UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 to Form 10-K on
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2005
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11906
MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2378738
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1000 LUCAS WAY, HAMPTON, VA 23666
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (757) 766-1500
10 WASHINGTON AVENUE, FAIRFIELD, NEW JERSEY 07004-3877
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS; ON WHICH REGISTERED:
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 75 days. Yes [ X ] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ X ] No [_]
At March 31, 2005, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $248,000,000
based on the closing price of the registrant's common stock on March 31,
2005.
At May 31, 2005, 13,578,869 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
THE INFORMATION REQUIRED TO BE FURNISHED PURSUANT TO PART III OF THIS FORM 10-K
IS SET FORTH IN, AND IS HEREBY INCORPORATED BY REFERENCE HEREIN FROM, THE
REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 13, 2005 TO BE FILED BY THE REGISTRANT WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A NO LATER THAN 120
DAYS AFTER THE FISCAL YEAR ENDED MARCH 31, 2005.
MEASUREMENT SPECIALTIES, INC.
FORM 10-K
TABLE OF CONTENTS
MARCH 31, 2005
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
------
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . 16
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES. . . . . . . . . . . . . . . . . . . . . . 19
ITEM 6. SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . . . 39
ITEM 9A. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . 39
ITEM 9B. OTHER INFORMATION. . . . . . . . . . . . . . . . . . 41
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . . . 41
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . 42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 42
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. . . . . 43
PART IV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . 43
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (the "Amendment") amends the Annual Report
on Form 10-K of Measurement Specialties, Inc. (the "Company") for the fiscal
year ended March 31, 2005, previously filed on June 14, 2005 (the "Original
10-K"). The Company has filed this Amendment solely for the purpose of filing
corrected versions of: (i) the Certification of Chief Executive Officer pursuant
to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as
amended (filed as Exhibit 31.1 to the Original 10-K), (ii) the Certification of
Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the
Securities Exchange Act of 1934, as amended (filed as Exhibit 31.2 to the
Original 10-K), and (iii) the Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350 (filed as Exhibit 32.1 to
the Original 10-K). This Amendment contains the corrected Certifications noted
herein and should be read in conjunction with the information set forth in the
Original 10-K, as well as the Company's quarterly reports on Form 10-Q for the
three months ended June 30, 2005 and September 30, 2005, filed on August 9,
2005, as amended on January 24, 2006, and November 9, 2005, as amended on
January 24, 2006, respectively, and any subsequent reports filed pursuant to the
Securities Exchange Act of 1934.
All information contained in this Amendment is as of the original filing date of
the Original Form 10-K and does not reflect events occurring after the filing of
the Original 10-K or modify or update the disclosures therein in any way other
than as required to reflect the amendments set forth herein.
PART I
ITEM 1. BUSINESS
INTRODUCTION
NOTES:
(1) AS MORE FULLY DESCRIBED BELOW UNDER "CHANGES TO OUR BUSINESS," WE
DISCONTINUED CERTAIN OF OUR BUSINESSES DURING THE FISCAL YEAR ENDED MARCH 31,
2003, AND SOLD ASSETS DURING THE FISCAL YEARS ENDED MARCH 31, 2003 AND 2004.
EXCEPT AS OTHERWISE NOTED, THE DESCRIPTIONS OF OUR BUSINESS, RESULTS AND
OPERATIONS CONTAINED IN THIS REPORT REFLECT ONLY OUR CONTINUING OPERATIONS.
(2) ALL DOLLAR AMOUNTS IN THIS REPORT ARE IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND PRODUCT PRICES.
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics, including pressure, force,
position, vibration, humidity and photo optics. We have two businesses, a Sensor
business and a Consumer Products business. We are a New Jersey corporation
organized in 1981 with corporate offices located in Hampton, Virginia.
Our Sensor segment designs and manufactures sensors for original equipment
manufacturers (OEMs) and end users. These sensors are used for automotive,
off-road, medical, industrial, consumer, military, aerospace, test and
measurement and traffic applications. Our sensor products include piezoresistive
pressure sensors and transducers, electromagnetic displacement sensors,
piezoelectric polymer film sensors, tilt sensors, membrane switch panel sensors,
custom microstructures, load cells, humidity sensors, accelerometers, photo
optic components and pulse oximetry sensors.
Our Consumer Products segment designs and manufactures sensor-based consumer
products. Our sensor-based consumer bath and kitchen scale products are sold and
marketed primarily under the brand names of our original equipment manufacturer
customers. Our tire pressure gauges and distance measurement products are sold
and marketed under our own brand names -Accutire(R) pressure gauges, ParkZone(R)
garage parking aids and Accutape(R) distance measurers - as well as those of our
OEM and private label customers.
OUR SENSORS
The majority of our sensors are devices, sense elements and transducers that
convert mechanical information into a proportionate electronic signal for
display, processing, interpretation or control. Sensors are essential to the
accurate measurement, resolution and display of pressure, force, linear or
rotary position, tilt, vibration, motion or humidity. Our other Sensor products
are transducers that convert an applied electrical signal into a mechanical
motion corresponding to the amplitude and frequency of the electrical input.
Each of our two businesses benefits from the same core technology base. Our
advanced technologies include piezoresistive silicon sensors,
application-specific integrated circuits, micro-electromechanical systems
(MEMS), piezoelectric polymers, foil strain gauges, force balance systems, fluid
capacitive devices, linear and rotational variable differential transformers,
electromagnetic displacement sensors and ultrasonic sensors. These technologies
allow our sensors to operate precisely and cost effectively.
We are a global operation with engineering and manufacturing facilities located
in North America, Europe and Asia. By functioning globally, we have been able to
enhance our applications engineering capabilities, increase our geographic
proximity to our customers and leverage our cost structure.
1
RECENT ACQUISITIONS
We have made the following acquisitions which are included in the consolidated
financial statements as of the effective date of acquisition (See Notes 2 and 5
to the Consolidated Financial Statements of the Company included in this Annual
Report on Form 10-K):
ACQUIRED COMPANY EFFECTIVE DATE OF ACQUISITION
COUNTRY
Elekon Industries USA, Inc. ("Elekon") June 24, 2004
USA
Entran Devices, Inc. and Entran SA ("Entran") July 16, 2004
USA and France
Encoder Devices, LLC ("Encoder Devices") July 16, 2004
USA
Humirel, SA ("Humirel") December 1, 2004
France
MWS Sensorik GmbH ("MWS Sensorik") January 1, 2005
Germany
Polaron Components Ltd. ("Polaron") February 1, 2005
United Kingdom
These acquisitions increased our revenues, technology base, share of the
addressable sensor marketplace and presence in Europe. The largest of these
acquisitions was Humirel, a Toulouse, France-based company with a proprietary
technology for measuring relative humidity, a new platform for the company.
Humirel's OEM customers in the automotive, industrial and medical marketplaces
are synergistic with our existing customer base.
Entran, with operations in the United States and France, increased our business
with end users who purchase miniature pressure transducers, accelerometers and
load cells for test and measurement applications. Elekon brought to the company
a new technology platform with photo optic and X-ray sensing as well as an
established customer base for pulse oximetry (SpO2) sensors. Encoder Devices, a
start-up company, offered us an emerging technology platform in magnetic
encoders - a robust, low cost capability well suited to our OEM customer base.
Two smaller acquisitions further added to our capabilities in Europe. MWS
Sensorik had been a distributor and value-added reseller of our piezoresistive
accelerometers and pressure sensors in Germany with a solid customer base in the
auto crash and road test market. We also acquired certain assets of Polaron,
reuniting us with the foil strain gage pressure business formerly owned by
Schaevitz and providing an additional customer base in Europe.
GROWTH STRATEGY
We plan to continue focusing our efforts on aggressively growing our Sensor
segment, which management believes has greater growth potential and higher
returns than the Consumer business. The majority of this growth over the next
year will be organic, the result of several promising proprietary technologies
that are gaining wider adoption in the marketplace. While we do not rule out
additional acquisitions in the future, management is currently focused on
integrating recent acquisitions and leveraging the inherent synergies for sales
and marketing, engineering and manufacturing.
We are building strength in both our OEM and end user business for Sensors.
Historically, our growth has been derived from, and will continue to derive
from, OEM projects with longer development cycles, in which our sensors are
designed into another product. However, some of the recent acquisitions - most
notably Entran, but also MWS and Polaron - serve primarily end user customers.
This new strength, coupled with our traditional Schaevitz linear and rotary
displacement business, provides a solid platform on which to build end user
sales. This market includes test and measurement applications as well as
manufacturing and industrial process control. Devices sold to end users are
packaged products (sensor elements with amplification, compensation and
sometimes value-add assemblies) which carry a higher average selling price.
2
We recently organized our Sensor engineering resources into seven technology
families: pressure, position, force, vibration, humidity, photo optics and
piezo film. This flexible and scalable structure enables us to readily
assimilate acquisitions, prioritize engineering resources and ultimately respond
better to market opportunities in key industries. This new organization gives
our global sales force a clear line of sight to the resources it needs to
qualify and develop promising new OEM projects. The Company continues to
operate under two distinct business segments, Sensor and Consumer, and overall
management within these two segments is aligned geographically between North
America, Europe/Middle East and Asia.
In the Consumer Products segment, our consumer scale business is focused on the
design, development and manufacture of innovative scale products for sale to our
worldwide base of OEM customers. In fiscal year 2004, we exited the retail scale
business by selling our Thinner(R) branded bathroom and kitchen scale business
to Conair Corporation. For digital tire pressure gauges, we design and
manufacture products for OEM customers as well as for sale at retail under the
Accutire(R) brand.
MARKETS
Many aspects of day-to-day life continue to be profoundly influenced by the
pervasive application of sensors to transportation, energy, security,
communications and medical technologies. Sensor manufacturers are moving toward
more sophisticated sensor packages called "smart sensors" that take advantage of
new lower cost digital based electronics to provide more accurate measurement
and control.
The shift toward sensors utilizing digital signal processing technologies has
enhanced applications in the automotive, industrial, medical, military and
consumer products markets. Examples of our sensor applications include:
- automotive and off-road applications in braking for electronic
stability control, occupant safety, fogging prevention, transmission
fluid level, oil pressure, diesel engine management, off-road
equipment leveling and security sensing;
- industrial sensors for regulating flow in paint sprayers and
agricultural equipment, monitoring pressure in heating, ventilating,
air conditioning & refrigeration compressors, flow measurement,
factory automation, high purity wafer fab flow control, and process
control valves such as those used in turbines for power generation
equipment;
- medical sensors for invasive blood pressure measurement, drug infusion
pump flow monitoring, electronic stethoscopes, vascular health
diagnostics, sleep apnea sensing, and ultrasound bone density, kidney
dialysis, environmental monitoring for patient breathing and body
activity sensor for implantable heart pacemakers;
- military and aerospace applications, which continue to drive sensor
development with new systems requiring small, high performance sensors
for navigation and weapons control systems, pressure monitoring,
hydrophones and traffic collision avoidance systems (TCAS)
- consumer products applications including the measurement of weight,
distance, and movement; digitizing information for electronic white
boards and pen input devices for laptops; acoustic pick-ups for
musical instruments and directional speakers; and load imbalance
sensors for washing machines;
- test and measurement applications including automotive crash
accelerometers, high-accuracy position transducers and miniature
pressure force and acceleration sensors used to verify system design
and performance;
- commercial and building equipment including: flow measurement of
dispensed beverages, gasoline pump monitoring, ATM currency control,
elevator feedback, oxygen systems in hospitals, and security for stand
alone equipment;
- traffic sensors used for real time traffic monitoring,
weigh-in-motion, vehicle speed and red light enforcement and toll
booth collection monitoring.
3
TECHNOLOGY
Measurement Specialties, Inc. has a broad and robust portfolio of technologies
available to solve client sensing needs, some of which are proprietary to the
Company. Our sensor technologies include:
- PIEZORESISTIVE TECHNOLOGY is widely used for the measurement of
pressure, load and acceleration, and its use in these applications is
expanding significantly. Piezoresistive materials, most often silicon,
respond to changes in applied mechanical variables such as stress,
strain, or pressure by changing electrical conductivity (resistance).
Changes in electrical conductivity can be readily detected in circuits
by changes in current with a constant applied voltage, or conversely
by changes in voltage with a constant supplied current.
- APPLICATION SPECIFIC INTEGRATED CIRCUITS (ASICS). These circuits
convert analog electrical signals into digital signals for
measurement, computation or transmission. Application specific
integrated circuits are well suited for use in both consumer and new
sensor products because they can be designed to operate from a
relatively small power source and are inexpensive and can improve
system accuracy.
- MICRO-ELECTROMECHANICAL SYSTEMS (MEMS). Micro-electromechanical
systems and related silicon micromachining technology are used to
manufacture components for physical measurement and control. Silicon
micromachining is an ideal technology to use in the construction of
miniature systems involving electronic, sensing, and mechanical
components because it is inexpensive and has excellent physical
properties. Micro-electromechanical systems have several advantages
over their conventionally manufactured counterparts. For example, by
leveraging existing silicon manufacturing technology,
microelectromechanical systems allow for the cost-effective
manufacture of small devices with high reliability and superior
performance.
- PIEZOELECTRIC POLYMER TECHNOLOGY. Piezoelectric materials (such as
PVDF) convert mechanical stress or strain into proportionate
electrical energy, and conversely, these materials mechanically expand
or contract when voltages of opposite polarities are applied.
Piezoelectric polymer films are also pyroelectric, converting heat
into electrical charge. These polymer films offer unique sensor design
and performance opportunities because they are thin, flexible, inert,
broadband, and relatively inexpensive. This technology is ideal for
applications where the use of rigid sensors would not be possible or
cost-effective.
- STRAIN GAUGE TECHNOLOGY. A strain gauge consists of a base substrate
material that will change its electrical properties with induced
stress or strain (such as bulk silicon). The foil is etched to produce
a grid pattern that is sensitive to changes in geometry, usually
length, along the sensitive axis producing a change in resistance. The
gauge is bonded to a sensing element surface which it will monitor.
The gauge operates through a direct conversion of strain to a change
in gauge resistance. This technology is useful for the construction of
reliable pressure and force sensors. The Company also manufactures a
proprietary strain gauge called Microfused(TM) in which the diaphragm
in contact with the media is fused to a silicon sensing element with
glass at high temperatures for a hermetic seal appropriate for harsh
environments.
- FORCE BALANCE TECHNOLOGY. A force-balanced accelerometer is a mass
referenced device that under the application of tilt or linear
acceleration, detects the resulting change in position of the internal
mass by a position sensor and an error signal is produced. This error
signal is passed to a servo amplifier and a current developed is fed
back into a moving coil. This current is proportional to the applied
tilt angle or applied linear acceleration and will balance the mass
back to its original position. These devices are used in military and
industrial applications where high accuracy is required.
- FLUID CAPACITIVE TECHNOLOGY. This technology is also referred to as
fluid filled, variable capacitance. The output from the sensing
element is two variable capacitance signals per axis.
4
Rotation of the sensor about its sensitive axis produces a linear
change in capacitance. This change in capacitance is electronically
converted into angular data, and provides the user with a choice of
ratiometric, analog, digital, or serial output signals. These signals
can be easily interfaced to a number of readout and/or data collection
systems.
- LINEAR VARIABLE DIFFERENTIAL TRANSFORMERS (LVDT). An LVDT is an
electromechanical sensor that produces an electrical signal
proportional to the displacement of a separate movable core. LVDTs are
widely used as measurement and control sensors wherever displacements
of a few micro inches to several feet can be measured directly, or
where mechanical input, such as force or pressure, can be converted
into linear displacement. LVDTs are capable of extremely accurate and
repeatable measurements in severe environments.
- HUMIDITY. Humidity technology is based upon variable capacitive
affecting a sensitive polymer layer under changing ambient humidity
conditions. This technology is uniquely designed for applications in
consumer markets, automotive, home appliance and environmental
control.
- PHOTO OPTICS. Photo-Optic sensors use light to measure different
parameters such as position, reflectance, color and many others. At
present our main application is in non-invasive medical sensing,
specifically Pulse-Oximetry.
- ULTRASONIC TECHNOLOGY. Ultrasonic sensors measure distance by
calculating the time delay between transmitting and receiving an
acoustic signal that is inaudible to the human ear. This technology
allows for the quick, easy, and accurate measurement of distances
between two points without physical contact.
BUSINESS SEGMENTS
Our financial results by our two business segments for the fiscal years ended
March 31, 2005, 2004 and 2003 are presented in Note 16 to the consolidated
financial statements included in this Annual Report on Form 10-K.
PRODUCTS
SENSORS. A summary of our Sensor business product offerings as of
March 31, 2005 is presented in the following table. New products acquired or
developed in the last year are highlighted with an asterisk*.
PRODUCT TECHNOLOGY
--------------------- -----------------------
APPLICATIONS
PRESSURE SENSORS Micro- Disposable catheter blood pressure,
AND TRANSDUCERS Electromechanical altimeter, dive tank pressure, process
Systems (MEMS) instrumentation, fluid level, measurement
and intravenous drug administration
monitoring, racing engine performance
Microfused(TM) Automotive electronic stability control
Piezoresistive Silicon systems, paint spraying machines, fertilizer
Strain Gauge dispensers, hydraulics, refrigeration and
automotive transmission
Foil Strain Gauge Instrumentation-grade aerospace and
weapon control systems, sub-sea
pressure, ship cargo level, steel mills
ACCELEROMETERS Piezoelectric Polymer Cardiac activity sensors, audio speaker
feedback, appliance load balancing
5
Micro- Crash test sensors, anthropomorphic dummy
Electromechanical sensors, road load dynamics, aerospace
Systems (MEMS) traffic alert and collision avoidance systems,
instrumentation
LOAD CELLS Microfused(TM) Automotive occupancy weight sensing,
Piezoresistive Silicon bathroom scales, exercise equipment,
Strain Gauge appliance monitoring, intravenous drug
administration monitoring
LINEAR VARIABLE Inductive Aerospace, machine control systems,
DISPLACEMENT Electromagnetic knitting machines, industrial process
TRANSDUCERS control, hydraulic actuators, instrumentation
(LVDT)
ROTARY POSITION Inductive Machine control systems, instrumentation
TRANSDUCERS AND Electromagnetic
ENCODERS*
Magnetic Encoders* Gas pump , dialysis machine controls
TILT/ANGLE SENSORS Fluid Capacitive Heavy equipment level measurement, auto
security systems, tire balancing,
instrumentation
RELATIVE HUMIDITY & Capacitive Film Auto anti-fogging systems, diesel engine
TEMPERATURE controls, air climate systems, reprography
SENSORS* machines, sleep apnea breathing apparatus
TRAFFIC SENSORS Piezoelectric Polymer Traffic survey, speed and traffic light
enforcement, toll, and truck weigh-in-
motion
CUSTOM PIEZOELECTRIC Piezoelectric Polymer Medical diagnostics, ultrasonic pen
FILM SENSORS digitizers, musical instrument pickups,
electronic stethoscope, security systems,
electronic water meters
PULSE OXIMETRY Photo optic infra-red Reusable and disposable patient blood
SENSORS (SPO2)* light absorption oxygen and pulse sensors
X-RAY DETECTION* X-ray sensor arrays Security systems, medical CT scanners
CONSUMER PRODUCTS. A summary of our sensor-based consumer products as of March
31, 2005 is presented in the following tables. Our scales are sold on an OEM
basis to manufacturers who sell them at retail under their own brand names. Our
tire pressure gauges are sold direct to retailers under our own brand names as
well as to OEMs under their own brand names.
