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 JUNE 30, 2003.
[] 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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(973) 808-3020
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(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 equity, as of the latest practicable date:
July 29, 2003 shares of common stock, no par value per share, at 12,354,801
1
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . 29
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . . . . . . 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . . . 33
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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 ended June 30,
--------------------------------------
2003 2002
------------------ ------------------
Net sales $ 26,041 $ 23,725
Cost of goods sold 13,452 15,808
------------------ ------------------
Gross profit 12,589 7,917
------------------ ------------------
Operating expenses (income):
Selling, general and administrative 7,566 8,051
Research and development 906 1,026
Customer funded development - (276)
Restructuring costs - 593
------------------ ------------------
Total operating expenses 8,472 9,394
------------------ ------------------
Operating income (loss) 4,117 (1,477)
Interest expense, net 165 721
Other income (7) (49)
------------------ ------------------
Income (loss) from continuing operations before income taxes 3,959 (2,149)
Income tax 288 18
------------------ ------------------
Income (loss) from continuing operations 3,671 (2,167)
------------------ ------------------
Discontinued operations:
Income (loss) from discontinued units 112 (3,536)
------------------ ------------------
Net income (loss) $ 3,783 $ (5,703)
================== ==================
Income (loss) per common share - Basic
Income (loss) from continuing operations $ 0.31 $ (0.18)
Income (loss) from discontinued units $ 0.01 $ (0.30)
------------------ ------------------
Net income (loss) $ 0.32 $ (0.48)
================== ==================
Income (loss) per common share - Diluted
Income (loss) from continuing operations $ 0.29 $ (0.18)
Income (loss) from discontinued units $ 0.01 $ (0.30)
------------------ ------------------
Net income (loss) $ 0.30 $ (0.48)
================== ==================
Weighted average common shares outstanding
Basic 11,953,000 11,899,000
Diluted 12,488,000 11,899,000
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
June 30, March 31,
2003 2003
----------------------------------------------------------- --------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,872 $ 2,694
Accounts receivable, trade, net of allowance for doubtful
accounts of $529 and $1,038, respectively 12,733 10,549
Inventories 13,055 14,275
Prepaid expenses and other current assets 2,400 1,885
--------- ----------
Total current assets 31,060 29,403
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Property and equipment, net 11,386 11,818
--------- ----------
Other assets:
Goodwill 4,191 4,191
Other assets 684 756
--------- ----------
Total assets 4,875 4,947
--------- ----------
$ 47,321 $ 46,168
========= ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
June 30, March 31,
2003 2003
--------------------------------------------------------------------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 3,260
Accounts payable 9,847 9,846
Accrued compensation 1,827 1,207
Accrued expenses and other current liabilities 4,791 5,744
Accrued litigation expenses 750 3,550
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Total current liabilities 17,215 23,607
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Other liabilities:
Long-term debt 5,000 2,000
Other liabilities 1,618 1,615
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6,618 3,615
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Total liabilities 23,833 27,222
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Commitments and contingencies
Shareholders' equity
Serial preferred stock; 221,756 shares authorized; none outstanding - -
Common stock, no par; 20,000,000 shares authorized; 12,310,941 and
11,922,958 shares issued and outstanding, respectively 5,502 5,502
Additional paid-in capital 43,954 43,197
Accumulated deficit (25,900) (29,683)
Accumulated other comprehensive loss (68) (70)
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Total shareholders' equity 23,488 18,946
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$ 47,321 $ 46,168
========== ===========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 2003
(Dollars in thousands)
(unaudited)
Additional Other
Common Paid-in Accumulated Comprehensive Comprehensive
Stock capital Deficit Loss Total Income
------- ----------- ------------- --------------- -------- -------------
Balance, April 1, 2003 $ 5,502 $ 43,197 $ (29,683) $ (70) $18,946
Net income - - 3,783 - 3,783 $ 3,783
Currency translation adjustment - - - 2 2 $ 2
-------------
Comprehensive Income $ 3,785
=============
Warrants Issued for services - 73 - - 73
Proceeds from exercise of stock options - 22 - - 22
Proceeds from exercise of stock warrants - 662 - - 662
------- ----------- ------------- --------------- --------
Balance, June 30, 2003 $ 5,502 $ 43,954 $ (25,900) $ (68) $23,488
======= =========== ============= =============== ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
For the three months ended June 30,
------------------------------------
2003 2002
----------------- -----------------
Cash flows from operating activities:
Net Income (Loss) $ 3,783 $ (5,703)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
(Gain)/Loss from discontinued units (112) 3,536
Depreciation and amortization 730 1,026
Assets write off 114 -
Deferred rent (7) 14
Warrants issued for professional services 73 -
Net changes in operating assets and liabilities: - -
Accounts receivable, trade (2,184) (224)
Inventories 1,220 (2,002)
Prepaid expenses and other current assets (515) (85)
Other assets 79 22
Accounts payable 1 5,845
Accrued litigation costs (2,800) -
Accrued expenses and other liabilities (328) 1,401
----------------- -----------------
Net cash provided by operating activities 54 3,830
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (412) (336)
----------------- -----------------
Net cash (used in) investing activities (412) (336)
----------------- -----------------
Cash flows from financing activities:
Borrowings under bank line of credit agreement - 300
Borrowings under bridge loan 3,000 -
Borrowings under capital lease -
Repayments of capital lease obligations - (52)
Repayments of debt (3,260) (2,499)
Payment of deferred financing costs - -
Warrants issued for debt -
Proceeds from exercise of options and warrants 684 117
----------------- -----------------
Net cash provided by (used in) financing activities 424 (2,134)
----------------- -----------------
Net increase in cash and cash equivalents, continuing operations 66 1,360
Effect of exchange rates - (857)
Cash from discontinued operations 112 (2,516)
Cash and cash equivalents, beginning of period 2,694 3,760
----------------- -----------------
Cash and cash equivalents, end of period $ 2,872 $ 1,747
================= =================
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ 176 $ 711
Income taxes $ 229 -
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION:
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 months
ended June 30, 2003 are not necessarily indicative of the results expected for
the 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 year ended March 31, 2003.
