831		$	4,230
Europe and other			9,677			8,428
Asia			9,528			9,428
Total:		$	25,036		$	22,086

 

9. COMMITMENTS AND CONTINGENCIES:

 

Pending Matters 

 

Robert L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No. 02-CV-3431 . On July 17, 2002, Robert DeWelt, the former acting Chief Financial Officer and former acting general manager of our former Schaevitz Division, filed a lawsuit against the Company and certain of the Company’s officers and directors in the United States District Court of the District of New Jersey. Mr. DeWelt resigned on March 26, 2002 in disagreement with the Company’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. The Company filed a motion to dismiss this case, which was denied on June 30, 2003. The Company has answered the complaint and is engaged in the discovery process. This litigation is ongoing and the Company cannot predict its outcome at this time.

 

SEB Patent Issue . On December 12, 2003, Babyliss, SA, a wholly owned subsidiary of Conair Corporation, received notice from the SEB Group (“SEB”) alleging that certain bathroom scales manufactured by the Company and sold by Babyliss in France violated certain patents owned by SEB. On May 19, 2004, SEB issued a Writ of Summons to Babyliss and the Company, alleging patent infringement and requesting the Tribunal de Grande Instance de Paris to grant them unspecified monetary damages and injunctive relief. Pursuant to the indemnification provisions of the Conair transaction, the Company has assumed defense of this matter. On January 4, 2006, the Tribunal ruled in the Company’s favor, invalidating the claims of the SEB patent that SEB had asserted. Although the time for appeal has not yet expired, the Company is unaware of any appeal of this decision by SEB.

 

The Honorable Dan Samuel v. Measurement Specialties, Inc., Case No. 3:06 cv 1005. On June 29, 2006, The Company was sued by a former director.  The matter is pending in the United States District Court for the District of Connecticut. In this matter, the plaintiff, The Honorable Dan Samuel, a former director of the Company, allowed his stock options to terminate before he attempted to exercise them. Mr. Samuel claims that the Company misled him with respect to when his options terminated/expired and asserts claims against the Company for negligent misrepresentation, fraud, breach of contract, and conversion and seeks damages in an amount not less than $450,000 plus interest and costs.

 

On August 30, 2006, the Company filed a motion to dismiss. At a conference before the Court, the Court suggested that Mr. Samuel file an amended complaint and that the Company, instead of moving to dismiss, answer the amended complaint, take some discovery and then renew its motion to dismiss as a summary judgment motion after discovery. Consistent with the Court's direction, on October 12, 2006, Mr. Samuel filed an amended complaint which contains counts asserting the following claims against the Company: Negligent Misrepresentation, Fraud, Breach of Contract, Conversion and Promissory Estoppel. The Company will answer the amended complaint and intends to vigorously defend itself against the claims made against Company. At this time, the Company is unable to express an opinion that an unfavorable result is either probable or remote.

 

In addition, the Company tendered this litigation to Chubb, the Company’s insurer under its Executive Protection Policy.  Chubb has agreed to defend the claims and has hired appointed panel counsel, Epstein Becker & Green, to defend the Company.  As a result, Epstein Becker will be assuming defense of this matter on the Company’s behalf; however, Chubb has reserved its rights regarding coverage if the Company is ultimately held liable to Mr. Samuel. 

 

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 we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition, or operating results.

 

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Warranty Reserve:

The Company’s sensor products generally have a warranty period of one year. Factors affecting the Company’s warranty liability include the number of products sold and historical and anticipated rates of claims and cost per claim. The Company provides for estimated product warranty obligations based on its 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 and changes in end user application and/or behavior.

Acquisition Earn-Outs:

As disclosed in Note 6, in connection with the HLP acquisition, the Company has potential performance based earn-out obligations totaling $3,517 if the maximum performance targets are achieved. At September 30, 2006, management has concluded that the performance targets will not be achieved by December 31, 2006, and accordingly, no amounts have been accrued as of September 30, 2006. With the acquisition of ATEX, the Company has three potential based earn-out obligations totaling approximately $1,888 if maximum sales performance targets are achieved. The first two earn-out payments are accrued at September 30, 2006, because satisfaction of the sales growth objective was considered probable.

10. DERIVATIVE INSTRUMENTS:

The Company has a number of forward purchase currency contracts with exercise dates through August 31, 2007 with a total notional amount of $5,650 at an average exchange rate of $1.26 (in U.S. dollars) to hedge Humirel’s exposure to fluctuation in the U.S. dollar relative to the Euro. Since these derivatives are not designated as cash-flow hedges under FASB 133, changes in their fair value are recorded in earnings, not in other comprehensive income. As of September 30, 2006 and March 31, 2006, the fair value of the currency contracts was a liability of $9 and $59, respectively.

 

11. DISCONTINUED OPERATIONS:

The Company's former Consumer business is classified as discontinued operations. During the six months ended September 30, 2005 the Consumer segment had net sales of $30,064, operating income of $4,773 and income from discontinued operations of $3,547.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

RECENT CHANGES IN OUR BUSINESS

DISCONTINUED OPERATIONS

Effective December 1, 2005, we completed the sale of our Consumer segment, including our Cayman Island subsidiary, Measurement Limited (“ML”), to Fervent Group Limited (“FGL”). FGL is a company controlled by the owners of River Display Limited (“RDL”), our long time partner and primary supplier of consumer products in Shenzhen, China. Accordingly, the related financial statements for the Consumer segment are reported as discontinued operations.

Our condensed consolidated financial statements for the three month and six month periods ended September 30, 2006 and 2005, include the results of our ongoing operations. As indicated above, the Consumer segment has been classified as discontinued operations in the consolidated financial results for all periods presented. Accordingly, all comparisons in Management’s Discussion and Analysis for each of the periods ended September 30, 2006 and 2005, exclude the results of these discontinued operations except as otherwise noted.

FORWARD-LOOKING STATEMENTS

This discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Forward looking statements may be identified by such words or phrases as “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will,” “may” and similar expressions. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future are forward-looking statements. The forward-looking statements below are not guarantees of future performance and involve a number of risks and uncertainties. Factors that might cause actual results to differ materially from the expected results described in or underlying our forward-looking statements include:

ཉ	Conditions in the general economy and in the markets served by us;

 

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ཉ	Competitive factors, such as price pressures and the potential emergence of rival technologies;
ཉ	Interruptions of suppliers’ operations or the refusal of our suppliers to provide us with component materials;
ཉ	Timely development, market acceptance and warranty performance of new products;
ཉ	Changes in product mix, costs and yields and fluctuations in foreign currency exchange rates;
ཉ	Uncertainties related to doing business in Europe, Hong Kong and China;
ཉ	Legal proceedings described below under “Part II. Item 1 - Legal Proceedings”; and
ཉ	The risk factors listed from time to time in our SEC reports.