PRODUCT TECHNOLOGY TYPES OF PRODUCTS RETAIL PRICE RANGE
------- --------------------- --------------------- --------------------
SCALES Piezoresistive, Bathroom Scales $ 5.00-60.00
Application Specific
Integrated Circuits
(ASICs)
Kitchen (Food) Scales $ 3.00-25.00
Sportsmen (Hunting & $ 15.00 - $30.00
Fishing) Scales
6
PRODUCT TECHNOLOGY BRAND NAME TYPES OF PRODUCTS RETAIL PRICE
------------- --------------------- ----------- ------------------ ---------------
RANGE
---------------
TIRE PRESSURE Piezoresistive Strain Accutire(R) Digital and $ 1.99-$60.00
GAUGES Gauge Mechanical Tire
Pressure Gauges
DISTANCE Ultrasonic Accutape(R) Interior Distance $ 13.00-22.00
MEASUREMENT Estimator
PRODUCTS
ParkZone(R) Garage Parking $15.00 - $30.00
Distance Estimator
CUSTOMERS
We sell our sensor products throughout the world. Our Sensor business designs,
manufactures and markets sensors for original equipment manufacturer
applications and for end users who use them for instrumentation and test
applications. Our extensive customer base consists of manufacturers of
electronic, automotive, medical, military, industrial and consumer products. One
of our Sensor business customers, a large OEM automotive supplier, accounted for
approximately 10% of our net sales during fiscal 2005, and during 2004 and 2003,
no one customer represented more than 10% of our net sales.
Our Consumer Products business customers are primarily retailers, resellers, or
manufacturers of consumer products in the United States and Europe. With the
sale of our Thinner(R) brand to Conair on January 30, 2004, our volume to Conair
increased to approximately 10% of net sales during fiscal 2005. No other
Consumer Products customer accounted for more than 10% of our net sales during
the last three fiscal years.
SALES AND DISTRIBUTION
We sell our sensor products through a combination of experienced regional sales
managers (typically degreed engineers), distributors and generally exclusive
sales relationships with outside sales representatives throughout the world. Our
engineering teams work directly with our global customers to tailor our sensors
to meet their specific application requirements.
As a result of the sale of our Thinner(R) brand to Conair in FY 2004, our
sensor-based consumer bath and kitchen scale products are now sold and marketed
under the brand names of our original equipment manufacturer customers. Our tire
pressure gauges and distance measurement products are sold and marketed under
our own brand names, as well as those of our OEM and private label customers.
We sell our products primarily in North America and Western Europe. The
international component of our sales has grown with recent acquisitions. In
addition, the growing Asian market represents a significant opportunity for our
business. Sales into foreign countries accounted for 33% of net sales for the
fiscal year ended March 31, 2005, 31.3% of net sales for the fiscal year ended
March 31, 2004, and 24% of net sales for the fiscal year ended March 31, 2003.
SUPPLIERS
We rely on contract manufacturers for a significant portion of our
consumer-finished products and for our photo optic sensors sold in the medical
marketplace. The majority of our sensor-based consumer products are assembled by
a single contract manufacturer located in China. We utilize alternative
manufacturers located in China to assemble additional sensor-based consumer
products. We also source our assembly of photo optic products from a single
contract manufacturer, with whom we have a contractual relationship. We procure
components and finished products as needed, through purchase orders. We believe
that the components we utilize could be obtained from alternative sources, or
that our products could be redesigned to use alternative suppliers' components,
if necessary.
7
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on expanding our core
technologies, improving our existing products, developing new products, and
designing custom sensors for specific customer applications. To maintain and
improve our competitive position, our research, design, and engineering teams
work directly with customers to design custom sensors for specific applications.
Our gross research and development expenses, including customer funded projects,
were $ 3,468, or 2.5% of net sales, for the fiscal year ended March 31, 2005;
$3,468, or 3.1% of net sales, for the fiscal year ended March 31, 2004; and
$3,594, or 3.3% of net sales, for the fiscal year ended March 31, 2003. Research
and development expenses for our Sensor business were $2,130, or 2.3% of net
sales of our Sensor business, for the fiscal year ended March 31, 2005; $2,085,
or 3.5% of net sales of our Sensor business, for the fiscal year ended March 31,
2004; and $2,191, or 4.2% of net sales of our Sensor business, for the fiscal
year ended March 31, 2003. Included in gross research and development was $268 ,
$4 and $367 of customer funded development for the fiscal years ended March 31,
2005, 2004, and 2003, respectively.
Research and development expenses in the Consumer Products business were $1,338,
or 2.7% of net sales for the fiscal year ended March 31, 2005; $1,383, or 2.6%
of net sales for the fiscal year ended March 31, 2004; $1,403, or 2.5% of net
sales for the fiscal year ended March 31, 2003.
COMPETITION
The global market for sensors includes many diverse products and technologies,
is highly fragmented and subject to moderate pricing pressures. Our
piezoresistive, MEMS and Microfused(TM) pressure sensing technologies compete
directly within the largest and fastest growing segments in the global market
for industrial pressure sensors. Most of our Sensor business competitors are
small companies or divisions of large corporations such as Danaher, Motorola,
Siemens, General Electric and Honeywell. The principal elements of competition
in the sensor market are production capability, price, quality, service, and the
ability to design unique applications to meet specific customer needs.
The market for sensor-based consumer products is characterized by frequent
introductions of competitive products and pricing pressures. Recently, a number
of brand name scale companies have been acquired by larger brand name companies
or by Asian original equipment manufacturers. The principal elements of
competition in the sensor-based consumer products market are price, quality and
the ability to introduce new and innovative products.
Although we believe that we compete favorably in our Sensor and Consumer
Products businesses, new product introductions by our competitors could cause a
decline in sales or loss of market acceptance for our existing products. If
competitors introduce more technologically advanced products, the demand for our
products would likely be reduced.
INTELLECTUAL PROPERTY
We rely in part on patents to protect our intellectual property. We own 79
United States utility patents, 32 United States design patents, and 45 foreign
patents to protect our rights in certain applications of our core technology. We
have 37 United States patent applications pending, including provisionals. These
patent applications may never result in issued patents. Even if these
applications result in patents being issued, taken together with our existing
patents, they may not be sufficiently broad to protect our proprietary rights,
or they may prove unenforceable. We have not obtained patents for all of our
innovations, nor do we plan to do so.
We also rely on a combination of copyrights, trademarks, service marks, trade
secret laws, confidentiality procedures, and licensing arrangements to establish
and protect our proprietary rights. In addition, we seek to protect our
proprietary information by using confidentiality agreements with certain
employees, sales representatives, consultants, advisors, customers and others.
We cannot be certain that these agreements will adequately protect our
proprietary rights in the event of any unauthorized use or disclosure, that our
employees, sales representatives, consultants, advisors, customers or others
will maintain the confidentiality of such proprietary information, or that our
competitors will not otherwise learn about or independently develop such
proprietary information.
8
Despite our efforts to protect our intellectual property, unauthorized third
parties may copy aspects of our products, violate our patents or use our
proprietary information. In addition, the laws of some foreign countries do not
protect our intellectual property to the same extent as the laws of the United
States. The loss of any material trademark, trade name, trade secret, patent
right, or copyright could harm our business, results of operations and financial
condition.
We believe that our products do not infringe on the rights of third parties.
However, we cannot be certain that third parties will not assert infringement
claims against us in the future or that any such assertion will not result in
costly litigation or require us to obtain a license to third party intellectual
property. In addition, we cannot be certain that such licenses will be available
on reasonable terms or at all, which could harm our business, results of
operations and financial condition.
FOREIGN OPERATIONS
We manufacture the majority of our sensor products, and most of our sensor
subassemblies used in our consumer products, in leased premises located in
Shenzhen, China. Sensors are also manufactured at our U.S. facilities in
Hampton, VA, San Jose, CA, and Torrance, CA, as well as our European facilities
in Toulouse, France, Les Clayes-sous-Bois, France and Pfaffenhofen, Germany.
Additionally, certain key management, sales and engineering activities are
conducted at leased premises in Wayne, PA, Aliso Viejo, CA and in Hong Kong. Our
pulse oximetry sensors are sourced from a single supplier, Opto Circuits India
Limited, ("Opto"), in Karnatake, India. As discussed in Note 10 to the
Consolidated Financial Statements included in this Annual Report on Form 10-K,
Opto is partially owned by Messrs. Thomas Dietiker and Jay Patel, employees of
the Company. Substantially all of our consumer products are assembled in China,
primarily by a single supplier, River Display, Ltd. ("RDL"), although we also
utilize alternative assemblers in China. There are no agreements which would
require us to make minimum payments to Opto or RDL, nor is Opto or RDL obligated
to maintain capacity available for our benefit, though we account for a
significant portion of both Opto and RDL's revenues. Additionally, most of our
products contain key components that are obtained from a limited number of
sources. These concentrations in external and foreign sources of supply present
risks of interruption for reasons beyond our control, including political and
other uncertainties regarding Hong Kong and China.
The Chinese government has continued to pursue economic reforms hospitable to
foreign investment and free enterprise, although the continuation and success of
these efforts is not assured. Our operations could be adversely affected by
changes in Chinese laws and regulations, including those relating to taxation
and currency exchange controls, by the imposition of economic austerity measures
intended to reduce inflation, and by social and political unrest. China became a
member of World Trade Organization (WTO) on December 11, 2001. Such membership
requires China and other members of the WTO to grant one another reciprocal
"Normal Trade Relations" (NTR) status (formerly known as Most Favored Nation).
Accordingly, China's preferred trading status with the United States (and other
WTO members) is no longer subject to annual review and Chinese goods exported to
the United States are subject to a low tariff and receive other favorable
treatment.
The continued stability of political, legal, economic or other conditions in
Hong Kong cannot be assured. No treaty exists between Hong Kong and the United
States providing for the reciprocal enforcement of foreign judgments.
Accordingly, Hong Kong courts may not enforce judgments predicated on the laws
of the United States, whether arising from actions brought in the United States
or, if permitted, in Hong Kong.
Most of our revenues are priced in United States dollars. Most of our costs and
expenses are priced in United States dollars, with the remaining priced in
Chinese renminbi, Euros and Hong Kong dollars. Accordingly, the competitiveness
of our products relative to products produced locally (in foreign markets) may
be affected by the performance of the United States dollar compared with that of
our foreign customers' currencies. United States sales were $68,555, $77,537 and
$81,795, or 48.6%, 68.7% and 76.0% of net sales, for the fiscal years ended
March 31, 2005, 2004 and 2003, respectively. Sales from our foreign facilities
were $72,386, $35,276, and $25,882 or 51.4%, 31.3% and 24.0% of net sales, for
the fiscal years ended March 31, 2005, 2004, and 2003, respectively. We are
exposed to foreign currency transaction and translation losses, which might
result from adverse fluctuations in the value of the Euro, Hong Kong dollar and
Chinese renminbi.
9
At March 31, 2005, we had net assets of $48,009 in the United States. At March
31, 2005, we had net assets of $49 in Europe, subject to fluctuations in the
value of the Euro against the dollar. At March 31, 2005, we had net assets of
$9,503 in Hong Kong subject to fluctuations in the value of the Hong Kong dollar
and net assets of $10,455 in China subject to fluctuations in the value of the
Chinese renminbi. We had net assets of $23,893 and $7,088 in the United States,
at March 31, 2004 and 2003, respectively. At March 31, 2004 and March 31, 2003,
we had no net assets in Europe. At March 31, 2004, we had net assets of $4,836
in Hong Kong subject to fluctuations in the value of the Hong Kong dollar and
net assets in China of $7,330 subject to fluctuations in the value of the
Chinese renminbi. At March 31, 2003, we had net liabilities of $2,045 in Hong
Kong subject to fluctuations in the value of the Hong Kong dollar and net assets
of $13,743 in China subject to fluctuations in the value of the Chinese
renminbi.
Fluctuations in the value of the Hong Kong dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong dollar to that of the United States dollar. However, there can be no
assurance that the value of the Hong Kong dollar will continue to be tied to
that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon. The Chinese government is currently
reevaluating its foreign currency policy, and there have been indications, as
reported widely in the news media, that the Chinese government may in fact allow
the Chinese renminbi to revalue in the foreseeable future. Based on the net
exposure of renminbi to US dollars for the fiscal year ended March 31, 2005, we
estimate a negative operating income impact of $135 for every 1% appreciation in
renminbi against US dollar (assuming no associated cost increases or currency
hedging).
Based on the net exposures of Euros to the US dollars for the fiscal year ended
March 31, 2005, we estimate a positive operating income impact of $95 for every
1% appreciation in Euros relative to the US dollar (assuming no associated cost
increases or currency hedging).
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to potential foreign currency,
transaction and translation risks, we may purchase currency exchange forward
contracts, currency options, or other derivative instruments, provided such
instruments may be obtained at suitable prices. We acquired a number of foreign
exchange currency contracts with the purchase of Humirel, as disclosed in Note 5
to the Consolidated Financial Statements in this Annual Report on Form 10-K.
EMPLOYEES
As of March 31, 2005, we had 1,903 employees, including 213 in the United
States, 150 in the European Union, and 1,540 in Asia. As of March 31, 2005,
1,485 employees were engaged in manufacturing, 145 were engaged in
administration, 80 were engaged in sales and marketing and 193 were engaged in
engineering.
Our employees in the U.S. and Asia are not covered by collective bargaining
agreements. The majority of our employees in the European Union are covered by
collective bargaining agreements. We believe our employee relations are
satisfactory.
10
ENVIRONMENTAL MATTERS
We are subject to comprehensive and changing foreign, federal, state, and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and hazardous wastes, and the
remediation of contamination associated with releases of hazardous substances.
We believe that we are in compliance with current environmental requirements.
Nevertheless, we use hazardous substances in our operations, and as is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from our properties, we may be held liable, and may be required to pay the cost
of remedying the condition. The amount of any resulting liability could be
material.
BACKLOG
At March 31, 2005, the dollar amount of backlog orders believed to be firm was
approximately $46,069. Acquisitions account for $9,921 of this backlog. We
include in backlog orders that have been accepted from customers that have not
been filled or shipped and are supported with a purchase order. It is expected
that the majority of these orders will be shipped during the next 12 months. At
March 31, 2004, our backlog of unfilled orders was approximately $27,200. All
orders are subject to modification or cancellation by the customer with limited
changes. We believe that backlog may not be indicative of actual sales for the
current fiscal year or any succeeding period.
SEASONALITY
Our Consumer Products sales are seasonal, with highest sales during the second
and third fiscal quarters. There is no significant seasonality to our Sensor
sales.
AVAILABLE INFORMATION
We maintain an Internet website at the following address: www.msiusa.com. The
information on our website is not incorporated by reference into this Annual
Report on Form 10-K.
We make available on or through our website certain reports and amendments to
those reports that we file with or furnish to the Securities and Exchange
Commission (the "SEC") in accordance with the Securities Exchange Act of 1934.
These include our annual reports on Form 10-K, our quarterly reports on Form
10-Q and our current reports on Form 8-K. We make this information available on
our website free of charge as soon as reasonably practicable after we
electronically file the information with, or furnish it to, the SEC.
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. Forward looking statements may be
identified by such words or phrases as "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will," "may" and similar expressions. All
statements that address operating performance, events or developments that we
expect or anticipate will occur in the future are forward-looking statements.
The forward-looking statements below are not guarantees of future performance
and involve a number of risks and uncertainties. Factors that might cause actual
results to differ materially from the expected results described in or
underlying our forward-looking statements include:
- Conditions in the general economy and in the markets served by us;
- Competitive factors, such as price pressures and the potential
emergence of rival technologies;
- Interruptions of suppliers' operations or the refusal of our suppliers
to provide us with component materials;
- Timely development, market acceptance and warranty performance of new
products;
- Changes in product mix, costs and yields and fluctuations in foreign
currency exchange rates;
- Uncertainties related to doing business in Europe, Hong Kong and
China;
- The continued decline in the European consumer products market;
- A decline in the United States consumer products market;
11
- Legal proceedings described below under "Item 3 - Legal Proceedings";
and
- The risk factors listed from time to time in our SEC reports.
This list is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the filing of this Annual Report on Form 10-K, whether as a result of new
information, future events, changes in assumptions or otherwise.
RISK FACTORS
An investment in our common stock is speculative in nature and involves a high
degree of risk. No investment in our common stock should be made by any person
who is not in a position to lose the entire amount of such investment.
In addition to being subject to the risks described elsewhere in this Form 10-K,
including those risks described below under "Liquidity and Capital Resources,"
an investment in our common stock is subject to the following risks and
uncertainties:
IF WE DO NOT DEVELOP AND INTRODUCE NEW PRODUCTS IN A TIMELY MANNER, WE MAY NOT
BE ABLE TO MEET THE NEEDS OF OUR CUSTOMERS AND OUR NET SALES MAY DECLINE.