The following information is unaudited. This report should be read in
conjunction with the 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, angle, flow and distance. The Company
has a Sensor segment and a Consumer Products segment. The Sensor segment
designs and manufactures sensors for leading original equipment manufacturers
(OEM) for electronic, automotive, medical, military and industrial applications.
Sensor products include pressure sensors, custom microstructures and
accelerometers. The Consumer Products segment designs and manufactures sensor
based consumer products, which are sold to leading 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 revolving credit facility may not be available or adequate to fund
operations and losses, if any, capital expenditures or the amounts, if any, to
be paid in settlement of, or for judgments related to, the Company's pending
legal proceedings. Under the terms of our 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 our revolving credit
facility.
8
The Company's cash and amounts available under the Company's revolving credit
facility may not be sufficient to satisfy the obligations discussed above. If
the Company is unable to satisfy these obligations, 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
satisfy 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, organized
in Hong Kong ("ML"); Jingliang Electronics (Shenzhen) Co. Ltd. ("JL"), organized
in the People's Republic of China ("China"); IC Sensors Inc., a California
corporation ("IC Sensors"); 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 to the current year presentation.
Stock Based Compensation:
The Company has two 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 fiscal 2004, and fiscal 2003 as a result of options issued with an
exercise price below the underlying stock's market price. The following table
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".
9
QUARTER ENDED JUNE,
2003 2002
-------- --------
Net income (loss), as reported $ 3,783 $(5,703)
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, modified, or
settled, net of related tax effects 37 35
-------- --------
Pro forma net income (loss) $ 3,746 $(5,738)
Net Income (loss) per share
Basic-as reported 0.32 (0.48)
Basic Proforma 0.31 (0.48)
Diluted- as reported 0.30 (0.48)
Diluted proforma 0.30 (0.48)
Recent Accounting Pronouncements:
On May 15, 2003, the Financial Accounting Standards Board issued Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" (SFAS 150), which requires that certain financial
instruments be presented as liabilities that were previously presented as equity
or as temporary equity. Such instruments include mandatory redeemable preferred
and common 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 is currently evaluating the impact that SFAS 150 will
have on its consolidated financial position and results of operations when
adopted.
In December 2002, the Financial Accounting Standards Board 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.
10
On July 29, 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." The standard requires companies to recognize costs associated with
exit or disposal activities when they are incurred, rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs
that are associated with a restructuring, discontinued operation, plant closing,
or other exit or disposal activity. 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 ("EITF") 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 incurred prior to December
31, 2002. (See Note 3).
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. At June 30, 2003 the Company had a provision of $837 to
cover the expected cost of lease terminations, which is included in accrued
expenses. The Company did not make any payments during the three months ended
June 30, 2003.
4. INVENTORIES:
Inventories, net, consists of the following:
JUNE 30, MARCH 31,
2003 2003
--------- ----------
RAW MATERIALS $ 6,697 $ 6,930
WORK-IN-PROCESS 2,112 2,630
FINISHED GOODS 4,246 4,715
--------- ----------
$ 13,055 $ 14,275
========= ==========
Inventory reserves were $4,339 at June 30, 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 June 30, 2003, the interest rate applicable
to borrowings under the revolving credit facility was 5.0 percent. 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
June 30, 2003, there were no outstanding borrowings and the Company had the
right to borrow an additional $6,680 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 quarter ended June 30, 2003 were approximately $13.
11
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 upon the filing of this Quarterly Report on Form 10-Q. In addition, the
Company is required to keep a minimum fixed charge ratio of 1.0 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 to with all covenants in the agreement.
For the quarter ended June 30, 2003, the weighted average short-term
interest rate on the revolving credit facility was 5.24%. The average amount
outstanding under this agreement for the period from April 1, 2003 through June
30, 2003 was $1,100. The Company maintains a letter of credit for $34 to
guarantee the lease of its facility in Fairfield, NJ.
Bridge Loan
On October 31, 2002, the Company received a $9,300 bridge loan from Castletop
Capital, L.P., 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 is evidenced by a Senior Secured Note
originally due January 31, 2003 and does 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 Capital 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 Capital exercised its
warrants 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, which was charged to interest expense over the life
of the debt, which was 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.
12
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 Capital, L.P. 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).
6. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
-------------------------------------------------------------
June 30,2003 March 31, 2003 Useful Life
-------------- ---------------- ---------------------------
Production machinery and equipment $ 13,759 $ 13,800 5-7 years
Tooling costs 3,612 3,579 5-7 years
Furniture and equipment 5,004 4,922 3-10 years
Leasehold improvements 1,721 1,721 Remaining term of the lease
Construction in progress 412 283
-------------- ----------------
Total 24,508 24,305
Less: accumulated depreciation and
amortization (13,122) (12,487)
-------------- ----------------
11,386 11,818
============== ================
Depreciation expense was $730 and $1,026 for the three months ended June 30,
2003 and three months ended June 30, 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 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 assets held for sale in the amount of $36,632
at March 31, 2002 and liabilities held for sale in the amount of $12,800 at
March 31, 2002 represent the assets and liabilities from these operations.