Our success depends upon our ability to develop and introduce new sensor
products, sensor-based consumer products and product line extensions. If we are
unable to develop or acquire new products in a timely manner, our net sales will
suffer. The development of new products involves highly complex processes, and
at times we have experienced delays in the introduction of new products. Since
many of our sensor products are designed for specific applications, we must
frequently develop new products jointly with our customers. We are dependent on
the ability of our customers to successfully develop, manufacture and market
products that include our sensors. Successful product development and
introduction of new products depends on a number of factors, including the
following:
- accurate product specification;
- timely completion of design;
- achievement of manufacturing yields;
- timely, quality and cost-effective production; and
- effective marketing.
12
RAPID GROWTH IN THE SENSOR DIVISION BRINGS RISKS AND CHALLENGES ASSOCIATED WITH
GROWTH.
The rapid growth of the Sensor Division through a combination of organic and
acquisitive means creates a unique set of challenges which include:
- managing inventory from acquired companies as well as inventory
required for new programs;
- prioritizing the right engineering programs so new opportunities are
harvested without losing business in smaller, more stable lines of
business;
- managing a growing end user business alongside a robust and larger OEM
business;
- building infrastructure and the management team to support growth of
the business in new geographies, especially Europe;
- maintaining a pipeline of increasingly larger opportunities to achieve
comparable year over year growth rates;
- maintaining a rapidly changing balance sheet to optimize debt to
equity and working capital ratios.
WE HAVE SUBSTANTIAL NET SALES AND OPERATIONS OUTSIDE OF THE UNITED STATES,
INCLUDING SIGNIFICANT OPERATIONS IN CHINA AND EUROPE THAT EXPOSE US TO
INTERNATIONAL RISKS.
Our international sales accounted for approximately 51.4% of our net sales in
the fiscal year ended March 31, 2005 and 31.3 % of our net sales in the fiscal
year ended March 31, 2004. At March 31, 2005, our foreign subsidiaries' total
assets aggregated $53,265, of which, $15,395 was in Hong Kong, $7,149 was in
China and $30,721 was in Europe. We are subject to the risks of foreign currency
transaction and translation losses, which might result from fluctuations in the
values of the Hong Kong dollar and Chinese renminbi. At March 31, 2005, we had
net assets of $9,503 subject to possible fluctuations in the value of the Hong
Kong dollar, net assets of $10,455 subject to fluctuations in the value of the
Chinese renminbi and net assets of $49 subject to fluctuations in the Euro. Our
foreign subsidiaries' operations reflect intercompany transfers of costs and
expenses, including interest on intercompany trade receivables, at amounts
established by us.
We manufacture or source nearly all of our sensor-based consumer products and
the majority of our sensor products in China. Our China subsidiary is subject to
certain government regulations, including currency exchange controls, which
limit the subsidiary's ability to pay cash dividends or lend funds to us. The
inability to operate in China or the imposition of significant restrictions,
taxes, or tariffs on our operations in China would impair our ability to
manufacture products in a cost-effective manner and could reduce our
profitability significantly.
Risks specific to our international operations include:
- political conflict and instability in the relationships among Hong
Kong, Taiwan, China, the United States and in our target international
markets;
- political instability and economic turbulence in Asian markets;
- changes in United States and foreign regulatory requirements resulting
in burdensome controls, tariffs and import and export restrictions;
- difficulties in staffing and managing international operations;
- changes in foreign currency exchange rates, which could make our
products more expensive as stated in local currency, as compared to
competitive products priced in the local currency;
- enforceability of contracts and other rights or collectability of
accounts receivable in foreign countries due to distance and different
legal systems;
13
- delays or cancellation of production and delivery of our products due
to the logistics of international shipping, which could damage our
relationships with our customers;
- a recurrence of the outbreak of SARS and the associated risks to our
operations in China and Hong Kong; and
- tax policy change in China, which could affect the profitability of
our operations in China. On January 1, 2004, China adopted a new Value
Added Tax (VAT) export refund rate, dropped from 17% to 13%, with the
intention of reducing their trade surplus and increasing pressure on
local currency.
COMPETITION IN THE MARKETS WE SERVE IS INTENSE AND COULD REDUCE OUR NET SALES
AND HARM OUR BUSINESS.
Highly fragmented markets and high levels of competition characterize our Sensor
business. Despite recent consolidations, including the acquisition of several
smaller competitors of ours by larger competitors like General Electric,
Honeywell, and Danaher Corporation, the sensor industry remains highly
fragmented. The Consumer Products business is also highly competitive and is
becoming more competitive as a result of the emergence of new scale
manufacturers and enhanced product lines from existing competitors. We cannot
assure that our original equipment manufacturer customers, who are also
competitors, will not develop their own production capability or locate
alternative sources of supply, and discontinue purchasing products from us. In
addition, the barriers to entry are being reduced in the scale industry due to
the emergence of low cost, commercially available electronics and load cells.
Some of our competitors and potential competitors may have a number of
significant advantages over us, including:
- greater financial, technical, marketing, and manufacturing resources;
- preferred vendor status with our existing and potential customer base;
- more extensive distribution channels and a broader geographic scope;
- larger customer bases; and
- a faster response time to new or emerging technologies and changes in
customer requirements.
A SUBSTANTIAL PORTION OF OUR NET SALES IS GENERATED BY A SMALL NUMBER OF LARGE
CUSTOMERS. IF ANY OF THESE CUSTOMERS REDUCE OR POSTPONE ORDERS, OUR NET SALES
AND EARNINGS WILL SUFFER.
Historically, a relatively small number of customers have accounted for a
significant portion of our net sales. For the fiscal year ended March 31, 2005,
the five largest customers of our Consumer Products business represented
approximately 55% of net sales for that business. Because we have no long-term
volume purchase commitments from any of our significant customers, we cannot be
certain that our current order volume can be sustained or increased. The loss of
or decrease in orders from any major customer could significantly reduce our net
sales and profitability.
OUR TRANSFER PRICING PROCEDURES MAY BE CHALLENGED, WHICH MAY SUBJECT US TO
HIGHER TAXES AND ADVERSELY AFFECT OUR EARNINGS.
Transfer pricing refers to the prices that one member of a group of related
companies charges to another member of the group for goods, services, or the use
of intellectual property. If two or more affiliated companies are located in
different countries, the laws or regulations of each country generally will
require that transfer prices be the same as those charged by unrelated companies
dealing with each other at arm's length. If one or more of the countries in
which our affiliated companies are located believes that transfer prices were
manipulated by our affiliate companies in a way that distorts the true taxable
income of the companies, the laws of countries where our affiliated companies
are located could require us to redetermine transfer prices and thereby
reallocate the income of our affiliate companies in order to reflect these
transfer prices. Any reallocation of income from one of our companies in a lower
tax jurisdiction to an affiliated company in a higher tax jurisdiction would
result in a higher overall tax liability to us.
14
Moreover, if the country from which the income is being reallocated does not
agree to the reallocation, the same income could be subject to taxation by both
countries.
We have adopted transfer-pricing procedures with our subsidiaries to regulate
intercompany transfers. Our procedures call for the transfer of goods, services,
or intellectual property from one company to a related company at prices that we
believe are arm's length. We have established these procedures due to the fact
that some of our assets, such as intellectual property developed in the United
States, are transferred among our affiliated companies. If the United States
Internal Revenue Service or the taxing authorities of any other jurisdiction
were to successfully require changes to our transfer pricing practices, we could
become subject to higher taxes and our earnings would be adversely affected. Any
determination of income reallocation or modification of transfer pricing laws
can result in an income tax assessment of the portion of income deemed to be
derived from the United States or other taxing jurisdiction.
PRESSURE BY OUR CUSTOMERS TO REDUCE PRICES AND TO AGREE TO LONG-TERM SUPPLY
ARRANGEMENTS MAY CAUSE OUR NET SALES OR PROFIT MARGINS TO DECLINE.
Our customers are under pressure to reduce prices of their products. Therefore,
we expect to experience pressure from our customers to reduce the prices of our
products. Our customers frequently negotiate supply arrangements with us well in
advance of delivery dates, thereby requiring us to commit to price reductions
before we can determine if we can achieve the assumed cost reductions. We
believe that we must reduce our manufacturing costs and obtain larger orders to
offset declining average sales prices. If we are unable to offset declining
average sales prices, our gross profit margins will decline.
AS PART OF OUR BUSINESS STRATEGY, WE HAVE ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
AND COSTLY TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR
DIVERT MANAGEMENT'S ATTENTION.
We made several acquisitions during fiscal year 2005. As a part of our business
strategy, we may enter into additional business combinations and acquisitions.
Acquisitions are typically accompanied by a number of risks, including the
difficulty of integrating the operations and personnel of the acquired
companies, the potential disruption of our ongoing business and distraction of
management, expenses related to the acquisition and potential unknown
liabilities associated with acquired businesses. If we are not successful in
completing acquisitions that we may pursue in the future, we may be required to
reevaluate our growth strategy, and we may incur substantial expenses and devote
significant management time and resources in seeking to complete proposed
acquisitions that will not generate benefits for us.
In addition, with future acquisitions, we could use substantial portions of our
available cash as all or a portion of the purchase price. We could also issue
additional securities as consideration for these acquisitions, which could cause
significant stockholder dilution. Our prior acquisitions and any future
acquisitions may not ultimately help us achieve our strategic goals and may pose
other risks to us.
15
As a result of our previous acquisitions, we have added several different
decentralized operating and accounting systems, resulting in a complex reporting
environment. We expect that we will need to continue to modify our accounting
policies, internal controls, procedures and compliance programs to provide
consistency across all our operations, in order to increase efficiency and
operating effectiveness and improve corporate visibility into our decentralized
operations.
ITEM 2. PROPERTIES
As of March 31, 2005, we leased all but one of our properties under operating
leases as follows:
LOCATION PRIMARY USE BUSINESS SQ. FT. LEASE EXPIRATION
------------------ -------------------------- -------- ------- ----------------
Fairfield, NJ USA* Light manufacturing, Sensor 20,853 Oct-05
research and development,
sales and marketing
Wayne, PA USA Research and development, Sensor 2,900 Dec-06
Sales and marketing
San Jose, CA USA Manufacturing, research Sensor 4,700 Aug-05
and development, sales and
marketing
Aliso Viejo, CA Research and development, Sensor 2,283 Dec-07
USA and Product Support
Shenzhen, China Sensors principal Asian Sensor 125,860 Sep-07
Manufacturing facility
Shenzhen, China Research and development
product support facility Consumer 12,214 Feb-07
Hampton, VA USA Sensors principal domestic
manufacturing and Sensor 80,725 Jul-11
distribution facility, and
Corporate headquarters
Hampton, VA USA** Distribution and warehouse Consumer 39,275 Jul-11
Torrance, CA Manufacturing, research
and development, sales and Sensor 7,100 May-06
marketing
Plainfield, IL *** Light Manufacturing,
Research and development, Sensor 3,000 May-06
Sales and marketing
Pfaffenhofen, Sales and Marketing Sensor 1,300 Dec-05
Germany
16
Toulouse, France Manufacturing, research
and development, sales and Sensor 20,000 July-07
marketing
Hong Kong, China Trading office Consumer 2,000 Mar-06
Kings Langley,
England**** Sales and marketing Consumer 1,070 Month to Month
Owned Property:
---------------
Les Clayes-sous- Manufacturing, sales and
Bois, France marketing Sensor 12,378
*The company acquired the lease of the Fairfield, NJ facility as part of the
Entran acquisition. There will be no activity at this facility after June,
2005. The company is in discussions with the facility landlord to exit the
lease prior to the October, 2005 lease termination date.
**Our Consumer distribution and warehouse space in Hampton, Virginia is
presently vacant due to the Conair transaction, as we no longer sell the Thinner
brand of bath and kitchen scales to retailers. We are presently attempting to
sublease the unused space. Our accounting for the Hampton lease is in accordance
with the requirements for FASB 146, "Accounting for Costs Associated with Exit
or Disposal Activities" whereby we did not record a liability for the lease as
part of the consummation of the transaction with Conair because the Company
still derives economic benefit from the lease.
***The Company elected to exit the lease in Plainfield, IL effective May 31,
2005.
****The Company elected to exit the lease in Kings Langley, England effective
May 31, 2005.
Our sensor manufacturing facilities located in China and Virginia are ISO 9001
certified. We believe that these premises are suitable and adequate for our
present operations.
ITEM 3. LEGAL PROCEEDINGS
PENDING MATTERS
Robert L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No.
02-CV-3431. On July 17, 2002, Robert DeWelt, the former acting Chief Financial
Officer and former acting general manager of our Schaevitz Division, filed a
lawsuit against us and certain of our officers and directors in the United
States District Court of the District of New Jersey. Mr. DeWelt resigned on
March 26, 2002 in disagreement with management's decision not to restate certain
of our financial statements. The lawsuit alleges a claim for constructive
wrongful discharge and violations of the New Jersey Conscientious Employee
Protection Act. Mr. DeWelt seeks an unspecified amount of compensatory and
punitive damages. We filed a Motion to Dismiss this case, which was denied on
June 30, 2003. We have answered the complaint and are engaged in the discovery
process. This litigation is ongoing and we cannot predict its outcome at this
time.
In re Service Merchandise Company, Inc. (Service Merchandise Company, Inc.
v. Measurement Specialties, Inc.), United States Bankruptcy Court for the Middle
District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro. No.
301-0462A. We are currently the defendant in a lawsuit filed in March 2001 by
Service Merchandise Company, Inc. ("SMC") and its related debtors (collectively,
the "Debtors") in the United States District Court for the Middle District of
Tennessee in the context of the Debtors' Chapter 11 bankruptcy proceedings. The
Bankruptcy Court entered a stay of the action in May 2001, which was lifted in
February 2002. On March 30, 2004, the court entered an order allowing written
discovery in the form of interrogatories and requests for production of
documents to begin. All other discovery remains stayed. The action alleges that
we received approximately $645 from one or more of the Debtors during the ninety
17
(90) day period before the Debtors filed their bankruptcy petitions, that the
transfers were to our benefit, were for or on account of an antecedent debt owed
by one or more of the Debtors, made when one or more of the Debtors were
insolvent, and that the transfers allowed us to receive more than we would have
received if the cases were cases under Chapter 7 of the United States Bankruptcy
Code. The action seeks to disgorge the sum of approximately $645 from us. It is
not possible at this time to predict the outcome of the litigation or estimate
the extent of any damages that could be awarded in the event that we are found
liable to the estates of SMC or the other Debtors.
SEB Patent Issue. On December 12, 2003, Babyliss, SA, a wholly owned
subsidiary of Conair Corporation, received notice from the SEB Group ("SEB")
alleging that certain bathroom scales manufactured by us and sold by Babyliss in
France violated certain patents owned by SEB. On May 19, 2004, SEB issued a Writ
of Summons to Babyliss and us, alleging patent infringement and requesting the
Tribunal de Grande Instance de Paris to grant them unspecified monetary damages
and injunctive relief. Pursuant to the indemnification provisions of the Conair
transaction, we have assumed defense of this matter. After thorough review, we
believe SEB's allegations of patent infringement are without merit and we intend
to defend our position vigorously. On November 9, 2004, we requested of the
Tribunal de Grande Instance de Paris a declaration of non-infringement of the
SEB patent with regard to certain weighing sensor design known as an "M" design
included in certain of our bathroom scales other than those to which SEB has
alleged infringement. On March 14, 2005, we filed pleadings with the Tribunal
seeking nullity of the SEB patent and a ruling of non-infringement of the SEB
patent with respect to the "M" design. At this time, we cannot predict the
outcome of this matter.
From time to time, we are subject to other legal proceedings and claims in
the ordinary course of business. We currently are not aware of any such legal
proceedings or claims that we believe will have, individually or in the
aggregate, a material adverse effect on our business, financial condition, or
operating results.
Settled Litigation
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties, Inc.
(Arbitration). Exeter Technologies, Inc. ("Exeter") and Michael Yaron alleged
underpayments of approximately $322 relating to a January 5, 2000 Product Line
Acquisition Agreement. We maintained the claim failed to recognize our rights
to certain contractual allowances and offsets. In March 2004, the parties
settled this matter for a $300 payment by the company.
Measurement Specialties, Inc. Securities Litigation. On March 20, 2002, a class
action lawsuit was filed on behalf of purchasers of our common stock in the
United States District Court for the District of New Jersey against the company
and certain of our present and former officers and directors. The complaint was
subsequently amended to include the underwriters of our August 2001 public
offering as well as our former auditors. The lawsuit alleged violations of the
federal securities laws. The lawsuit sought an unspecified award of money
damages. After March 20, 2002, nine additional similar class actions were filed
in the same court. The ten lawsuits were consolidated into one case under
caption In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No.
1071 (D.N.J.). Plantiffs filed a Consolidated Amended Complaint on September
12, 2002. The underwriters made a claim for indemnification under the
underwriting agreement.
On April 1, 2004, we reached an agreement in principle to settle this class
action lawsuit. On July 20, 2004, the court approved the settlement agreement.
18
Pursuant to the agreement, the case has been settled as to all defendants in
exchange for payments of $7,500 from the company and $590 from Arthur Anderson,
our former auditors. Both our primary and excess D&O insurance carriers
initially denied coverage for this matter. After discussion, our primary D&O
insurance carrier agreed to contribute $5,000 and our excess insurance carrier
agreed to contribute $1,400 to the settlement of this case. As part of the
arrangement with our primary carrier, we agreed to renew our D&O coverage for
the period from April 7, 2003 through April 7, 2004. The $3,200 renewal premium
represented a combination of the market premium for an aggregate of $6,000 in
coverage for this period plus a portion of our contribution toward the
settlement.
SEC Investigation. In February 2002, we contacted the staff of the SEC after
discovering that our former chief financial officer had made the
misrepresentation to senior management, our board of directors and our auditors
that a waiver of a covenant default under our credit agreement had been obtained
when, in fact, our lenders had refused to grant such a waiver. Since February
2002, the company and a special committee formed by our board of directors have
been cooperating with the staff of the SEC. In June, 2002, the staff of the
Division of Enforcement of the SEC informed the company that it was conducting a
formal investigation relating to matters reported in our Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001.