Since these businesses were disposed of by December 31, 2002, the assets and
liabilities have been removed from the balance sheet. The amounts for
Terraillon on the consolidated statements of operations for the three months
ended June 30, 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, as the
Company was no longer in a position to support its losses. 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
13
dilapidations claim of up to 350 Pounds Sterling (approximately $584 United
States dollars based on market exchange rates as of August 4, 2003) 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 Company is
currently in negotiations with the landlord regarding this matter. The results
of operations of Schaevitz UK are reflected in 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
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, if
utilized, will be accounted as a component of wafer costs. 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" for the
three months ended September 30, and 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.
THREE MONTHS ENDED JUNE 30, 2002
---------------------------------------
TERRAILLON SCHAEVITZ, UK TOTAL
------------ --------------- --------
Net sales $ 8,671 $ 905 $ 9,576
Cost of goods sold 5,319 617 5,936
------------ --------------- --------
Gross profit 3,352 288 3,640
Operating expenses :
Selling, general and administrative 3,358 3,726 7,084
Research and development 68 68
------------ --------------- --------
Total operating expenses 3,358 3,794 7,152
Operating loss (6) (3,506) (3,512)
Interest expense, net of interest income (12) 2 (10)
Other income(expense) (12) (7) (19)
------------ --------------- --------
(Loss) before income taxes (30) (3,511) (3,541)
Income taxes benefit (5) (5)
------------ --------------- --------
Net loss from discontinued operations $ (25) $ (3,511) $(3,536)
============ =============== ========
14
8. PER SHARE INFORMATION AND STOCK OPTIONS 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 92,000 shares for the three months ended
June 30, 2002. For the three months ended June 30, 2003, a total of 535,000
shares were added to the common shares outstanding to arrive at diluted earnings
per share. The breakdown of these additional equivalent shares are 389,000
equivalent shares for warrants, and 146,000 equivalent shares for stock options.
The computation of the basic and diluted net income per share are as follows:
FOR THE QUARTER ENDED
JUNE 30, 2003
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Income Shares Per Share
-------- ---------- ----------
Income from continuing operations $ 3,671 11,953,000 $ 0.31
Income from discontinued operations 112 11,953,000 0.01
Basic EPS
-------- ---------- ----------
Income available to common shareholder $ 3,783 11,953,000 $ 0.32
Effect of dilutive securities
warrants 389,000
stock options 146,000
-------- ---------- ----------
Diluted EPS
Income available to common stockholders
-------- ---------- ----------
and assumed conversions $ 3,783 12,488,000 $ 0.30
======== ========== ==========
9. SEGMENT INFORMATION:
The Company has two business segments, a Sensor segment and a Consumer Products
segment.
The Company's Sensor business designs, manufactures, and markets sensors for
original equipment manufacturer applications. These products include pressure
sensors, custom microstructures, accelerometers, tilt/angle sensors, and
displacement sensors for electronic, automotive, military, and industrial
applications.
The Company's Consumer Products business manufactures and markets sensor-based
consumer products. These products include bathroom and kitchen scales; tire
pressure gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive, and ultrasonic
technologies.
Segment data have been presented on a basis consistent with how business
activities are reported internally to management.
15
The accounting policies of the segments are substantially the same as those
described in Note 1.
The Company has no material intersegment sales.
The following comparisons reflect the result from continuing operations.
The following is information related to industry segments:
THREE MONTHS ENDED JUNE 30,
------------------------------
2003 2002
-------------- --------------
Net sales
Consumer Products $ 11,251 $ 11,194
Sensors 14,790 12,531
-------------- --------------
Total 26,041 23,725
-------------- --------------
Operating income (loss)
Consumer Products 2,108 833
Sensors 4,597 904
-------------- --------------
Total segment operating income (loss) 6,705 1,737
Unallocated expenses (2,588) (3,214)
-------------- --------------
Total operating income (loss) 4,117 (1,477)
Interest expense, net of interest income 165 721
Other income ( 7) (49)
-------------- --------------
Income (loss) from continuing operations before income tax 3,959 (2,149)
Income tax 288 18
-------------- --------------
Income (loss) from continuing operations 3,671 (2,167)
Income (loss) from discontinued operations 112 (3,536)
-------------- --------------
Net Income (loss) $ 3,783 $ (5,703)
============== ==============
JUNE 30, MARCH 31,
2003 2003
--------- ----------
SEGMENT ASSETS
CONSUMER PRODUCTS $ 12,563 $ 11,478
SENSORS 34,636 34,391
UNALLOCATED 122 299
--------- ----------
TOTAL $ 47,321 $ 46,168
========= ==========
16
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No.
1071 (D.N.J.).
On March 20, 2002, a class action lawsuit was filed on behalf of purchasers
of the Company's common stock in the United States District Court for the
District of New Jersey against the Company and certain of its present and former
officers and directors. The complaint was subsequently amended to include the
underwriters of the August 2001 public offering as well as the Company's former
auditor's. The lawsuit alleges violations of the federal securities laws. The
lawsuit seeks an unspecified award of money damages. After March 20, 2002, nine
additional similar class actions were filed in the same Court. The ten lawsuits
have been consolidated into one case under the caption In re: Measurement
Specialties, Inc. Securities Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs
filed a Consolidated Amended Complaint on September 12, 2002. The underwriters
have made a claim for indemnification under the underwriting agreement. The
parties have fully briefed motions to dismiss the case, which remain under
consideration by the court.
The Company has Directors and Officers (D&O) 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 the Company contested. 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. The $3,200 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 a contribution toward a potential settlement in
the class action lawsuit. Such amount had been accrued during the three months
ended, March 31, 2003. No assurance can be given that this insurance will be
adequate, or that the 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 it would have a
material adverse effect on its 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 its 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 lenders had refused to
grant such a waiver. Since February 2002, the Company, and a special committee
formed by the 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.
17
The Company cannot predict how long these investigations will continue or
their outcome.
Measurement Specialties, Inc. v. 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 states that plaintiffs seek a declaration that
the plaintiffs entered into the share purchase agreement on June 7, 2001 for the
sale of their shares in Terraillon Holdings Limited to the Company as a result
of an operative misrepresentation and misstatement. Plaintiffs further seek
damages for misrepresentation and/or breach of contract and/or breach of
warranty and costs of the proceedings. On August 9, 2002, the Company entered
an Appearance, which is the equivalent of the acceptance of service of process.
On August 22, 2002, plaintiffs filed a Statement of Claim, which is the
equivalent of a Complaint. The Company has filed a Defense, which is similar to
an Answer, and awaits commencement of the discovery process. This litigation is
ongoing and the Company cannot predict its outcome.
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 general manager of the Company's Schaevitz Division, filed a lawsuit against
the Company and certain of its 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 intends to answer the complaint and
commence the discovery process. This litigation is ongoing and the Company
cannot predict its outcome.
In re: Clark Material Handling Company, et al. (Clark Material Handling
Company, et al. v. Lucas Control Systems, Case No. 02-997).
The Company is currently the defendant (as successor to Lucas Control
Systems) in a lawsuit filed in April 2002 by Clark Material Handling Company and
its related debtors (the "Debtors") in the context of the Debtors' Chapter 11
bankruptcy proceedings. Plaintiffs assert that Lucas Control Systems ("Lucas")
received $34 from one or more of the Debtors during the ninety day period before
the Debtors filed their bankruptcy petitions, that the transfers were to Lucas'
benefit, were for or on account of an antecedent debt owed by one or more of the
Debtors, made when one or more of the Debtors were insolvent, and that the
transfers allowed Lucas to receive more than it would have received if the cases
were cases under Chapter 7 of the United States Bankruptcy Code. The action
seeks to disgorge the sum of $34 from Lucas. This litigation is ongoing and the
Company cannot predict its outcome.
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 the
Company and Amp Incorporated alleging breaches of the lease for the Company's
former facility in Valley Forge, Pennsylvania. The Company is the assignee of
Amp Incorporated under the lease. The plaintiff alleges that the Company owes
at least $770 for certain payment defaults under the lease. The plaintiff also
seeks an unspecified amount of damages related to plaintiff's allegations of,
among other things, damage to the property, failure to remove alterations and
failure to conduct environmental testing. An answer has been filed disputing
the amounts claimed to be due.
18
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration).
Exeter Technologies, Inc. ("Exeter") and Michael Yaron ("Yaron") have
alleged underpayments relating to a January 5, 2000 Product Line Acquisition
Agreement of approximately $322. The Company maintains that any monies
potentially due to Exeter are potentially subject to offset against a related
claim asserted against the Company by a third-party. The parties are working
together to resolve this dispute through a non-binding arbitration and both
sides have exchanged documents in order to facilitate the resolution process.
An arbitration is scheduled for early September, 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.
11. RELATED PARTY TRANSACTIONS:
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. As of June 30, 2003 and as of July 25, 2003 on a cumulative basis, the
Company has incurred $3,026 and $3,072, respectively, in consulting fees and
expenses to CRP (excluding the success fees described in this paragraph). 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, CRP exercised its right to purchase
120,615 shares of stock at an exercise price of $2.28.
Effective April 21, 2003, the Company entered into an agreement with Four
Corners Capital Partners LP to provide for the services of Chief Executive
Officer by Frank Guidone to the Company. The agreement was for an indefinite
period of time, with both parties having the right to terminate the agreement
with at least a sixty-day advance notice. The Company would be charged an annual
fee of $ 400, and travel costs for Mr. Guidone. The Company also issued Four
Corners Capital Partners LP warrants to purchase 600,000 shares of company
stock, at an exercise price of $3.16. The warrants vest over a four-year period,
with the potential of a reduced vesting period, if certain targets are achieved.
The company recorded a charge of $73 in the three months ended June 30, 2003
representing the estimated fair value of the portion of the warrants earned by
Four Corners Capital, LP. The warrants were valued using the Black-Scholes
option pricing model, using a risk free rate of .81 %, volatility of .27, and
option life of 1 month. Through June 30, 2003, the Company paid an aggregate of
$33 for Executive Services to Four Corners Capital Partners LP. The Company
will record future charges on the warrants as they are earned.