On June 28, 2004, the Company reached a definitive settlement agreement with the
SEC which resolved the SEC's investigation of the Company. On June 30, 2004,
the court approved the settlement agreement. Pursuant to the definitive
settlement agreement, the Company paid one dollar in disgorgement and $1,000 in
civil penalties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our security holders during the fourth
quarter of fiscal year 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
(A) Market Price
Our common stock, no par value, is traded on the American Stock Exchange
(AMEX) under the symbol MSS. The following table presents high and low sales
prices of our common stock as reported on the AMEX for the periods indicated:
HIGH LOW
------ ------
YEAR ENDING MARCH 31, 2005
Quarter ended June 30, 2004 $22.82 $18.65
Quarter ended September 30, 2004 25.85 19.74
Quarter ended December 31, 2004 26.98 23.75
Quarter ended March 31, 2005 28.06 23.00
YEAR ENDING MARCH 31, 2004
Quarter ended June 30, 2003 $ 5.65 $ 2.96
Quarter ended September 30, 2003 13.50 5.15
Quarter ended December 31, 2003 22.10 11.85
Quarter ended March 31, 2004 23.55 18.36
19
(B) Approximate Number of Holders of Common Stock
At May 27, 2005, there were approximately 112 shareholders of record of our
common stock.
(C) Dividends
We have not declared cash dividends on our common equity. Additionally, the
payment of dividends is prohibited under our credit agreement. We intend to
retain earnings to support our growth strategy and we do not anticipate paying
cash dividends in the foreseeable future.
At present, there are no material restrictions on the ability of our Hong
Kong subsidiary to transfer funds to us in the form of cash dividends, loans,
advances, or purchases of materials, products or services. Chinese laws and
regulations, including currency exchange controls, restrict distribution and
repatriation of dividends by our China subsidiary.
(D) Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 for information about our equity compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
Consolidated Financial Statements and the related Notes to the Consolidated
Financial Statements included in this Annual Report on Form 10-K.
(AMOUNTS IN THOUSANDS OF US DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,
2005 2004 2003 2002 2001
Results of operations:
Net sales $140,941 $112,813 $107,676 $ 97,273 $ 97,033
Income (loss) from continuing operations $ 14,826 $ 21,374 $ (6,323) $(24,234) $ 2,462
Net income (loss) $ 14,826 $ 21,586 $ (9,097) $(29,047) $ 1,197
Net cash provided by (used in):
Operating activities $ 11,377 $ 10,405 $ 3,047 $ (6,077) $ (4,123)
Investing activities $(48,322) $ 9,687 $ 21,113 $(12,070) $(19,287)
Financing activities $ 22,100 $ (3,508) $(24,178) $ 27,344 $ 27,539
Income (loss) from continuing operations
per common share:
Basic $ 1.11 $ 1.73 $ (0.53) $ (2.30) $ 0.30
Diluted $ 1.05 $ 1.53 $ (0.53) $ (2.30) $ 0.27
Loss per common share from discontinued operations
Basic $ - $ 0.02 $ (0.23) $ (0.43) $ (0.15)
Diluted $ - $ 0.01 $ (0.23) $ (0.43) $ (0.14)
Net Income (loss) per common share:
Basic $ 1.11 $ 1.75 $ (0.76) $ (2.76) $ 0.15
Diluted $ 1.05 $ 1.54 $ (0.76) $ (2.76) $ 0.13
Cash dividends declared per common share None None None None None
As of March 31,
20
Total assets $126,004 $ 77,000 $ 46,168 $ 89,612 $ 67,685
Long-term debt, net of current maturities $ 20,028 $ - $ 2,000 $ - $ -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our results of operations and financial condition
should be read together with the other financial information and Consolidated
Financial Statements and related Notes included in this Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in the forward-looking statements as a result of a variety of factors.
Our fiscal year begins on April 1 and ends on March 31. References in this
report to the year 2004 or fiscal 2004 refer to the 12-month period from April
1, 2003 through March 31, 2004 and references in this report to the year 2005 or
fiscal 2005 refer to the 12-month period from April 1, 2004 through March 31,
2005.
OVERVIEW
We are a designer and manufacturer of sensors and sensor-based consumer
products. We produce a wide variety of sensors that use advanced technologies to
measure precise ranges of physical characteristics including pressure, position,
force, vibration, humidity and photo optics. We have two segments, the Sensor
and Consumer Products.
Our Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. Our sensor products include
pressure and electromagnetic displacement sensors, piezoelectric polymer film
sensors, panel sensors, custom microstructures, load cells, accelerometers,
optical sensors and humidity sensors.
Our Consumer Products segment designs and manufactures sensor-based consumer
products that we sell to original equipment manufacturers, retailers and
distributors in both the United States and Europe. Consumer products include
bathroom and kitchen scales, tire pressure gauges and distance estimators.
The following table sets forth, for the periods indicated, certain items in our
consolidated statements of income as a percentage of net sales:
FISCAL YEAR ENDED MARCH 31,
-----------------------------------
2005 2004 2003
----------- -------- ------------
Net Sales
Sensors 65.5% 53.4% 48.6%
Consumer products 34.5 46.6 51.4
----------- -------- ------------
Total net sales 100.0 100.0 100.0
Cost of Sales 57.9 55.4 64.7
----------- -------- ------------
Gross profit 42.1 44.6 35.3
Operating expenses (income)
Selling, general, and administrative 25.4 27.0 31.8
Non-cash compensation - 5.7 -
Litigation expense - 1.3 3.3
Research and development 2.5 3.1 3.3
Customer funded development (0.2) - (0.3)
21
Amortization of acquired intangibles 0.5 - -
Restructuring costs - 0.4 1.1
Interest expense, net 0.5 0.3 1.9
Other expenses (income) (0.1) (1.3) (0.4)
----------- -------- ------------
28.6 36.5 40.7
Income/(loss) from continuing operations before
income taxes 13.5 8.1 (5.4)
Income tax benefit (expense) (3.0) 10.8 (0.4)
Loss from operations of discontinued units - 0.2 (3.6)
Gain on disposition of discontinued units - - 1.0
----------- -------- ------------
NET INCOME (LOSS) 10.5 % 19.1 % (8.4) %
=========== ======== ============
EXECUTIVE SUMMARY
Measurement Specialties has seen a significant amount of change over the last
several years. In May 2002, we embarked upon an aggressive restructuring effort
to improve the operating performance of the Company. A key component of this
restructuring was the elimination of underutilized facilities to consolidate our
operations in Shenzhen, China and Hampton, Virginia. Having completed this
restructuring, Measurement Specialties is now a global sensor solutions company
with a broad range of technologies and capabilities. In fiscal year 2005, the
Company embarked on an ambitious growth strategy for the sensor division, to be
achieved through acquisition and organic growth. The result was six acquisitions
during FY 05: Elekon Industries, Inc., Entran Devices, Inc. and Entran SA,
Encoder Devices, LLC, Humirel SA, MWS Sensorik GMBH, and Polaron Components Ltd.
(the "Acquisitions") (See Notes 2 and 5 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K). Our focus remains engineered
solutions where we can use our engineering and manufacturing talent and depth of
knowledge and experience in sensors to provide a complete solution to our
customers. We also have a substantial end user business for high quality "off
the shelf" sensors and transducers used for test, instrumentation and process
control. A key to our manufacturing strategy is leveraging the significant
infrastructure we now have in Shenzhen, China. This infrastructure has enabled
us to reduce costs and improve financial performance while continuing to provide
our customers with low cost, highly reliable products.
OUR STRATEGY
DEVELOPMENT STRATEGY. We focus our development efforts in both our Sensor
business and Consumer Products business on the original equipment manufacturers
(OEM) market. In the Consumer Products business, having both a branded and OEM
consumer scale business created some channel conflicts historically. As part of
this focus, we sold certain assets associated with our Thinner(R) branded
bathroom and kitchen scale business to Conair Corporation on January 30, 2004.
We previously sold our Thinner(R) branded scales directly to retailers,
predominantly in the U.S. and Canada. On a going-forward basis, we expect to
supply these scales directly to Conair and intend to continue our efforts in the
design, development and manufacture of innovative scale products for sale to our
worldwide base of OEM customers. Although our development focus is on the OEM
market, we intend to continue to develop and manufacture our tire pressure
gauges, which are sold directly to retail customers under the Accutire(R) brand.
As OEM margins have historically been lower than margins on sales to retail
customers, we expect our Consumer Products segment margins will decline as a
result of this transaction.
22
GROWTH STRATEGY. We are focused on aggressively growing our Sensor segment. We
expect that this growth will come through a combination of organic growth and
the acquisition of sensor businesses. To that end, since March 31, 2004, the
Company has made six Acquisitions referenced above. To finance the Acquisitions,
we entered into an expanded $35 million credit facility (See Note 7 to the
Consolidated Financial Statements included in this Annual Report on Form 10-K).
To finance additional acquisitions, we would consider additional borrowings, the
sale of equity securities, or the sale of existing Company assets, including
assets in our Consumer Products segment. The results of operations of these
acquisitions are included in our consolidated statement of operations as of and
since their respective dates of purchase.
ESTABLISHMENT OF OFFSHORE HOLDING COMPANIES. In the quarter ended June 30,
2004, the Company reorganized its Asian operations under an offshore holding
company, Kenabell Holding Limited, a British Virgin Island Company ("Kenabell
Holding BVI"). As part of the reorganization, a new entity was formed under
Kenabell Holding BVI in the Cayman Islands, Measurement Limited ("ML Cayman"). A
significant portion of the Consumer business in Asia was transferred into ML
Cayman during the quarter ended June 30, 2004. These holding companies were
formed as part of a foreign tax planning restructuring, and to facilitate any
potential future sale of assets of our Consumer Products business.
MSI Sensors (Asia) Limited (formerly named Measurement Limited, organized in
Hong Kong) owns all of the shares of MSI Sensors (China) Ltd. (formerly named
Jingliang Electronics (Shenzhen) Co. Ltd, organized in the Peoples Republic of
China). Kenabell Holding BVI owns all of the shares of MSI Sensors (Asia)
Limited and ML Cayman. All the companies are included in the consolidated
financial statements of the group.
In the quarter ended March 31,2005, as part of a foreign tax planning
restructuring, the Company completed the reorganization of its European
subsidiaries, which includes Entran SA and Humirel SA . This reorganization
involved transferring ownership of these subsidiaries to a Cyprus holding
company under Kenabell Holding BVI, named Acalon Holding Limited. In
conjunction with this reorganization, the ownership of Kenabell Holding BVI was
also transferred to Measurement Specialties Foreign Holdings Corporation, a
Delaware corporation.
TRENDS.
Sensor Business: The sensors market is highly fragmented with hundreds of niche
players. While the worldwide sensors market that we serve is expected to have a
5% Compound Annual Growth Rate (CAGR), we expect to gain share and grow our
Sensor business in excess of the market. As a result of this growth strategy,
we anticipate pursuing high volume sensor business that will carry lower gross
margins than our traditional averages, which may influence our overall sensor
gross margins. Accordingly, we anticipate average gross margins in the sensor
division to decline to 47% from 50% for the fiscal year ending March 31, 2006.
Consumer Products Business: As a result of the Conair transaction, we now supply
bath and kitchen scales solely to OEM manufacturers for sale under their labels.
As OEM margins historically have been lower than retail margins, including the
effect of the amortized gain related to the Conair transaction (See Note 6 to
the Consolidated Financial Statements included in this Annual Report on Form
10-K), we anticipate gross margins in the Consumer Products business to be in
the 22% - 24% range for the fiscal year ending March 31, 2006.
Please refer to Item 1 Business in this report for additional details regarding
the basis of the trends described above.
CHANGES IN OUR BUSINESS
DISCONTINUED OPERATIONS:
23
In September 2002, we sold all of the outstanding stock of Terraillon Holdings
Limited (referred to herein as "Terraillon"), a European manufacturer of branded
consumer bathroom and kitchen scales, to Fukuda (Luxembourg) S.a.r.l., an
investment holding company incorporated in Luxembourg.
We placed our United Kingdom subsidiary, Measurement Specialties UK Limited
(referred to herein as "Schaevitz(R) UK"), into receivership on June 5, 2002
pursuant to the terms of a Mortgage Debenture dated February 28, 2001. Certain
assets of Schaevitz(R) UK related to the foil strain gauge sensor business were
reacquired during FY05 in the acquisition of Polaron Components, LTD.
Our consolidated financial statements for the fiscal years ended March 31, 2005,
2004, and 2003 include the results of our ongoing operations. As a result of
placing Schaevitz UK into receivership and selling Terraillon, these entities
have been classified as discontinued operations in the consolidated financial
results for all periods presented. Accordingly, all comparisons in Management's
Discussion and Analysis for each of the fiscal years ended March 31, 2005, 2004
and 2003 exclude the results of these discontinued operations except for "Loss
from discontinued units", "Cumulative effect of accounting change, net of tax",
and "Net income (loss)."
SALE OF ASSETS:
On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner(R) branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner(R) brand name and exclusive rights to the Thinner(R)
designs in North America. Assets sold to Conair included, among other things,
all inventories of finished scales, open customer purchase orders, and patents.
We previously sold our Thinner(R) branded scales directly to retailers,
predominately in the U.S. and Canada. On a going-forward basis, we expect to
supply these scales directly to Conair and intend to continue our efforts in the
design, development and manufacture of innovative scale products for sale to our
worldwide base of OEM customers.
In July 2002, we sold the assets, principally property and equipment, related to
our silicon wafer fab manufacturing operation in Milpitas, CA to Silicon
Microstructures, Inc. ("SMI"), a wholly-owned subsidiary of Elmos Semiconductor
AG. The wafer fab operation was formerly part of our IC Sensors division.
Our San Jose research and design center (the former IC Sensors division)
continues to design and sell all, and manufacture most, of the product lines it
produced prior to the sale, including custom wafers and die, pressure sensors,
accelerometers and custom MEMS components, and continues to outsource to SMI the
manufacturing of silicon chips used in these products. This sale is reflected in
the results of operations of the Sensors segment.
RECENT ACQUISITIONS:
As a result of the recent acquisition discussed in Part I, Item I, "Recent
Acquisitions" of this Annual Report on Form 10-K, the financial statements are
not comparable.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123R (Revised 2004), Share-Based Payment. The new FASB rule
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements, rather than disclosed in the footnotes to
the financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. The scope of Statement 123R includes
a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123R replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. FASB Statement 123, as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However,
24
that statement permitted entities the option of continuing to apply the guidance
in Opinion 25, as long as the footnotes to the financial statements disclosed
what net income would have been had the preferable fair-value-based method been
used. Under the effective date provisions included in Statement 123R,
registrants would have been required to implement the Statement's requirements
as of the beginning of the first interim or annual period beginning after June
15, 2005, or after December 15, 2005 for small business issuers. The new rule
allows registrants to implement Statement 123R at the beginning of their next
fiscal year, instead of the next interim period, that begins after June 15,
2005, or December 15, 2005 for small business issuers. The Company will be
required to apply FASB 123R beginning with the quarter ending June 30, 2006.
The Company is currently quantifying the impact of FASB 123R, however, the
Company does believe the adoption of FASB Statement 123R will have a material
effect on its financial position and results of operations consistent with the
pro-forma disclosures.
On November 24, 2004, the FASB issued FASB Statement No. 151, Inventory Costs -
An amendment of ARB No. 43, Chapter 4. This new standard is the result of a
broader effort by the FASB to improve financial reporting by eliminating
differences between GAAP in the United States and GAAP developed by the
International Accounting Standards Board ("IASB"). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. Statement 151 clarifies that abnormal amounts of idle facility
expense, freight, handling costs and spoilage should be expensed as incurred and
not included in overhead. Further, Statement 151 requires that allocation of
fixed production overheads to conversion costs should be based on normal
capacity of the production facilities. The provisions in Statement 151 are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Companies must apply the standard prospectively. The Company does not
believe the adoption of FASB Statement 151 will have a material effect on its
financial position or results of operations.
On December 17, 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29. This new standard is
the result of a broader effort by the FASB to improve financial reporting by
eliminating differences between GAAP in the United States and GAAP developed by
the International Accounting Standards Board (IASB). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. Statement 153 amends APB Opinion No. 29, Accounting for Nonmonetary
Transactions, that was issued in 1973. The amendments made by Statement 153 are
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary
assets that do not have "commercial substance." Previously, Opinion 29 required
that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. The
provisions in Statement 153 are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Early application is
permitted and companies must apply the standard prospectively. The Company does
not believe the adoption of FASB Statement 153 will have a material effect on
its financial position or results of operations.
In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and
Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle, unless it is impracticable to do so. Statement 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005. The Company does not believe the
adoption of FASB Statement 151 will have a material effect on its financial
position or results of operations.
25
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP
109-1"),"Application of SFAS No. 109, "Accounting for Income Taxes", to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." FSP 109-1, which is effective immediately, states that
the tax deduction of qualified domestic production activities, which is provided
by the American Jobs Creation Act of 2004 (the "Jobs Act"), will be treated as a
special deduction as described in SFAS No. 109. Consequently, the impact of the
deduction, which is effective January 1, 2005, will be reported in the period in
which the deduction is claimed on the Company's income tax returns. The Company
does not expect FSP 109-1 to have a material effect on its financial statements.
In December 2004, the FASB issued FASB Staff Position No. 109-2 ("FSP
109-2"),"Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004". FSP 109-2
provides accounting and disclosure guidance related to the Jobs Act provision,
which addresses the limited time 85% dividends received deduction on the
repatriation of certain foreign earnings. Although adoption is effective
immediately, FSP 109-2 states that a company is allowed time beyond the
financial reporting period to evaluate the effect of the Jobs Act on its plan
for reinvestment or repatriation of foreign earnings. The Company is evaluating
the impact of the repatriation provisions of the Jobs Act and will complete its
review by December 31, 2005. However, it is not expected that these provisions
will have a material impact on the Company's financial statements. Accordingly,
as provided for in FSP 109-2, the Company has not adjusted its tax expense or
net deferred tax assets to reflect the repatriation provisions of the Jobs Act.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements and revenues and expenses during the
periods reported. The following accounting policies involve "critical accounting
estimates" because they are particularly dependent on estimates and assumptions
made by management about matters that are highly uncertain at the time the
accounting estimates are made. In addition, while we have used our best
estimates based on facts and circumstances available to us at the time,
different estimates reasonably could have been used in the current period, or
changes in the accounting estimates we used are reasonably likely to occur from
period to period which may have a material impact on the presentation of our
financial condition and results of operations. We review these estimates and
assumptions periodically and reflect the effects of revisions in the period that
they are determined to be necessary.