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.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following discussion of our results of operations and financial condition
should be read together with the other financial information and consolidated
financial statements and related notes included in this 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 business designs, manufactures, and markets sensors for original
equipment manufacturer applications. These products include pressure sensors,
custom microstructures, accelerometers, tilt/angle sensors, and displacement
sensors for electronic, automotive, medical, military, and industrial
applications. Our Sensor business customers include manufacturers such as
Alaris Medical, Texas Instruments, Allison Transmission, Althen GmbH, and Graco.
Our Consumer Products business manufactures and markets sensor-based consumer
products. These products include bathroom and kitchen scales, tire pressure
gauges, and distance estimators. These products are typically based on
application-specific integrated circuits, piezoresistive, and ultrasonic
technologies. Our Consumer Products customers include retailers such as Bed
Bath & Beyond, Linens 'n Things, Sears, Costco and Target, and European
resellers such as Laica, Ole Bodtcher Hanson, and Babyliss.
The following table sets forth, for the periods indicated, certain items in our
consolidated statements of income as a percentage of net sales:
20
THREE MONTHS ENDED JUNE 30,
2003 (1) 2002 (1)
------------- -------------
Net Sales
Sensors 56.8% 52.8 %
Consumer products 43.2 47.2
------------- -------------
100.0 100.0
Cost of Sales 51.7 66.6
------------- -------------
Gross profit 48.3 33.4
Operating expenses (income)
Selling, general, and administrative 29.1 33.8
Research and development 3.4 4.3
Customer funded development - (1.2)
Restructuring costs - 2.5
Interest expense, net 0.6 3.0
Other expenses (income) - 0.1
------------- -------------
33.1 42.5
Income (loss) from continuing operations before income taxes 15.2 (9.1)
Income tax provision (1.1) 0.0
Income (loss) from operations of discontinued units 0.4 (14.9)
------------- -------------
Net income (loss) 14.5% (24.0)%
============= =============
(1) The consolidated financial statements for the three months ended June 30,
2003 and 2002 include the results of the ongoing operations of Measurement
Specialties, Inc. As a result of our restructuring plan, we sold all of the
outstanding stock of Terraillon in September 2002 and placed Schaevitz UK into
receivership in June 2002. Accordingly, Terraillon and Schaevitz UK are
classified as discontinued operations in the consolidated financial results for
all periods presented. The comparisons above exclude the results of these
discontinued operations, except for "Income (loss) from discontinued units" and
"Net income (loss)."
21
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, at which time title generally
passes to the customer. Certain consumer products may be sold with a provision
allowing the customer to return a portion of products. Upon shipment, we provide
for allowances for returns based upon historical and estimated return rates.
The amount of actual returns could differ from our estimate. Changes in
estimated returns would be accounted for in the period of change.
We utilize manufacturing representatives as sales agents for certain of our
products. Such representatives do not receive orders directly from customers,
take title to or physical possession of products, or invoice customers.
Accordingly, revenue is recognized upon shipment to the customer.
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. We are not responsible for the ultimate sale to third party
customers and therefore record revenue upon shipment to the distributor.
ACCOUNTS RECEIVABLE:
The majority of the accounts receivable are due from retailers and manufacturers
of electronic, automotive, military, and industrial products. Credit is
extended based on evaluation of a customer's financial condition and, generally,
collateral is not required. Accounts receivable are generally due within 30 to
90 days and are stated as amounts due from customers net of allowances for
doubtful accounts, and other sales allowances. Accounts outstanding longer than
the contractual payment terms are considered past due. We determine our
allowance by considering a number of factors, including the length of time trade
accounts receivable are past due, our previous loss history, the customer's
current ability to pay its obligation to us, and the condition of the general
economy and the industry as a whole. We write-off accounts receivable when we
determine they are uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts. Actual
uncollectible accounts could exceed our estimates and 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 expected historical or projected future operating
results; (ii) significant negative industry or economic trends; (iii)
significant decline in our stock price for a sustained period; and (iv) a change
in our market capitalization relative to net book value. If the recoverability
of these assets is unlikely because of the existence of one or more of the
above-mentioned factors, an impairment analysis is performed using a projected
discounted cash flow method. Management must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of
these assets. If these estimates or related assumptions change in the future,
we may be required to record an impairment charge. Impairment charges would be
included in general and administrative expenses in our statements of operations,
and would result in reduced carrying amounts of the related assets on our
balance sheets. During the quarter ended June 30, 2003, we disposed of
approximately $114 in fixed assets.
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. Realization of a deferred tax asset is dependent on generating future
taxable income.
23
The income tax provision is based upon the proportion of pretax profit in each
jurisdiction in which we operate. The income tax rates in Hong Kong and China
are less than those in the United States. Deferred income taxes are not provided
on our subsidiaries' earnings, which are expected to be reinvested.
Distribution, in the form of dividends or otherwise, would subject our
subsidiaries' earnings to United States income taxes, subject to an adjustment
for foreign tax credits. Determination of the amount of unrecognized deferred
United States income tax liability is not practicable because of the
complexities associated with its hypothetical calculation.
WARRANTY RESERVE:
Our sensors 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.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
The consolidated financial statements for the three months ended June 30, 2003
and 2002 include the results of the ongoing operations of Measurement
Specialties, Inc. As a result of our restructuring plan, we sold all of the
outstanding stock of Terraillon in September 2002 and placed Schaevitz UK into
receivership in June 2002. Accordingly, Terraillon and Schaevitz UK are
classified as discontinued operations in the consolidated financial results for
all periods presented.
Net Sales. Net sales increased to $26,041 for the three months ended June 30,
2003 from $23,725 for the three months ended June 30, 2002. Net sales of our
Sensor business increased $2,259 , or 18.0%, to $14,790 for the three months
ended June 30, 2003 from $12,531 for the three months ended June 30, 2002.
Sales generally across all product lines were higher for the three months ended
June 30, 2003 compared with the same period ended June 30, 2002, with a
significant increase in sales of our microfuse products to automotive industry
customers. Net sales of our Consumer Products business increased $57, or 0.5%,
to $11,251 for the three months ended June 30, 2003 from $11,194 for the three
months ended June 30, 2002.
Gross Profit. Gross profit increased $4,672 , or 59.0%, to $12,589 for the
three months ended June 30, 2003 from $7,917 for the three months ended June
30, 2002. Gross margin increased to 48.3% for the three months ended June 30,
2003 from 33.4% for the three months ended June 30, 2002. Gross margin for our
Sensor business increased to 57.0% for the three months ended June 30, 2003 from
40.4% for the three months ended June 30, 2002. The continued improvement of
our Sensors margin is partially due to our production planning and restructuring
efforts, which have resulted in a more efficient manufacturing operation. In
addition, the business unit benefited from favorable raw material costs in the
quarter, and improved absorption of manufacturing overhead as a result of the
business unit's increased sales volume. Gross margin for our Consumer Products
business increased to 34.1% for the three months ended June 30, 2003 from 27.2%
for the three months ended June 30, 2002. The increase is due to improved
margins on sales to retail customers, which was partially offset by a decrease
24
in margins on OEM sales. The gross margin on retail sales increased as a result
of lower material and freight costs. The gross margin related to our OEM sales
was negatively affected by higher costs associated with the introduction of new
products in Europe. On a continuing basis our gross margin may vary due to
product mix, sales volume, availability of raw materials and other factors.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $485 or 6.0%, to $7,566 for the three months ended June 30,
2003 from $8,051 for the three months ended June 30, 2002. The decrease was
primarily due to lower legal and professional fees incurred during the first
quarter of fiscal year 2004, when compared to the first quarter of fiscal year
2003. Legal and professional fees were high in the quarter ended June 30, 2002
due to defaults under our credit agreement, restatement of our financial
statements, class action lawsuits and SEC investigation. These legal and
professional fees declined approximately $540 compared to the quarter ended June
30, 2002. Offsetting these declines was an increase to the employee profit
sharing accrual as a result of the improvement in our company performance.
Research and Development. Research and development costs decreased $120 or
11.8%, to $906 for the three months ended June 30, 2003 from $1,026 for the
three months ended, June 30, 2002. We had no Customer-funded development for
the three months ended June 30, 2003 compared with $276 for the three months
ended June 30, 2002. On a net basis, research and development costs increased
$156 , or 20.8%, to $906 for the three months ended June 30, 2003 from $750 for
the three months ended June 30, 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.
Interest Expense, Net. Net interest expense decreased $556 , or 77.1%, to $165
for the three months ended June 30, 2003 from $721 for the three months ended
June 30, 2002. This decrease in interest expense is attributable to a $23,016
reduction in average debt outstanding from $28,360 in the three months ended
June 30, 2002 to $5,344 in the three months ended June 30, 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
carryforwards.
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. There was a gain of $112 in the quarter ended,
June 30, 2003, as additional funds were received from the liquidation of
Schaevitz UK. We had a loss of $3,536 for the three months ended June 30, 2002
from these discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) increased by $963 from $14,978 as of March 31, 2003 to $15,941 as of
June 30, 2003. The increase was attributable to an increase in accounts
receivable of $2,184 from $10,549 at March 31, 2003 to $12,733 at June 30, 2003,
partially offset by a decrease in inventory of $1,220 from $14,275 at March 31,
2003 to $13,055 at June 30, 2003. Accounts receivable increased as a result of
strong sales in our Sensor segment. The inventory decline is attributable to our
continued inventory management efforts. Accounts payable was flat at June 30,
2003 compared with March 31, 2003. Cash provided by operating activities was $54
for the three months ended June 30, 2003, as compared to $3,830 for the three
months ended June 30, 2002. Included in cash provided from operations for the
current period is $2,800 of costs paid to our insurance carrier related to the
D&O premium renewal (See Note 10 to the condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q). Excluding this
payment, cash from operations would have been $2,854. Capital spending increased
to $412 for the three months ended June 30, 2003 from $336 for the three months
ended June 30, 2002. Financing activities for the three months ended June 30,
2003 provided $424 primarily due to the increase in subdebt associated with the
D&O premium renewal and the exercise of warrants and stock options, offset by a
pay down of company debt under the revolver.
25
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
June 30, 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 upon the filing of this
Quarterly Report on Form 10-Q. We were successful in meeting this requirement.
In addition, beginning in the fiscal quarter ended June 30, 2003, we are
required to keep a minimum fixed charge ratio of 1.0 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 were successful
in meeting this requirement, for the quarter ended June 30, 2003.
Bridge Loan
On October 31, 2002, we received a $9,300 bridge loan from Castletop Capital,
L.P., a limited partnership controlled by Morton Topfer, Chairman of our Board
of Directors. The proceeds from this loan were used to repay all our
obligations under our previous term loan and revolving credit facility. The
loan is evidenced by a Senior Secured Note originally due January 31, 2003 and
does 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 Capital also received a
warrant to purchase up to 297,228 shares of our common stock for an exercise
price equal to the average closing price of our common stock on the American
Stock Exchange for the first five trading days after October 31, 2002 ($1.64 per
share). The warrant had a term of five years. On June 26, 2003, Castletop
Capital exercised its warrants to purchase 297,228 shares of our common 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 a debt discount, which was charged to interest expense over the life
of the debt, which was originally due on January 31, 2003.