REVENUE RECOGNITION:
Revenue is recognized when earned, which occurs when the following four
conditions are met: 1. persuasive evidence of an arrangement exists; 2. delivery
has occurred or services have been rendered; 3. the price to the buyer is fixed
or determinable; and 4. collectability is reasonably assured. Certain consumer
products may be sold with a provision allowing the customer to return a portion
of products. We provide for allowances for returns based upon historical and
estimated return rates. The amount of actual returns could differ from our
estimate. Changes in estimated returns would be accounted for in the period of
change.
We utilize manufacturing representatives as sales agents for certain of
our products. Such representatives do not receive orders directly from
customers, take title to or physical possession of products, or invoice
customers. Accordingly, revenue is recognized upon shipment to the customer.
26
Certain consumer products are sold under "private label" arrangements with
various distributors. Such products are manufactured to the distributor's
specifications. We are not responsible for the ultimate sale to third party
customers and therefore record revenue upon shipment to the distributor.
On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner(R) branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner(R) brand name and exclusive rights to the Thinner(R)
designs in North America. We have accounted for the sale of this business under
the guidance of EITF 00-21. As a significant portion of the proceeds from the
sale was in fact an up-front payment for future lost margins, the majority of
the gain on sale has been deferred and will be amortized into revenues in future
periods over the estimated remaining lives for those products sold to Conair.
(See Note 6 to our Consolidated Financial Statements included in this Annual
Report on Form 10-K for a discussion of the sale of the business to Conair).
ACCOUNTS RECEIVABLE:
The majority of our accounts receivable are due from manufacturers of
electronic, automotive, military, and industrial products and retailers. Credit
is extended based on evaluation of a customer's financial condition and,
generally, collateral is not required. Accounts receivable are generally due
within 30 to 90 days and are stated as amounts due from customers net of
allowances for doubtful accounts, and other sales allowances. Accounts
outstanding longer than the contractual payment terms are considered past due.
We determine our allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, our previous loss
history, the customer's current ability to pay its obligation to us, and the
condition of the general economy and the industry as a whole. We write off
accounts receivable when we determine they are uncollectible, and payments
subsequently received on such receivables are credited to the allowance for
doubtful accounts. Actual uncollectible accounts could exceed our estimates and
changes to our estimates will be accounted for in the period of change.
INVENTORIES:
Inventories are valued at the lower of cost or market ("LCM"). For purposes of
analyzing the LCM, market is current replacement cost. Market cannot exceed the
net realizable value (i.e., estimated selling price in the ordinary course of
business less reasonably predicted costs of completion and disposal) and market
shall not be less than net realizable value reduced by an allowance for an
approximately normal profit margin. In evaluating LCM, management also
considers, if applicable, other factors as well, including known trends, market
conditions, currency exchange rates and other such issues. If the utility of
goods is impaired by damage, deterioration, obsolescence, changes in price
levels or other causes, a loss shall be charged as cost of sales in the period
which it occurs.
We make purchasing decisions principally based upon firm sales orders from
customers, the availability and pricing of raw materials and projected customer
requirements. Future events that could adversely affect these decisions and
result in significant charges to our operations include slowdown in customer
demand, customer delay in the issuance of sales orders, miscalculation of
customer requirements, technology changes that render raw materials and finished
goods obsolete, loss of customers and/or cancellation of sales orders. We
establish reserves for our inventories to recognize estimated obsolescence and
unusable items on a continual basis.
Products that have existed in inventory for one calendar year with no usage and
that have no current demand or no expected demand, will be considered obsolete
and fully reserved. Obsolete inventory approved for disposal is written-off
against the reserve. Furthermore, consideration is given to ultimate
circumstances when recording inventory reserves and the disposal of inventory
considered obsolete. Market conditions surrounding products are also considered
periodically to determine if there are any net realizable valuation matters,
which would require a write-down of any related inventories. If market or
technological conditions change, it may result in additional inventory reserves
and write-downs, which would be accounted for in the period of change. The level
of inventory reserves reflects the nature of our industry whereby technological
and other changes, such as customer buying requirements, result in impairment of
inventory.
27
GOODWILL IMPAIRMENT:
Management assesses goodwill for impairment at the reporting unit level on an
annual basis or more frequently under certain circumstances. Such circumstances
include (i) significant adverse change in legal factors or in the business
climate, (ii) an adverse action or assessment by a regulator, (iii)
unanticipated competition, (iv) a loss of key personnel, (v) a
more-likely-than-not expectation that a reporting unit or a significant portion
of a reporting unit will be sold or otherwise disposed of, and (vi) recognition
of an impairment loss in a subsidiary that is a component of a reporting unit.
Management must make assumptions regarding estimating the fair value of our
reporting units. If these estimates or related assumptions change in the future,
we may be required to record an impairment charge. Impairment charges would be
included in general and administrative expenses in our statements of operations,
and would result in reduced carrying amounts of the goodwill.
ACQUISITIONS:
In all acquisitions, the purchase price of the acquired business is allocated to
the assets acquired and liabilities assumed at their fair values on the date of
the acquisition. The fair values of these items were based upon management's
estimates. Certain of the acquired assets are intangible in nature, including
customer relationships, patented and proprietary technology, covenants not to
compete, trade names and order backlog. The excess purchase price over the
amounts allocated to the assets is recorded as goodwill.
All such valuation methodologies, including the determination of subsequent
amortization periods, involve significant judgments and estimates. Different
assumptions and subsequent actual events could yield materially different
results.
LONG LIVED ASSETS:
The Company accounts for the impairment of long-lived assets in accordance with
FAS 142, "Accounting for Goodwill and Other Intangible Assets" and FAS 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets". Long-lived
assets, such as property, plant, and equipment, and purchased intangibles
subject to amortization, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
Management assesses the recoverability of long-lived assets whenever events or
changes in circumstance indicate that the carrying value may not be recoverable.
The following factors, if present, may trigger an impairment review:
(i) Significant underperformance relative to expected historical or
projected future operating results;
(ii) Significant negative industry or economic trends;
(iii) Significant decline in stock price for a sustained period; and
(iv) A change in market capitalization relative to net book value.
If the recoverability of these assets is unlikely because of the existence of
one or more of the above-mentioned factors, an impairment analysis is performed
using a projected discounted cash flow method at the appropriate level (lowest
level at which cash flows is identifiable).
Management must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of these assets. Other factors could
include, among other things, quoted market prices, or other valuation techniques
considered appropriate based on the circumstances. If these estimates or related
assumptions change in the future, an impairment charge may need to be recorded.
Impairment charges would be included in our statements of operations, and would
result in reduced carrying amounts of the related assets on our balance sheet.
INCOME TAXES:
We file income tax returns in every jurisdiction in which we have reason to
believe that we are subject to tax. Historically, we have been subject to
examination by various taxing jurisdictions. To date, none of these examinations
has resulted in any material additional tax. Nonetheless, any tax jurisdiction
may contend that our filing position regarding one or more of our transactions
is contrary to that jurisdiction's laws or regulations.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in financial statements or tax
returns. Under this method, deferred tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of
existing assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Realization of a deferred tax asset is dependent on generating future taxable
income. During the fiscal year ended March 31, 2002, we provided a valuation
allowance against deferred tax assets since we believed at the time that enough
uncertainty existed regarding the realizability of our deferred tax assets.
However, because of the current and expected future results of the company,
taking into account the current status of our litigation (see Note 15 to the
consolidated financial statements included in this Annual Report on Form 10-K
for a discussion of our pending litigation), we have concluded that this
valuation allowance against the deferred tax assets is no longer necessary, and
have reversed the allowance against the provision for taxes in the fiscal year
ended March 31, 2004. (See Note 12 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K for a further discussion of our
taxes.)
The income tax provision is based upon the proportion of pretax profit in each
jurisdiction in which we operate. The income tax rates in Hong Kong and China
are less than those in the United States. Deferred income taxes are not provided
on our subsidiaries' earnings which are expected to be reinvested. Distribution,
in the form of dividends or otherwise, would subject our subsidiaries' earnings
to United States income taxes, subject to an adjustment for foreign tax credits.
Determination of the amount of unrecognized deferred United States income tax
liability is not practicable because of the complexities associated with its
hypothetical calculation.
WARRANTY RESERVE:
Our sensor and consumer products generally are marketed under warranties to end
users of up to five years. Factors affecting our warranty liability include the
number of products sold and historical and anticipated rates of warranty claims
and cost per claim. We provide for estimated product warranty obligations at the
time of sale, based on our historical warranty claims experience and assumptions
about future warranty claims. This estimate is susceptible to changes in the
near term based on introductions of new products, product quality
improvements/declines and changes in end user application and/or behavior.
28
CONTINGENCIES AND LITIGATION:
We periodically assess the potential liabilities related to any lawsuits or
claims brought against us. While it is typically very difficult to determine the
timing and ultimate outcome of these actions, we use our best judgment to
determine if it is probable that we will incur an expense related to a
settlement for such matters and whether a reasonable estimation of such probable
loss, if any, can be made. Given the inherent uncertainty related to the
eventual outcome of litigation, it is possible that all or some of these matters
may be resolved for amounts materially different from any estimates that we may
have made with respect to their resolution.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2005 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2004
(in thousands, except percentages)
ANALYSIS OF CONSOLIDATED STATEMENTS OF INCOME
PERCENTAGE
2005 2004 CHANGE
Net Sales $140,941 $112,813 24.93%
Sensors 92,268 60,247 53.15%
Consumer products 48,673 52,566 -7.41%
Gross profit 59,406 50,300 18.10%
Selling, general, and administrative 35,796 30,448 17.56%
Litigation expense - 1,500 -100.00%
Non-Cash Equity Based Compensation - 6,483 -100.00%
Research and development, net 3,200 3,464 -7.62%
Restructuring costs - 506 -100.00%
Interest expense, net 637 323 97.18%
Income taxes 4,250 (12,262) 134.66%
Income (loss) from discontinued units - 212 -100.00%
The consolidated financial statements for the fiscal years ended March 31, 2005,
2004 and 2003 include the results of the ongoing operations of Measurement
Specialties, Inc. As a result of our restructuring plan, we sold all of the
outstanding stock of Terraillon in September 2002 and placed Schaevitz UK into
receivership in June 2002.
Accordingly, Terraillon and Schaevitz UK are classified as discontinued
operations in the consolidated financial results for all periods presented.
Net Sales.
SENSOR BUSINESS. Sensor sales increased $32,021 from $60,247 to $92,268.
Excluding sales from recent acquisitions of $18,078, sales increased $13,943, or
23.1%. The increase in net sales for our base Sensor business in the fiscal year
ended March 31, 2005 is primarily a result of increased demand in our pressure,
liquid level and traffic sensor products. The significant contributor to the
increase in net sales for these lines is the expanded demand for the automotive
sector with many new platforms adopting our sensor technology which resulted in
strong growth for this market segment. Strong organic growth was also realized
in our acceleration, pressure, security and tilt products in the industrial,
high purity, off-road vehicle test and measurement and commercial market
segments. Approximately $17,100, or 94.5%, of the sales from recent acquisitions
are attributable to Elekon, Entran, and Humirel.
29
CONSUMER PRODUCTS BUSINESS. Net sales decreased $3,893 in the fiscal year ended
March 31, 2005. The US retail bath scale business decreased approximately
$11,800, mainly due to the sale of the Thinner(R) branded business to Conair.
However, this decrease was more than offset by an increase of $14,700 in the OEM
bath scale business. There was a decrease in sales of approximately $6,800 in
the tire gauge line. The majority of this decrease is due to non-repeating
promotions, changes in the scope and selection of customer product assortments,
and a decline in selected OEM customers.
Gross Margin.
Gross margin as a percent of sales for the fiscal year ended March 31, 2005
decreased to 42.1% from 44.6% for the fiscal year ended March 31, 2004.
SENSOR BUSINESS. Gross margin as a percent of sales for our base Sensor business
(which excludes the effects of acquisitions) decreased slightly to 53.4% for the
fiscal year ended March 31, 2005 from 54.2% for the fiscal year ended March 31,
2004. This change is due to the increase in sales of automotive sensors, which
carries a lower gross margin than our average sensor business. Also contributing
to the margin decline is higher commodity costs in our core sensor lines.
Including acquisition sales, gross margin as a percent of sales for our Sensor
business decreased to 50.3%. Elekon represents 36.5% of the acquired sales, and
carries a substantially lower gross margin than our base sensor business. Due to
higher sales of lower margin product, we anticipate sensor gross margin to
decline to approximately 47% to 50% for the fiscal year ended March 31, 2006.
CONSUMER PRODUCTS BUSINESS. Gross margin as a percent of sales in our Consumer
Products business decreased to 25.4% for the fiscal year ended March 31, 2005
from 32.0% for the fiscal year ended March 31, 2004. The majority of the
decrease was in the bathroom scale product line, and is a result of lower
margins associated with sales to original equipment manufacturers as opposed to
retail customers. Margins in our tire gauge product line decreased by 2.2% as a
result of retail pricing pressures. Due to continued pricing pressure with our
OEM customers and increases in commodity costs, we anticipate gross margin to
decline to 22% to 24% for the fiscal year ended March 31, 2006.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling , General and Administrative. Selling, General and Administrative (SG&A)
expenses increased from $30,448 in fiscal 2004 to $35,796 in fiscal 2005.
Excluding SG&A expenses specifically associated with the acquired companies,
SG&A expenses decreased to approximately $29,146. The additional selling,
general and administrative costs resulting from the Acquisitions were more than
offset by lower expenses for employee profit sharing of $1,855 and lower costs
in the Consumer Product segment resulting from the Conair transaction. Partially
offsetting the decline were increased professional fees of $655, primarily
associated with the implementation of Sarbanes-Oxley requirements, as well as
the write-off of certain deferred financing costs from early loan termination
fees associated with the debt refinancing $225 and severance costs of a former
executive $210 recorded in the quarter ended December 31, 2004.
Litigation Expense. Litigation expensed decreased significantly during fiscal
2005 because the Company settled the SEC Investigation and the Class Action
lawsuit for amounts which had been accrued during the prior fiscal year. We
recorded a net charge of $1,500 during the fiscal year ended March 31, 2004
relating to the SEC investigation, class action lawsuit, and the Hibernia
Capital Partners litigation. This net charge represented the combination of a
$1,000 charge relating to the SEC investigation, an additional $1,100 charge
relating to the class action lawsuit, which was partially offset by the reversal
of $600 from the prior accrual upon the favorable settlement of the Hibernia
lawsuit.
Non-Cash Equity Based Compensation. During the fiscal year ended March 31, 2004,
we recorded a non-cash equity based compensation charge of $6,483, or $.46 per
share diluted, for the vesting of the warrants issued to Four Corners Capital
Partners LP, a limited partnership of which Mr. Guidone is a principal. There
was no additional charge resulting from these warrants issued to Four Corners as
all the warrants vested in the fiscal year ended March 31, 2004.
30
Research and Development. Customer-funded development for the fiscal year ended
March 31, 2005 increased to $268 compared to $4 for the fiscal year ended March
31, 2004. On a net basis, research and development costs decreased $264. This
decrease was due to the increase in customer funded development and little
change in research and development spending.
Restructuring Costs. During the fiscal year ended March 31, 2005, we had no
restructuring costs. For the fiscal year ended March 31, 2004, we recorded a
charge of $506 for additional costs relating to our restructuring plan. This
charge resulted from the settlement of litigation related to our former facility
in Valley Forge, Pennsylvania.
Interest Expense, Net. The increase in interest expense is attributable to an
increase in average debt outstanding from $2,657 for fiscal 2004 to $8,455 for
fiscal 2005, partially offset by a lower average interest rate. The increase in
debt was due to acquisitions.
Income Taxes. The income tax benefit incurred during fiscal year 2004 was due to
the reversal of the $15.4 million valuation allowance for deferred tax assets,
and the income tax expense incurred during fiscal year 2005 does not reflect any
such adjustments. The current year tax rate of approximately 22.3 percent is
lower than the prior year effective rate of approximately 25.8 percent, after
taking into account the impact of the reversal of the valuation allowance. The
decrease in the effective tax rate as compared to last year is mainly due to
three factors: (i) a larger portion of income allocated to jurisdictions with
lower tax rates, (ii) the recordation of deferred tax assets associated with
certain temporary or timing differences for inventory reserves and depreciation,
and (iii) the amortization of deferred tax liabilities relating to a number of
the acquisitions.
During fiscal 2004, the valuation allowance for deferred tax assets was
reversed. Based on the evaluation of relevant factors in fiscal 2004, a
valuation allowance for deferred tax assets was recorded because it was
determined that it was more likely than not that a portion or all of the
deferred tax assets would not be realized. In arriving at our conclusion to
reverse the valuation allowance at March 31, 2004, we took into consideration
the guidance provided by FAS 109, after considering both positive and negative
evidence. Our analysis of positive evidence supporting the conclusion that the
valuation allowance was no longer applicable included the assessment of three
key issues that principally lead to the allowance: substantial operating losses,
debt and pending litigation.
Our analysis supporting the reversal of the valuation allowance was
straight-forward, as the positive evidence which could be objectively verified
outweighed the negative evidence. The current and expected results of the
Company, as well as taking into account the status of litigation, indicated that
the valuation allowance was not needed. The Company had fully executed a
restructuring whereby the Company returned to profitability, as supported by the
earnings during fiscal 2004. Our provision for income taxes differs from the
statutory US federal income tax rate due to our estimate and distribution of the
full year's tax rate based upon the expected taxable income taxed at the
applicable jurisdiction's tax rate. The expectations and estimates utilized in
calculating the tax provision and our effective tax rate on a quarterly basis
involve complex domestic and foreign tax issues and are monitored closely and
subject to change based on ultimate circumstances. The utilization during fiscal
2005 of a portion of the Company's net operating loss carry forward of $25,326
at March 31, 2005 will greatly reduce the Company's cash payment for the U.S.
portion of the provision for income taxes.
We continue to evaluate the implications of the recently enacted American Jobs
Creation Act of 2004. Due to, among other things, the volume of manufacturing in
the US and our net operating loss carry-forwards, we do not expect this Act to
have an immediate and significant impact on our effective tax rates.
Discontinued Operations. The income from discontinued operations in the fiscal
year ended March 31, 2004 reflects additional proceeds from the receiver
associated with the Schaevitz UK liquidation. There were no additional proceeds
in the fiscal year ended March 31, 2005.