Amendment to Bridge Loan
We used a portion of the proceeds from the 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 non-default interest rate under the bridge loan was increased to
11%; and
- The security interest and rights of Castletop under the bridge loan
agreement were subordinated to those of FCC.
There were no amendments to the warrant issued as part of the bridge loan
transaction.
26
Second Amendment to Bridge Loan
On April 11, 2003, we entered into a second amendment to our bridge loan to
increase the aggregate outstanding principal amount of the Subordinated Note in
favor of Castletop Capital, L.P. from $2,000 to $5,000. No other changes were
made to the note. The additional borrowing was used to fund the $3,200 renewal
premium payable in connection with the renewal of our 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 our contribution toward a potential settlement in the class
action lawsuit).
Liquidity
At July 25, 2003, we had approximately $ 6,061 of available cash and $ 6,680 of
borrowing capacity under our revolving credit facility. Our ongoing capital
needs and other obligations, include the payment of:
- Substantial consulting and 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 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. See "Legal
Proceedings" below for a more complete discussion of our pending legal
proceedings.
Our cash and amounts available under our revolving credit facility may not be
sufficient to satisfy the obligations discussed above. If we are unable to
satisfy these obligations, we may need to explore other fund raising
alternatives, including the sale of assets or equity securities. No assurance,
however, can be given that we will be able to successfully sell assets or stock,
or, even if such transactions are possible, that they will be on terms
reasonable to us, that they will enable us to satisfy our obligations or that
such actions will be permitted under our credit agreement. Additionally, any
sale of securities will dilute existing shareholders and may be at prices that
are substantially lower than current market prices. If we are unable to satisfy
our loss contingencies and do not obtain additional funds, we will likely be
unable to continue operations.
Dividends
We have not declared cash dividends on our common equity. Additionally, the
payment of dividends is prohibited under our credit agreement and bridge loan
agreement. 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.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(DOLLARS IN THOUSANDS)
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 June 30,
2003, we had net assets of $1,600 subject to fluctuations in the value of the
Hong Kong dollar, and net liabilities of $15,400 subject to fluctuations in the
value of the Chinese renminbi. At June 30, 2002, we had net liabilities of
$3,200 subject to fluctuations in the value of the Hong Kong dollar, and net
assets of $11,100 subject to fluctuations in the value of Chinese renminbi. At
March 31, 2003, we had net liabilities of $2,000 subject to fluctuations in the
value of the Hong Kong dollar, and the net assets of $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.
See Note 7 of the Notes to the condensed consolidated financial statements
included in this report for a discussion of the elimination of certain of our
foreign operations.
Interest on our revolving credit facility 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. Our results will be
adversely affected by any increase in interest rates. For example, based on the
current debt outstanding at July 25, 2003, an annual interest rate increase of
100 basis points would increase interest expense and thus decrease our after tax
profitability by $50. We do not hedge this interest rate exposure.
28
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 and market acceptance, and warranty performance of
new products;
- Changes in product mix, costs, yields and fluctuations in foreign
currency exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the European consumer products market;
- 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.
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 June 30, 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 recording, processing, summarizing and reporting 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.
The following changes in the company's internal control over financial reporting
occurred during the quarter ended June 30, 2003:
- completion of a financial reporting system that consolidates our
financial results in such a manner that serves both our external and
internal reporting requirements; and
- completion of the consolidation of the financial information for our
China manufacturing facility onto one information technology platform
and general ledger.
- appointment of a financial executive from our corporate headquarters
to serve as Controller of the China Sensor business.
29
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(DOLLARS IN THOUSANDS)
CLASS ACTION LAWSUIT
LITIGATION:
In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No.
1071 (D.N.J.).
On March 20, 2002, a class action lawsuit was filed on behalf of purchasers
of our common stock in the United States District Court for the District of New
Jersey against the company and certain of our present and former officers and
directors. The complaint was subsequently amended to include the underwriters
of the 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. The parties
have fully briefed motions to dismiss the case, which remain under consideration
by the court.
We have Directors and Officers (D&O) 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. The $3,200 renewal premium represents a
combination of the market premium for D&O coverage for the period from April 7,
2003 through April 7, 2004 plus our contribution toward a potential settlement
in the class action lawsuit. No assurance can be given that this insurance will
be adequate, or 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.
30
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 the company that it is conducting a formal investigation relating to
matters reported in our Quarterly Report on Form 10-Q for the quarter ended
December 31, 2001.
We have also learned that the Office of the United States Attorney for the
District of New Jersey is conducting an inquiry into the matters that are being
investigated by the SEC.
We cannot predict how long these investigations will continue or their
outcome.
Measurement Specialties, Inc. v. 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 states that plaintiffs seek a declaration that
the plaintiffs entered into the share purchase agreement on June 7, 2001 for the
sale of their shares in Terraillon Holdings Limited to the company as a result
of an operative misrepresentation and misstatement. Plaintiffs further seek
damages for misrepresentation and/or breach of contract and/or breach of
warranty and costs of the proceedings. On August 9, 2002, we entered an
Appearance, which is the equivalent of the acceptance of service of process. On
August 22, 2002, plaintiffs filed a Statement of Claim, which is the equivalent
of a Complaint. We have filed a Defense, which is similar to an Answer, and
await commencement of the discovery process. This litigation is ongoing and we
cannot predict its outcome at this time.