31
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2003
(in thousands, except percentages)
PERCENTAGE
2004 2003 CHANGE
Net Sales $112,813 $107,676 4.77%
Sensors 60,247 52,326 15.14%
Consumer products 52,566 55,350 -5.03%
Gross profit 50,300 37,996 32.38%
Selling, general, and administrative 30,448 34,245 -11.09%
Litigation expense 1,500 3,550 -57.75%
Non-Cash Equity Based Compensation 6,483 - -
Research and development, net 3,464 3,227 7.34%
Restructuring costs 506 1,219 -58.49%
Interest expense, net 323 2,057 -84.30%
Income taxes (12,262) 483 -2638.72%
Income (loss) from discontinued units 212 (3,910) 105.42%
The consolidated financial statements for the fiscal years ended March 31, 2004
and 2003 include the results of the ongoing operations of Measurement
Specialties, Inc. As a result of our restructuring plan, we sold all of the
outstanding stock of Terraillon in September 2002 and placed Schaevitz UK into
receivership in June 2002.
Accordingly, Terraillon and Schaevitz UK are classified as discontinued
operations in the consolidated financial results for all periods presented.
Net Sales.
Sensor Business. Sensor sales increased $7,921, or 15.1% from the fiscal year
ended March 31, 2003 to the fiscal year ended March 31, 2004. This increase was
due to increased IC Sensors (ICS) and Microfused product line sales during
fiscal 2005 as compared to the same period in the prior fiscal year. The
improved ICS product line sales of $4,021 were the result of increased demand
from existing and new customers in the medical field, the introduction of a new
line of instrumentation grade pressure transducers, as well as increased sales
in the European and Asian markets. The improved Microfused product line sales of
$4,025 were primarily due to continued growth in demand in the automotive sector
due to the introduction of new customer platforms. The increase in the
automotive demand accounted for $2,784. The Microfused product line sales also
increased across other markets to include medical, industrial, refrigeration,
and flow measurement.
Consumer Products Business. The decrease in net sales of $2,784 for our Consumer
Products business in the fiscal year ended March 31, 2004 is primarily
attributable to lower bath scale and kitchen accessory sales, which were
slightly offset by an increase in tire gauge sales in the U.S. Bath scale sales
decreased from $41,146 to $36,378 due to the Conair transaction, as Conair made
virtually no purchases in the month of February as they assessed the inventory
that was acquired as part of the transaction. In addition, net sales will
decline for the portion of the scale business that was sold to Conair because we
are no longer selling at retail sales prices, which are higher than sales prices
to OEM customers. Kitchen accessory sales decreased to $1,038 in the year ending
March 31, 2004 compared to the prior year sales of $1,821 due to
underperformance in this product category. Accordingly, we have decided to
discontinue selling kitchen accessories. Tire gauge sales improved from $12,383
to $16,179 due to increases in core business with some of our major customers.
32
Gross Margin.
Gross margin as a percent of sales for the fiscal year ended March 31, 2004
increased to 44.6% from 35.3% for the fiscal year ended March 31, 2003.
Sensor Business. Gross margin as a percent of sales for our Sensor business
increased to 54.2% for the fiscal year ended March 31, 2004 from 41.1% for the
fiscal year ended March 31, 2003. The continued contribution margin improvement
in the Sensor Business was primarily due to more efficient manufacturing
operations and decreased material costs, as more raw materials were purchased in
Asia. This improvement accounted for a reduction of 5% of variable costs
directly associated with manufacturing. Our increased operations efficiency over
the prior year was the direct result of our continued focus on production
planning and implementation of our restructuring plan. This accounted for an
improvement of approximately 8%.
Consumer Products Business. Gross margin as a percent of sales in our Consumer
Products business increased to 32.0% for the fiscal year ended March 31, 2004
from 30.7% for the fiscal year ended March 31, 2003. The increase in gross
margin for our Consumer Products business in the fiscal year ended March 31,
2004 is primarily due to improved margins on our sales to original equipment
manufacturers. The margins on sales to original equipment manufacturers improved
as a result of improved product mix, lower freight costs and a reduction in
material costs due to our concentration on the more efficient use of raw
materials in the manufacturing process. The margin on our retail customer sales
increased slightly for the period ended March 31, 2004 as compared to the same
period ended March 31, 2003. This increase was mainly due to lower freight and
material costs, offset slightly by lower margins for the kitchen accessories
product category. Together, the improved margins on the OEM and retail business
are responsible for that 1.3% increase in gross margin. This is slightly offset
by the kitchen accessory line's drop in margin from 38.0% in fiscal 2003 to
17.5% in fiscal 2004. We have decided to no longer sell kitchen accessories and
liquidated much of the remaining inventory in the fiscal year ended March 31,
2004 at margins below historical levels.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
Selling, General and Administrative. Selling, General and Administrative (SG&A)
expenses decreased to $30,448 in fiscal 2004 from $34,245 in fiscal 2003. Legal
and professional fees decreased approximately $6,260 in the fiscal year ended
March 31, 2004 as compared to the fiscal year ended March 31, 2003. The higher
professional fees in the fiscal 2003 period as compared to the fiscal 2004
period were due to a higher level of professional activity relating to the
restatement of our financial statements and the class action lawsuit and the SEC
investigation. Offsetting these declines is an overall charge of $2,851 in the
fiscal year ended March 31, 2004 for employee bonus payouts and the employer's
match against the employee contributions to the 401-K plan as a result of the
improvement in company performance.
Litigation Expense. Litigation fees decreased from $3,550 in the fiscal year
ended March 31, 2003 to $1,500 in the fiscal year ended March 31, 2004. We
recorded a net charge of $1,500 during the fiscal year ended March 31, 2004
relating to the SEC investigation, class action lawsuit, and the Hibernia
Capital Partners litigation. This net charge represents the combination of a
$1,000 charge relating to the SEC investigation, an additional $1,100 charge
relating to the class action lawsuit, offset by the reversal of $600 from the
prior accrual upon the favorable settlement of the Hibernia lawsuit. Litigation
fees of $3,550 during the fiscal year ended March 31, 2003 relate to a $2,800
accrual for the class action lawsuit and $750 accrual for the Hibernia lawsuit.
33
Non-Cash Equity Based Compensation. During the fiscal year ended March 31, 2004,
we recorded a non-cash equity based compensation charge of $6,483, or $.46 per
share diluted, for the vesting of the warrants issued to Four Corners Capital
Partners LP, a limited partnership of which Mr. Guidone is a principal. The
vesting of these warrants was based on a combination of time and performance
factors. The warrants were scheduled to vest beginning the last day of July 2003
through the last day of April 2007 at a rate of 35%, 30%, 20% and 15%,
respectively, in each of the four years following the grant date of the warrant.
The warrants provided the right to buy shares from time to time until April 30,
2013 with the potential of a reduced vesting period if the Company's stock price
reached certain levels, as shown in the table below:
---------------------------------------------------
Period Acceleration Price Number of Shares
------------ ------------------- ----------------
Period One $7.50 210,000
Period Two $10.00 180,000
Period Three $12.00 120,000
Period Four $15.00 90,000
---------------------------------------------------
The vesting of the warrants was accelerated and became vested on September 18,
2003, October 24, 2003, November 28, 2003, and January 22, 2004, respectively,
because the Company's stock price increased to a level above the defined
acceleration prices. (See Note 10 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K.)
Research and Development. We had virtually no customer-funded development for
the fiscal year ended March 31, 2004 compared with $367 for the fiscal year
ended March 31, 2003. On a net basis, research and development costs increased
$237, or 7.3%, to $3,464 for the fiscal year ended March 31, 2004 from $3,227
for the fiscal year ended March 31, 2003. This change resulted from decreased
customer-funded development which was partially offset by decreased research and
development efforts in our Sensor business.
Restructuring Costs. Restructuring costs decreased from $1,219 for the fiscal
year ended March 31, 2003 to $506 for the fiscal year ended March 31, 2004.
During the fiscal year ended March 31, 2004, we recorded a charge of $506 for
additional costs relating to our restructuring plan. This charge resulted from
the settlement of litigation related to our former facility in Valley Forge,
Pennsylvania. The restructuring costs of $1,219 in fiscal 2003 relate to
severance and lease costs relating to reductions in our workforce and
consolidation of operations.
Interest Expense, Net. The decrease in interest expense is attributable to a
$14,122 reduction in average debt outstanding from $16,298 for the fiscal year
ended March 31, 2003 to $2,176 for the fiscal year ended March 31, 2004.
Income Taxes. Our provision for income taxes includes taxes payable by our
foreign subsidiaries. For U.S. tax purposes, our available net operating loss
carry-forwards will offset all current fiscal year taxable income.
During the fiscal year ended March 31, 2002, we provided a valuation allowance
against deferred tax assets since we believed at the time that enough
uncertainty existed regarding the realization of our deferred tax assets. The
Company reversed this valuation allowance for the year ended March 31, 2004. Our
analysis of positive evidence supporting the conclusion that the valuation
allowance was no longer applicable included the assessment of three key issues
that principally lead to the allowance: Substantial operating losses, debt and
pending litigation. Our analysis supporting the reversal of the valuation
allowance was straight-forward, as the positive evidence which could be
objectively verified outweighed the negative evidence. Current and expected
results of the Company, as well as taking into account the status of litigation
at that time, indicated that the valuation allowance was not needed. The Company
had fully executed a restructuring whereby the Company returned to
profitability, as supported by the strong earnings during fiscal 2004, coupled
with the elimination of debt, a forecast indicating the Company would generate
more than enough taxable income to realize the deferred tax assets and the
status of litigation, the Company reversed the valuation allowance for the
deferred tax assets. (See Note 12 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K for a further discussion on taxes.)
34
Discontinued Operations. The income from discontinued operations in the fiscal
year ended March 31, 2004 reflects additional proceeds from the receiver
associated with the Schaevitz UK liquidation.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) increased by $10,996 from $16,261 as of March 31, 2004 to $27,257 as of
March 31, 2005. The increase was attributable to an increase in accounts
receivable of $6,359 from $14,010 at March 31, 2004 to $20,369 at March 31,
2005, an increase in inventory of $10,112 from $10,170 at March 31, 2004 to
$20,282 at March 31, 2005 and offset by an increase in accounts payable of
$5,475 from $7,919 at March 31, 2004 to $13,393 at March 31, 2005. The $10,996
increase in operating working capital is partially attributed to the $4,800 of
net operating working capital from the acquisition of Elekon, Entran, Encoder,
Humirel, Polaron and MWS. The remaining increase in inventory is attributable to
higher sales, as well as our attempt to reposition and establish inventory
buffers in order to reduce manufacturing lead times. We anticipate improving
turnover to historical levels over the next several quarters.
Cash provided from operating activities was $11,377 for the fiscal year ended
March 31, 2005, as compared to $10,405 provided for the fiscal year ended March
31, 2004. Included in cash provided from operations for the fiscal year ended
March 31, 2005 is $2,100 of costs paid to settle our SEC investigation and
securities class action litigation, as compared to $1,450 for same period last
year (See Note 15 to the Consolidated Financial Statements included in this
Annual Report on Form 10-K.)
Investing activities included cash payments, net of cash acquired, of $43,691
for the acquisition of Elekon, Entran, Encoder, Humirel, Polaron and MWS. In
addition, capital spending increased to $4,631 for the fiscal year ended March
31, 2005 from $1,943 for the fiscal year ended March 31, 2004. The increase in
capital spending is primarily attributable to investment in revenue generating
projects at our Shenzhen, China facility. Capital spending is expected to be in
the range of $5,500 to $6,500 for the fiscal year ended March 31, 2006.
Financing activities for the fiscal year ended March 31, 2005 provided $22,100,
reflecting financing for the acquisitions, and proceeds from the exercise of
employee stock options.
Revolving Credit Facility:
On December 17, 2004, the Company entered into a new, $35,000 five-year credit
agreement with GE Commercial Finance, Commercial & Industrial Finance ("GE"),
comprised of a $20,000 term loan and $15,000 revolving credit facility. JP
Morgan Chase Bank, N.A. and Wachovia Bank National Association participated in
the syndication. Interest accrues on the principal amount of borrowings at a
rate based on either a London Inter-bank Offered Rate (LIBOR) rate plus a LIBOR
margin or at an Index (prime based) Rate plus an Index Margin. The LIBOR or
Index Rate is at the election of the borrower. From the closing date to the
second anniversary date of the closing, the applicable LIBOR and Index Margins
are 4.50% and 2.75%, respectively, and from the second anniversary, the
applicable LIBOR and Index Margins are 4.25% and 2.50%, respectively, subject to
a 2% increase upon the occurrence of an event of default under the credit
agreement. The term loan is payable in nineteen equal quarterly installments
beginning on March 1, 2005 through December 17, 2009. Proceeds from the new
credit facility were primarily used to support the acquisition of Humirel (See
Note 5 to the Consolidated Financial Statements included in this Annual Report
on Form 10-K), ordinary working capital and general corporate needs and replaced
the $15,000 revolving credit facility with Bank of America Business Capital
(formerly Fleet Capital Corporation). The Company has provided a security
interest in substantially all of the Company's assets as collateral for the new
credit facilities. Borrowings under the line are subject to certain financial
covenants and restrictions on indebtedness, dividend payments, financial
guarantees, and other related items. The most restrictive covenant relates to
limits on capital spending. At March 31, 2005, the Company was in compliance
with applicable debt covenants.
As of March 31, 2005, the Company utilized the LIBOR based Index Rate, and the
interest rate applicable to borrowings under the revolving credit facility was
8.5%. As of March 31, 2005, the outstanding borrowings on the term loan and
revolver were $19,500 and $1,400 respectively, and the Company had the right to
borrow an additional $13,600 under the revolving credit facility. The revolving
credit facility is not directly based on any borrowing base requirements.
35
The weighted average interest rate for the above credit facilities was 7.26% for
the twelve months ended March 31, 2005. The average amount outstanding under the
above credit facilities for the twelve months ended March 31, 2005 was $8,455.
Promissory Notes:
In connection with the acquisition of Elekon Industries USA, Inc. (See Note 5 to
the Consolidated Financial Statements included in this Annual Report on Form
10-K ), the Company issued unsecured Promissory Notes ("Notes") totaling $3,000,
of which $2,300 was outstanding and $1,200 considered current at March 31, 2005.
The Notes amortize over a period of three years, are payable quarterly and bear
interest at 6%.
Other Short-Term Debt:
In connection with the acquisition of Entran and Humirel, the Company assumed
short-term borrowing of those companies that totaled $685 at March 31, 2005.
This amount is included in short-term debt in the consolidated balance sheet.
Liquidity:
At May 31 2005, we had approximately $ 6,916 of available cash and $13,600 of
borrowing capacity under our revolving credit facility. This amount includes the
increased borrowing capacity resulting from the Acquisitions. The decline in the
cash balance and increase in borrowing from March 31, 2004 primarily reflects
the use of $43,691 of cash and borrowings of $20,000 to fund the Acquisitions.
See Note 5 to the Consolidated Financial Statements included in this Annual
Report on Form 10-K for a discussion on the Acquisitions.
OTHER COMPREHENSIVE INCOME
Other comprehensive income consists of foreign currency translation adjustments
and unrealized gains on currency hedging contracts. The increase in other
comprehensive income is due the changes in the exchange rate of the US dollar
relative to the Euro for the Euro denominated operations of Humirel SA and
Entran SA.
DEFERRED REVENUE
On January 30, 2004, Conair Corporation purchased certain assets of our
Thinner(R) branded bathroom and kitchen scale business, and now owns worldwide
rights to the Thinner(R) brand name and exclusive rights to the Thinner(R)
designs in North America. We accounted for the sale of this business under the
guidance of EITF 00-21.
DIVIDENDS
We have not declared cash dividends on our common equity. The payment of
dividends is prohibited under the existing credit agreement with GE. 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.
36
SEASONALITY
Our sales of consumer products are seasonal, with highest sales during the
second and third fiscal quarters. Sales of sensor products are not seasonal.
INFLATION
We compete on the basis of product design, features, and value. Accordingly, our
revenues generally have kept pace with inflation, notwithstanding that inflation
in the countries where our subsidiaries are located has been consistently higher
than inflation in the United States. Increases in labor costs have not had a
significant impact on our business because most of our employees are in China,
where prevailing labor costs are low. However, we have experienced some
significant increases in materials costs, in particular increases in steel and
resin costs in our consumer business, and as a result have suffered a decline in
margin.
OFF BALANCE SHEET ARRANGEMENTS
We do not have any financial partnerships with unconsolidated entities, such as
entities often referred to as structured finance, special purpose entities or
variable interest entities which are often established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Accordingly, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had such relationships.
AGGREGATE CONTRACTUAL OBLIGATIONS
As of March 31, 2005, the Company's contractual obligations, including payments
due by period, are as follows:
Contractual Obligations
PAYMENT DUE BY PERIOD
1-3 3-5 MORE THAN 5
TOTAL LESS THAN 1 YEAR YEARS YEARS YEARS
(LONG-TERM DEBT
OBLIGATIONS) $23,538 $ 3,510 $ 5,873 $14,021 $ 134
(CAPITAL LEASE OBLIGATIONS) $ 645 $ 264 $ 345 $ 36 $ 0
(OPERATING LEASE
OBLIGATIONS) $ 6,218 $ 1,992 $ 2,126 $ 1,383 $ 717
(PURCHASE OBLIGATIONS) $ 0 $ 0 $ 0 $ 0 $ 0
DEFFERRED ACQUISITION
PAYMENTS $ 5,789 $ 1,720 $ 4,069 $ 0 $ 0
(OTHER LONG-TERM
LIABILITIES REFLECTED ON THE
REGISTRANT'S BALANCE SHEET
UNDER GAAP $ 0 $ 0 $ 0 $ 0 $ 0
TOTAL $36,190 $ 7,486 $12,413 $15,440 $ 851
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a certain level of foreign currency exchange risk.
37
Most of our revenues are priced in United States dollars. Most of our costs and
expenses are priced in United States dollars, with the remaining priced in
Chinese renminbi, Euros and Hong Kong dollars. Accordingly, the competitiveness
of our products relative to products produced locally (in foreign markets) may
be affected by the performance of the sales out of the United States dollar
compared with that of our foreign customers' currencies. United States sales
were $68,555, $77,537 and $81,794, or 48.6%, 68.7% and 76.0% of net sales, for
the fiscal years ended March 31, 2005, 2004 and 2003, respectively. Sales from
our foreign facilities were $72,386, $35,276, and $25,882 or 51.4%, 31.3% and
24.0% of net sales, for the fiscal years ended March 31, 2005, 2004, and 2003,
respectively. We are exposed to foreign currency transaction and translation
losses, which might result from adverse fluctuations in the value of the Euro,
Hong Kong dollar and Chinese renminbi.
At March 31, 2005, we had net assets of $48,009 in the United States. At March
31, 2005, we had net assets of $49 in Europe, subject to fluctuations in the
value of the Euro against the dollar. At March 31, 2005, we had net assets of
$9,503 in Hong Kong subject to fluctuations in the value of the Hong Kong dollar
and net assets of $10,455 in China subject to fluctuations in the value of the
Chinese renminbi. We had net assets of $23,893 and $7,088 in the United States,
at March 31, 2004 and 2003, respectively. At March 31, 2004 and March 31, 2003,
we had no net assets in Europe. At March 31, 2004, we had net assets of $4,836
in Hong Kong subject to fluctuations in the value of the Hong Kong dollar and
net assets in China of $7,330 subject to fluctuations in the value of the
Chinese renminbi. At March 31, 2003, we had net liabilities of $2,045 in Hong
Kong subject to fluctuations in the value of the Hong Kong dollar and net assets
of $13,743 in China subject to fluctuations in the value of the Chinese
renminbi.
Fluctuations in the value of the Hong Kong dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong dollar to that of the United States dollar. However, there can be no
assurance that the value of the Hong Kong dollar will continue to be tied to
that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon. The Chinese government is currently
reevaluating its foreign currency policy, and there have been indications, as
reported widely in the news media, that the Chinese government may in fact allow
the Chinese renminibi to revalue in the foreseeable future. Based on the net
exposure of renminbi to US dollars for the fiscal year ended March 31, 2005, we
estimate a negative operating income impact of $135 for every 1% appreciation
in renminbi against US dollar (assuming no associated cost increases or currency
hedging).
Based on the net exposures of Euros to the US dollars for the fiscal year ended
March 31, 2005, we estimate a positive operating income impact of $95 for every
1% appreciation in Euros relative to the US dollar (assuming no associated costs
increases or currency hedging).
The Company acquired a number of foreign currency exchange contracts with the
purchase of Humirel. These currency contracts have a total notional amount of
$9,650 with exercise dates through December 31, 2005 at an average exchange rate
of $1.27 (Euro to US dollar conversion rate). These derivatives are designated
as cash-flow hedges, and changes in their fair value are carried in accumulated
other comprehensive income until the hedged transaction affects earnings. When
the hedged transaction affects earnings, the appropriate gain or loss from the
derivative designated as a hedge of the transaction is reclassified from
accumulated other comprehensive income to cost of sales. As of March 31, 2005,
the amount that will be reclassified from accumulated other comprehensive income
to cost of sales over the next twelve months is an unrealized loss of $7. There
is no ineffective portion of the derivatives.
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to foreign currency transaction
and translation risks, we may purchase currency exchange forward contracts,
currency options, or other derivative instruments, provided such instruments may
be obtained at suitable prices. However, to date, other than for the foreign
currency exchange contracts acquired with the purchase of Humirel, we have not
done so.
We are exposed to a certain level of interest rate risk. Interest on the
principal amount of our borrowings under our revolving credit facility accrues
at a rate based on either a London Inter-bank Offered Rate (LIBOR) rate plus a
LIBOR margin or at an Indexed (prime based) Rate plus an Index Margin. The LIBOR
or Index Rate is at our election. Our results will be adversely affected by any
increase in interest rates. For example, for every $1,000 of debt outstanding,
an annual interest rate increase of 100 basis points would increase interest
expense and decrease our after tax profitability by $10. We do not hedge this
interest rate exposure.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed below in Item 15:
Exhibits, Financial Statement Schedules and are filed with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
Measurement Specialties, Inc.'s management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of March 31, 2005. The term
"disclosure controls and procedures," as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange
Act"), means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company's management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of March 31, 2005, our
Chief Executive Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective at the reasonable
assurance level.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Measurement Specialties, Inc. is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the
supervision of, the company's principal executive and principal financial
officers and effected by the company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
- Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the company;
- Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
39
- Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial
reporting as of March 31, 2005. In making this assessment, Measurement
Specialties, Inc.'s management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on our assessment, management concluded that, as of March 31, 2005, our
internal control over financial reporting was effective based on those criteria.
Our management's assessment of the effectiveness of our internal control over
financial reporting as of March 31, 2005 has been audited by Grant Thornton LLP,
an independent registered public accounting firm, as stated in their report
which appears under Item 15.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
MEASUREMENT SPECIALTIES INC. AND SUBSIDIARIES
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
Measurement Specialties Inc. and Subsidiaries maintained effective internal
control over financial reporting as of March 31, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or
40
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Measurement Specialties Inc. and
Subsidiaries maintained effective internal control over financial reporting as
of March 31, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of March 31,
2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of March 31, 2005 and 2004 and the related consolidated
statements of operations, shareholders' equity and cash flows, for each of the
three years in the period ended March 31, 2005, and our report dated June 10,
2005 expressed an unqualified opinion on those financial statements.
Grant Thornton LLP
New York, New York
June 10, 2005
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the quarter ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Apart from certain information concerning our Code of Conduct which is set forth
below in this Item,, other information required by this Item is incorporated
herein by reference to the applicable information in the proxy statement for our
annual meeting of shareholders to be held on September 13, 2005, including the
information set forth under the captions "Election of Directors", "Committees of
the Board of Directors", and "Executive Officers".
We have a Code of Conduct that applies to all of our directors, officers and
employees, including our principal executive officer, principal financial
officer and principal accounting officer. You can find our Code of Conduct on
our website by going to the following address: www.msiusa.com. Also on our
website we will post any amendments to the Code of Conduct, as well as any
waivers that are required to be disclosed by the rules of either the Securities
and Exchange Commission or The American Stock Exchange, on our website.
41
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
applicable information in the proxy statement for our annual meeting of
shareholders to be held on September 13, 2005, including the information set
forth under the captions "Executive Compensation" and "Compensation Committee
Interlocks and Insider Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table provides information with respect to the equity securities
that are authorized for issuance under our compensation plans as of March 31,
2005:
EQUITY COMPENSATION PLAN INFORMATION
EQUITY COMPENSATION PLAN INFORMATION
For the Year Ended March 31, 2005
NUMBER OF SHARES
NUMBER OF REMAINING FOR
SECURITIES TO BE FUTURE ISSUANCE
ISSUED UPON UNDER EQUITY
EXERCISE OF WEIGHTED-AVERAGE COMPENSATION PLANS
OUTSTANDING EXERCISE PRICE OF (EXCLUDING
OPTIONS, OUTSTANDING SECURITIES
WARRANTS AND OPTIONS, WARRANTS REFLECTED IN
RIGHTS AND RIGHTS COLUMN(A))
EQUITY COMPENSATION PLANS
APPROVED BY SECURITY HOLDERS
EQUITY COMPENSATION PLANS
NOT APPROVED BY SECURITY
HOLDERS 1,590,599 $ 12.38 768,975
----------------------------------------------------------
TOTAL 1,590,599 $ 12.38 768,975
==========================================================
The other information required by this Item is incorporated by reference to the
applicable information in the proxy statement for our annual meeting of
shareholders to be held on September 13, 2005, including the information set
forth under the caption "Beneficial Ownership of Measurement Specialties Common
Stock."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
applicable information in the proxy statement for our annual meeting of
shareholders to be held on September 13, 2005, including the information set
forth under the caption "Executive Agreements and Related Transactions."
42
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
applicable information in the proxy statement for our annual meeting of
shareholders to be held on September 13, 2005, including the information set
forth under the caption "Fees Paid to Our Independent Auditors."
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following consolidated financial statements and schedules are
filed at the end of this report, beginning on page F-l. Other
schedules are omitted because they are not required or are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
DOCUMENT PAGES
Consolidated Statements of Operations for the Years Ended
March 31, 2005, 2004 and 2003 F-1
Consolidated Balance Sheets as of March 31, 2005 and 2004 F-2 to F-3
Consolidated Statements of Shareholders' Equity for the Years
March 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the Years Ended F-5 to F-6
March 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements F-7
Schedule II - Valuation and Qualifying Accounts, for the Years
Ended March 31, 2005, 2004 and 2003 S-1
(b) See Exhibit Index following this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ FRANK GUIDONE
------------------------------
Frank Guidone
Chief Executive Officer
Date: January 24, 2006
43
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
-------------------------- --------------------------------------------- ----------------
January 24, 2006
/s/ Frank Guidone President, Chief Executive Officer and
-------------------------- Director (Principal Executive Officer)
Frank Guidone
January 24, 2006
/s/ John P. Hopkins Chief Financial Officer (Principal Financial
-------------------------- Officer and Principal Accounting Officer)
John P. Hopkins
/s/ Morton L. Topfer Chairman of the Board January 24, 2006
--------------------------
Morton L. Topfer
/s/ John D. Arnold Director January 24, 2006
--------------------------
John D. Arnold
/s/ Satish Rishi Director January 24, 2006
--------------------------
Satish Rishi
/s/ R. Barry Uber Director January 24, 2006
--------------------------
R. Barry Uber
EXHIBIT INDEX
NUMBER DESCRIPTION
------------- -----------
3.1 Second Restated Certificate of Incorporation of
Measurement Specialties, Inc.
3.2 Bylaws of Measurement Specialties, Inc.
4.1 Specimen Certificate for shares of common stock of
Measurement Specialties, Inc.
10.1 Supply and Distribution Agreement dated September 26,
1997 between Korona GmbH & Co. KG and
Measurement Specialties, Inc.
44
10.2 Product Line Acquisition Agreement dated January 5,
2000 between Exeter Technologies, Inc., Dr. Michael
Yaron and Measurement Specialties, Inc.
10.3 Stock Purchase Agreement dated February 11, 2000
between Perkin-Elmer, Inc. and Measurement
Specialties, Inc.
10.4 Purchase Agreement dated August 4, 2000 between
TRW Sensors & Components, Inc. and Measurement
Specialties, Inc.
10.5 Asset Purchase Agreement dated August 14, 1998
between AMP Incorporated, The Whitaker Corporation
and Measurement Specialties, Inc.
10.6 Measurement Specialties, Inc. 1995 Stock Option Plan.
10.7 Measurement Specialties, Inc. 1998 Stock Option Plan.
10.8 Lease dated December 30, 1999 between Hollywood
Place Company Limited and Measurement Limited for
property in Kowloon, Hong Kong.
10.9 Lease dated September 14, 1977 between Schaevitz E.M.
Limited and Slough Trading Estate Limited for property
in Slough, England.
10.10 Deed of Variation dated July 14, 1992 of Lease between
Slough Trading Estate Limited and Lucas Schaevitz Limited.
10.11 Assignment of Lease, dated August 4, 2000, from Lucas
Schaevitz Limited to Measurement Specialties (England)
Limited.
10.12 License to Assign dated August 4, 2000 between Slough
Trading Estate Limited, Lucas Schaevitz Limited,
Measurement Specialties (England) Limited and
Measurement Specialties, Inc. for property in Slough,
England.
10.13 Lease dated May 5, 1994 between Transcube Associates and
Measurement Specialties, Inc. for property in Fairfield, New
Jersey.
45
10.14 First Amendment dated February 24, 1997 to Lease
between Transcube Associates and Measurement
Specialties, Inc.
10.15 Second Amendment dated July 10, 2000 to Lease
between Transcube Associates and Measurement
Specialties, Inc.
10.16 First Amendment dated February 1, 2001 to Lease
between Kelsey-Hayes Company and Measurement
Specialties, Inc. for property in Hampton, Virginia.
10.17 Lease Agreement dated May 20, 1986 between Semex,
Inc. and Pennwalt Corporation and all amendments for
property in Valley Forge, Pennsylvania.
10.18 Lease Agreement dated January 10, 1986 between
Creekside Industrial Associates and I.C. Sensors and all
amendments for property in Milpitas, California.
10.19 Lease Agreements for property in Shenzhen, China
10.20 Lease dated August 4, 2000 between Kelsey-Hayes
Company and Measurement Specialties, Inc. for property
in Hampton, Virginia.
10.21 Amended and Restated Revolving Credit, Term Loan
and Security Agreement dated as of February 28, 2001
among Measurement Specialties, Inc., Measurement
Specialties UK Limited, Summit Bank, The Chase
Manhattan Bank and First Union National Bank as agent
and all amendments.
10.22 Agreement for the Purchase of the Share Capital of
Terraillon Holdings Limited, dated 7 June 2001, among
Hibernia Development Capital Partners LLP, Hibernia
Development Capital Partners II LLP, Fergal Mulchrone
and Chris Duggan and Andrew Gleeson and
Measurement Specialties, Inc.
10.23 Supplemental Agreement, dated 11 July 2001,
concerning the amendment of the Agreement for the
Purchase of the Share Capital of Terraillon Holdings
Limited, dated 7 June 2001.
10.24 Asset Purchase Agreement dated July 12, 2002 by and
among Elmos Semiconductor AG, Silicon
Microstructures, Inc., Measurement Specialties, Inc., and
IC Sensors Inc. Stock Purchase Agreement, dated as of
September 18, 2002, by and between FUKUDA
(Luxembourg) S.a.r.l. and Measurement Specialties, Inc.
10.26 Forbearance Agreement, dated as of July 2, 2002, by and
among Wachovia Bank, National Association, for itself
and as agent for Fleet National Bank and JP Morgan
Chase Bank, Measurement Fleet National Bank and JP
Morgan Chase Bank, Measurement Specialties, Inc.,
46
Measurement Specialties UK Limited, IC Sensors, Inc.,
Measurement Limited, Jingliang Electronics (Shenzhen)
Co., Ltd. and Terraillon Holdings Limited.
10.27 Agreement of Lease, commencing October 1, 2002, between
Liberty Property Limited Partnership and
Measurement Specialties, Inc.
10.28 Sublease Agreement, dated August 1, 2002, between
Quicksil, Inc. and Measurement Specialties, Inc.
10.29 Senior Secured Note and Warrant Purchase Agreement,
dated as of October 31, 2002, by and among Castletop
Capital, L.P. and Measurement Specialties, Inc.
(including first amendment thereto)
10.30 Loan and Security Agreement, dated January 31, 2003,
by and among Fleet Capital Corporation, Measurement
Specialties, Inc. and IC Sensors, Inc.
10.31 Second Amendment to Loan and Security Agreement,
effective as of the 11th day of April 2003, by and among
Measurement Specialties, Inc., IC Sensors, Inc. and Fleet
Capital Corporation.
10.32 Second Amendment to Senior Secured Note and Warrant
Purchase Agreement, dated April 11, 2003, among
Castletop Capital, L.P. Measurement Specialties, Inc.
and IC Sensor, Inc.
10.33 Agreement of Purchase and Sale of Assets, dated
January 30, 2004, between Measurement Specialties Inc.
and Conair Corporation
10.34 Agreement of Purchase and Sale dated as of June 24, 2004
by and among Measurement Specialties Inc. and Thomas Dietiker
and Wilma Dietiker
10.35 Stock Purchase Agreement dated as of July 16, 2004 by and
among Measurement Specialties Inc., and the Principal
Shareholders of Entran Devices, Inc. and Entran SA.
10.36 Asset Purchase Agreement dated as of July 16, 2004
between Measurement Specialties Inc. and Encoder
Devices LLC.
10.37 Share Purchase Agreement dated as of December 17, 2004
by and among Measurement Specialties, Inc.
Entran S.A. and the Principal Shareholders of Humirel
S.A.
10.38 Loan and Security Agreement dated December 17, 2004
between Measurement Specialties, Inc. and General
Electric Capital Corporation, Wachovia Bank
and JPMorgan Chase Bank
21.1 Subsidiaries.
23.1 Consent of Grant Thornton LLP dated June 10, 2005.
23.2+ Consent of Grant Thornton LLP dated January 24, 2006.
31.1* Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.1 Certification pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
+ Filed herewith
* Revised Exhibit as set forth in the Explanatory Note above, filed herewith.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
MEASUREMENT SPECIALTIES INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of Measurement
Specialties Inc. and Subsidiaries (a Delaware corporation) as of March 31, 2005
and 2004, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended March 31,
2005. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Measurement
Specialties Inc. and Subsidiaries as of March 31, 2005 and 2004, and the results
of its operations and its cash flows for each of the three years in the period
ended March 31, 2005 in conformity with accounting principles generally accepted
in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Schedule II is presented for purposes
of additional analysis and is not a required part of the basic financial
statements. This schedule has been subject to the auditing procedures applied in
the audit of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
We also have audited, in accordance with the standards of the Public Company
Oversight Board (United States), the effectiveness of Measurement Specialties
Inc. and Subsidiaries' internal control over financial reporting as of March 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated June 10, 2005 expressed an unqualified opinion
thereon.