Robert L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No.
02-CV-3431.
On July 17, 2002, Robert DeWelt, the former acting Chief Financial Officer
and general manager of our Schaevitz Division, filed a lawsuit against the
company and certain of our officers and directors. Mr. DeWelt resigned on March
26, 2002 in disagreement with management's decision not to restate certain of
our financial statements. The lawsuit alleges a claim for constructive wrongful
discharge and violations of the New Jersey Conscientious Employee Protection
Act. Mr. DeWelt seeks an unspecified amount of compensatory and punitive
damages. We filed a Motion to Dismiss this case, which was denied on June 30,
2003. We intend to answer the complaint and commence the discovery process.
This litigation is ongoing and we cannot predict its outcome at this time.
In re: Clark Material Handling Company, et al. (Clark Material Handling
Company, et al. v. Lucas Control Systems, Case No. 02-997).
We are currently the defendant (as successor to Lucas Control Systems) in a
lawsuit filed in April, 2002 by Clark Material Handling Company and its related
debtors (the "Debtors") in the context of the Debtors' Chapter 11 bankruptcy
proceedings. Plaintiffs assert that Lucas Control Systems ("Lucas") received
$34 from one or more of the Debtors during the ninety (90) day period before the
Debtors filed their bankruptcy petitions, that the transfers were to Lucas'
benefit, were for or on account of an antecedent debt owed by one or more of the
Debtors, made when one or more of the Debtors were insolvent, and that the
transfers allowed Lucas to receive more than it would have received if the cases
were cases under Chapter 7 of the United States Bankruptcy Code. The action
seeks to disgorge the sum of $34 from Lucas. This litigation is ongoing and we
cannot predict its outcome at this time.
31
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 the
company and Amp Incorporated alleging breaches of the lease for our former
facility in Valley Forge, Pennsylvania. We are the assignee of Amp Incorporated
under the lease. The plaintiff alleges that we owe at least $770 for certain
payment defaults under the lease. The plaintiff also seeks an unspecified
amount of damages related to plaintiff's allegations of, among other things,
damage to the property, failure to remove alterations and failure to conduct
environmental testing. An answer has been filed disputing the amounts claimed
to be due.
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties,
Inc. (Arbitration).
Exeter Technologies, Inc. ("Exeter") and Michael Yaron ("Yaron") have
alleged underpayments relating to a January 5, 2000 Product Line Acquisition
Agreement of approximately $322. We maintain that any monies potentially due to
Exeter are potentially subject to offset against a related claim asserted
against us by a third-party. The parties are working together to resolve this
dispute through a non-binding arbitration and both sides have exchanged
documents in order to facilitate the resolution process. An arbitration is
scheduled for early September, 2003.
From time to time, we are subject to other legal proceedings and claims in
the ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 21, 2003, the Compensation Committee of our 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, a limited partnership of which Mr. Guidone is a
Principal. Pursuant to this arrangement, Four Corners will make Mr. Guidone
available to serve as our Chief Executive Officer for which it will receive an
annual fee of $400 and will be eligible to receive a performance based bonus.
In addition, Four Corners was issued a warrant to purchase up to 600,000 shares
of our common stock. The right to purchase the shares vests over a period of
four years (subject to the continued service of Mr. Guidone), and may be
accelerated in the event certain performance milestones are achieved. 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. 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.
On June 12, 13 and July 14, 2003, Corporate Revitalization Partners, a
turnaround/crisis management firm of which Mr. Guidone is a managing director
and principal, exercised warrants to purchase 120,615 shares of our common stock
at an exercise price of $2.28 per share. The shares were issued in reliance
upon the exemption from registration under Section 4(2) of the Securities Act of
1933, as a transaction not involving a public offering.
On June 26, 2003, Castletop Capital, L.P., a limited partnership controlled
by Morton Topfer, Chairman of our Board of Directors, exercised warrants to
purchase 297,228 shares of our common stock at an exercise price of $1.64 per
share. The shares were issued in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933, as a transaction not involving
a public offering.
32
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 June
30, 2003:
On May 30, 2003, we filed a current report on form 8-K pursuant to Item 5 (other
events) to attach a press release reporting results for our fourth fiscal
quarter and the twelve-month period ended March 31, 2003.
33
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: August 7, 2003 John P. Hopkins
Chief Financial Officer (authorized officer and
principal financial officer)
34
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
4.1 Stock Purchase Warrant, effective as of April 21, 2003, issued to Four Corners Capital
Partners, LP
4.2 Registration Rights Agreement, effective as of April 21, 2003, by and between Four
Corners Capital Partners, LP and Measurement Specialties, Inc.
10.1 Agreement, effective as of April 1, 2003, by and between Four Corners Capital Partners,
LP and Measurement Specialties, Inc.
10.2 Noncompetition Agreement, dated as of April 1, 2003, by and between Frank Guidone
and Measurement Specialties, Inc.
99.1 Exhibit 31.1 -- Certification of Frank D. Guidone required by Rule 13a-14(a) or Rule 15d-
14(a)
99.2 Exhibit 31.2 -- Certification of John P. Hopkins required by Rule 13a-14(a) or Rule 15d-
14(a)
99.3 Exhibit 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
35