GRANT THORNTON LLP
New York, New York
June 10, 2005
MEASUREMENT SPECIALTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31,
-------------------------------------
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 2005 2004 2003
-------------------------------------
Net sales $ 140,941 $ 112,813 $ 107,676
Cost of goods sold 81,535 62,513 69,680
-------------------------------------
Gross profit 59,406 50,300 37,996
-------------------------------------
Operating expenses (income):
Selling, general and administrative 35,796 30,448 34,245
Non-Cash Equity based Compensation (Selling, general and administrative) - 6,483 -
Litigation expense - 1,500 3,550
Research and development 3,468 3,468 3,594
Customer funded development (268) (4) (367)
Amortization of acquired intangibles 774 30 30
Restructuring costs - 506 1,219
-------------------------------------
Total operating expenses 39,770 42,431 42,271
-------------------------------------
Operating income (loss) 19,636 7,869 (4,275)
Interest expense, net 637 323 2,057
Gain on sale of Assets - (1,424) (159)
Other expense (income) (77) (142) (333)
-------------------------------------
Income (loss) from continuing operations before income taxes 19,076 9,112 (5,840)
Income tax 4,250 (12,262) 483
-------------------------------------
Income (loss) from continuing operations 14,826 21,374 (6,323)
-------------------------------------
Discontinued operations:
Income (loss) from operations of discontinued units (net of income tax
benefit) - 212 (3,910)
Gain on disposition of discontinued units (net of income tax benefit) - - 1,136
-------------------------------------
Income (loss) from discontinued units - 212 (2,774)
-------------------------------------
Net income (loss) $ 14,826 $ 21,586 $ (9,097)
=====================================
Income (loss) per common share - Basic
Income (loss) from continuing operations $ 1.11 $ 1.73 $ (0.53)
Income (loss) from discontinued units - 0.02 (0.23)
-------------------------------------
Net income (loss) $ 1.11 $ 1.75 $ (0.76)
=====================================
Income (loss) per common share - Diluted
Income (loss) from continuing operations $ 1.05 $ 1.53 $ (0.53)
Income (loss) from discontinued units - 0.01 (0.23)
-------------------------------------
Net income (loss) $ 1.05 $ 1.54 $ (0.76)
=====================================
Weighted average shares outstanding - Basic 13,392 12,333 11,911
=====================================
Weighted average shares outstanding - Diluted 14,095 13,997 11,911
=====================================
The accompanying notes are an integral part of these consolidated financial statements
F-1
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
($ IN THOUSANDS) 2005 2004
------------------------------------------------------------ ---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,402 $ 19,274
Accounts receivable, trade, net of allowance for doubtful
accounts of $390 and $327, respectively 20,369 14,010
Inventories 20,282 10,170
Deferred income taxes 4,284 6,192
Prepaid expenses and other current assets 3,029 3,392
---------- ----------
Total current assets 52,366 53,038
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET 14,924 10,628
---------- ----------
OTHER ASSETS:
Goodwill 40,010 4,191
Acquired intangible assets, net 10,583 46
Deferred income taxes 7,190 8,476
Other assets 931 621
---------- ----------
Total other assets 58,714 13,334
---------- ----------
TOTAL ASSETS $ 126,004 $ 77,000
========== ==========
The accompanying notes are an integral part of these consolidated financial statements
F-2
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, MARCH 31,
($ IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2005 2004
---------------------------------------------------------------------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of promissory notes payable $ 1,200 $ -
Current portion of deferred acquisition payments 1,720 -
Short-term debt 2,085 -
Current portion of long term debt 2,310 -
Accounts payable 13,394 7,919
Accrued expenses and other current liabilities 4,525 1,886
Accrued litigation expense, class action - 2,800
Accrued compensation 2,231 3,224
Income taxes payable 1,165 -
Deferred gain on sale of assets, current 2,925 2,830
Accrued litigation expenses, other - 2,100
----------- -----------
Total current liabilities 31,555 20,759
OTHER LIABILITIES:
Deferred gain, net current portion 839 3,914
Promissory notes payable, net current portion 1,100 -
Long term debt, net of current portion 18,928 -
Deferred acquisition payments, net current portion 4,069 -
Other liabilities 1,497 1,487
----------- -----------
Total liabilities 57,988 26,160
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Serial preferred stock; 221,756 shares authorized; none outstanding - -
Common stock, no par; 20,000,000 shares authorized; 13,257,084 and
11,922,958 shares issued and outstanding, respectively 5,502 5,502
Additional paid-in capital 56,285 53,509
Accumulated earnings (deficit) 6,729 (8,097)
Accumulated other comprehensive loss (500) (74)
----------- -----------
Total shareholders' equity 68,016 50,840
----------- -----------
$ 126,004 $ 77,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements
F-3
MEASUREMENT SPECIALTIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 2005, 2004, AND 2003
Accumulated
Additional Retained Other
Common paid-in Earnings Comprehensive Comprehensive
($ IN THOUSANDS) stock capital (Deficit) Loss Total Income (Loss)
---------------------------------------------------------------------------------------------------------------------------------
BALANCE, APRIL 1, 2002 $ 5,502 $ 42,346 $ (20,586) $ (435) 26,827
Comprehensive income (loss): -
Net (loss) (9,097) (9,097) (9,097)
Currency translation adjustment - effect of -
disposal of Terraillon 365 365 365
--------------
Comprehensive (loss) (8,732)
==============
Proceeds from exercise of stock options 134 134
Warrants issued for professional service 265 265
Warrants issued for debt 452 452
--------------------------------------------------------------
BALANCE, MARCH 31, 2003 $ 5,502 $ 43,197 $ (29,683) $ (70) $18,946
Comprehensive income (loss): -
Net income 21,586 21,586 21,586
Currency translation adjustment (4) (4) (4)
--------------
Comprehensive income 21,582
==============
Proceeds from the exercise of warrants
issued for non-cash
equity based compensation 6,483 6,483
Proceeds from exercise of stock options 1,014 1,014
Tax benefit from stock options 367 367
Accelerated options for Conair transaction 523 523
Tax benefit from warrant exercise 1,162 1,162
Proceeds from exercise of stock warrants 763 763
--------------------------------------------------------------
BALANCE, MARCH 31, 2004 $ 5,502 $ 53,509 $ (8,097) $ (74) $50,840
Comprehensive income (loss):
Net income 14,826 14,826 14,826
Currency translation adjustment and other (426) (426) (426)
--------------
Comprehensive income (loss) 14,400
==============
Proceeds from exercise of stock options 1,200 1,200
Tax benefit from stock options 1,100 1,100
Issuance of common stock for Humirel
acquisition 476 476
--------------------------------------------------------------
BALANCE, MARCH 31, 2005 $ 5,502 $ 56,285 $ 6,729 $ (500) $68,016
==============================================================
The accompanying notes are an integral part of these consolidated financial statements
F-4
MEASUREMENT SPECIALTIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) MARCH 31,
-------------------------------
2005 2004 2003
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 14,826 $ 21,586 $ (9,097)
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
(Gain)Loss from discontinued operations - (212) 3,910
Depreciation and amortization 3,869 2,824 3,331
Deferred rent - 28 17
Warrants issued for professional services - - 265
Amortization of debt discount - - 452
Gain on sale of assets - (159)
Gain on sale of Discontinued Units - - (1,136)
Gain from Sale of Thinner line - (1,424) -
Amortization of Deferred Gain Thinner line (2,980) (398) -
Provision for writedown of assets - 310 656
Provision for doubtful accounts 56 245 842
Provision for warranty 110 333 641
Provision for inventory obsolescence 216 - -
Acceleration of option for Conair transaction - 523 -
Non-Cash equity compensation - 6,483 -
Deferred income taxes 3,194 - -
Tax benefit on exercise of stock options 1,100 1,529 -
Net changes in operating assets and liabilities net
of acquisitions: - - -
Accounts receivable, trade (3,697) (3,706) 829
Inventories (7,296) 1,252 1,751
Prepaid expenses and other current assets 363 (13,946) 203
Other assets 65 (2,168) (57)
Accounts payable, trade 6,976 (1,928) (3,386)
Accrued expenses and other liabilities (1,690) 524 435
Accrued litigation expenses (4,900) (1,450) 3,550
Income Taxes Payable 1,165 - -
--------- --------- ---------
Net cash provided by (used in) operating activities 11,377 10,405 3,047
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,631) (1,943) (1,518)
Proceeds from sale of Wafer Fab - - 3,370
Proceeds from sale of Terraillon - - 18,197
Cash received from receiver - 212 1,064
Proceeds from sale of thinner line - 11,418 -
Acquisition of business, net of cash acquired (43,691) - -
--------- --------- ---------
Net cash provided by (used in) investing activities (48,322) 9,687 21,113
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under secured note - 3,000 9,300
Payment under promissory notes - (5,000) (7,300)
Borrowing under bank line of credit agreement - - 20,568
Repayments under bank line of credit agreement - (3,260) (46,371)
Payment of promissory notes - - (218)
Proceeds from long term debt 20,000 - -
Repayment of long term debt (500) - -
Repayments under revolver (12,695) - -
Borrowings under revolver 14,095 - -
Payment of deferred financing costs (net) - (25) (291)
Proceeds from exercise of options and warrants 1,200 1,777 134
--------- --------- ---------
Net cash provided by (used in) financing activities 22,100 (3,508) (24,178)
--------- --------- ---------
Effect of exchange rates (27) (4) 365
--------- --------- ---------
Net change in cash and cash equivalents (14,872) 16,580 347
Cash used in discontinued operations - - (1,413)
Cash and cash equivalents, beginning of year 19,274 2,694 3,760
--------- --------- ---------
Cash and cash equivalents, end of period $ 4,402 $ 19,274 $ 2,694
--------- --------- ---------
Supplemental Cash Flow Information:
Cash paid (refunded) during the period for:
Interest $ 519 $ 334 $ 2,582
Taxes 1,778 1,193 -
Taxes refunded (109) - (588)
Noncash investing and financing transactions
Common stock issued in connection with acquisition 476 - -
Notes issued for acquisition 3,000 - -
Deferred acquisition payments 5,789 - -
Liabilities assumed 7,582 - -
Cash paid, net of cash acquired 43,691 - -
Fair value of assets acquired $ 61,578 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
F-5
MEASUREMENT SPECIALTIES INC.
Notes to Consolidated Financial Statements at and for the year ended MARCH 31,
2005
($ IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. DESCRIPTION OF BUSINESS:
DESCRIPTION OF BUSINESS:
Measurement Specialties, Inc. ("MSI" or the "Company") is a designer and
manufacturer of sensors and sensor-based consumer products. The Company produces
a wide variety of sensors that use advanced technologies to measure precise
ranges of physical characteristics including pressure, motion, force,
displacement, tilt/angle, flow and distance. The Company has two businesses, a
Sensor business and a Consumer Products business.
The Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. The Company's sensor products
include pressure and electromagnetic displacement sensors, Piezoelectric polymer
film sensors, custom microstructures, load cells and accelerometers.
The Consumer Products segment designs and manufacturers sensor-based consumer
products that are sold to retailers and distributors in both the United States
and Europe. Consumer products include bathroom and kitchen scales, tire pressure
gauges and distance estimators.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries (the "Subsidiaries").
In the quarter ended June 30, 2004, the Company reorganized its Asian operations
under an offshore holding company, Kenabell Holding Limited, a British Virgin
Island Company ("Kenabell Holding BVI"). As part of the reorganization, a new
entity was formed under Kenabell Holding BVI in the Cayman Islands, Measurement
Limited ("ML Cayman"). A significant portion of the Consumer business in Asia
was transferred into ML Cayman during the quarter ended June 30, 2004. These
holding companies were formed as part of a foreign tax planning restructuring,
and to facilitate any potential future sale of assets of our Consumer Products
business.
MSI Sensors (Asia) Limited (formerly named Measurement Limited, organized in
Hong Kong) owns all of the shares of MSI Sensors (China) Limited (formerly named
Jingliang Electronics (Shenzhen) Co. Ltd, organized in the Peoples Republic of
China). Kenabell Holding BVI owns all of the shares of MSI Sensors (Asia)
Limited and ML Cayman. All the companies are included in the consolidated
financial statements of the group.
In the quarter ended March 31, 2005, as part of a foreign tax planning
restructuring, the Company completed the reorganization of its European
subsidiaries which includes, Entran SA and Humirel SA. This reorganization
involved transferring ownership of these subsidiaries to a Cyprus holding
company under Kenabell Holding BVI, named Acalon Holdings Limited. In
conjunction with this reorganization, the ownership of Kenabell Holding BVI was
also transferred to Measurement Specialties Foreign Holdings Corporation, a
Delaware corporation.
IC Sensors Inc., a California corporation ("IC Sensors") continues as a
wholly-owned subsidiary of the Company.
F-6
The Company has made the following acquisitions which are included in the
consolidated financial statements as of the effective date of acquisition (See
Note 5):
EFFECTIVE
DATE OF
ACQUIRED COMPANY ACQUISITION COUNTRY
Elekon Industries USA, Inc. ("Elekon") June 24, 2004 USA
Entran Devices, Inc. and Entran SA ("Entran") July 16, 2004 USA and France
Encoder Devices, LLC ("Encoder") July 16, 2004 USA
Humirel, SA ("Humirel") December 1, 2004 France
MWS Sensorik GmbH ("MWS Sensorik") January 1, 2005 Germany
Polaron Components Ltd ("Polaron") February 1, 2005 United Kingdom
Elekon, Entran, Humirel and MWS Sensorik are wholly-owned subsidiaries of the
Company.
All significant inter-company balances and transactions have been eliminated.
RECLASSIFICATIONS:
The presentation of certain prior year information has been reclassified to
conform to the current year presentation.
The Company reclassified $6,272 of the current deferred tax asset as of March
31, 2004 to long-term, since a portion of the deferred tax assets will be
utilized beyond twelve months. Additionally, the Company reclassified $2,830 as
of March 31, 2004 of the deferred gain on sale of assets to current from
long-term, since a portion of the deferred gain on sale would be recognized
during the next twelve months.
USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions which affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
The Company considers highly liquid investments with original maturities of up
to three months, when purchased to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash equivalents and short-term debt are carried at cost, which approximates
fair value due to the short-term nature of such instruments. Long-term debt is
carried at cost, which management believes approximates fair value because the
interest rate on such instruments approximated market yields at March 31, 2005.
There was no long-term debt at March 31, 2004.
INVENTORIES:
Inventories are valued at the lower of cost or market (LCM). For purposes of
analyzing the LCM, market is current replacement cost. Market cannot exceed the
net realizable value (i.e., estimated selling price in the ordinary course of
business less reasonably predicted costs of completion and disposal) and market
shall not be less than net realizable value reduced by an allowance for an
approximately normal profit margin. In evaluating LCM, management also
considers, if applicable, other factors as well, including known trends, market
conditions, currency exchange rates and other such issues. If the utility of
goods is impaired by damage, deterioration, obsolescence, changes in price
levels or other causes, a loss shall be charged as cost of sales in the period
which it occurs.
F-7
The Company makes 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. The
Company establishes reserves for its inventories to recognize estimated
obsolescence and unusable items on a continual basis.
Products that have existed in inventory for one calendar year with no usage and
that have no current demand or no expected demand, will be considered obsolete
and fully reserved. Obsolete inventory approved for disposal is written-off
against the reserve. Furthermore, consideration is given to ultimate
circumstances when recording inventory reserves and the disposal of inventory
considered obsolete. Market conditions surrounding products are also considered
periodically to determine if there are any net realizable valuation matters,
which would require a write-down of any related inventories. If market or
technological conditions change, it may result in additional inventory reserves
and write-downs, which would be accounted for in the period of change. The level
of inventory reserves reflects the nature of the industry whereby technological
and other changes, such as customer buying requirements, result in impairment of
inventory.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the shorter of
the lease terms or the estimated useful lives of the assets. Normal maintenance
and repairs of property and equipment are expensed as incurred. Renewals,
betterments and major repairs that materially extend the useful life of property
and equipment are capitalized.
INCOME TAXES:
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been included in financial statements or tax
returns. Under this method, deferred tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of
existing assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Realization of a deferred tax asset is dependent on generating future taxable
income. During the fiscal year ended March 31, 2002 the Company provided a
valuation allowance against deferred tax assets since it believed at the time
that enough uncertainty existed regarding the realizability of its deferred tax
assets. The Company reversed this valuation allowance for the year ended March
31, 2004. The analysis of positive evidence supporting the conclusion that the
valuation allowance was no longer applicable included the assessment of three
key issues that principally lead to the allowance: Substantial operating losses,
debt and pending litigation. The analysis supporting the reversal of the
valuation allowance was straight-forward, as the positive evidence which could
be objectively verified outweighed the negative evidence. Current and expected
results of the Company, as well as taking into account the status of litigation
at that time, indicated that the valuation allowance was not needed. The Company
had fully executed a restructuring whereby the Company returned to
profitability, as supported by the strong earnings during fiscal 2004, coupled
with the elimination of debt, a forecast indicating the Company would generate
more than enough taxable income to realize the deferred tax assets and the
status of litigation, the Company reversed the valuation allowance for the
deferred tax assets. (See Note 15 for a discussion of the status of the
Company's litigation and see Note 12 regarding Income Taxes.)
F-8
Tax benefits from early disposition of the stock acquired by employees from the
exercise of incentive stock options or non-qualified stock options are credited
to additional paid-in capital.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
The functional currency of the Company's foreign operations is the applicable
local currency. The foreign subsidiaries' assets and liabilities are translated
into United States dollars using exchange rates in effect at the balance sheet
date and their operations are translated using the average exchange rates
prevailing during the year. The resulting translation adjustments are recorded
as a component of other comprehensive income (loss).
Realized foreign currency transaction gains and losses are included in
operations.
GOODWILL:
As of March 31, 2005, 2004 and 2003, the Company has tested its goodwill for
impairment under the provisions of SFAS No. 142, and no impairment charges were
deemed necessary. See Note 5 for further discussion of the impact of SFAS No.
142 on the Company's financial position and results of operations.
Per SFAS No. 142, 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 the
company reporting units. If these estimates or related assumptions change in the
future, the Company may be required to record an impairment charge. Impairment
charges would be included in general and administrative expenses in the
Company's statements of operations, and would result in reduced carrying amounts
of the goodwill.
BUSINESS COMBINATIONS:
In all acquisitions, the purchase price of the acquired business is allocated to
the assets acquired and liabilities assumed at their fair values on the date of
the acquisition. The fair values of these items are based upon management's
estimates. Certain of the acquired assets are intangible in nature, including
customer relationships, patented and proprietary technology, covenants not to
compete, trade names and order backlog. The excess purchase price over the
amounts allocated to the assets is recorded as goodwill.
All such valuation methodologies, including the determination of subsequent
amortization periods, involve significant judgments and estimates. Different
assumptions and subsequent actual events could yield materially different
results.
LONG-LIVED ASSETS:
The Company accounts for the impairment of long-lived assets in accordance with
FAS 142, "Accounting for Goodwill and Other Intangible Assets" and FAS 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets". Long-lived
assets, such as property, plant, and equipment, and purchased intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be
F-9
generated by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be
disposed of would be separately presented in the balance sheet and reported at
the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated. The assets and liabilities of a disposed group classified as
held for sale would be presented separately in the appropriate asset and
liability sections of the balance sheet.
Management assesses the recoverability of long-lived assets whenever events or
changes in circumstance indicate that the carrying value may not be recoverable.
The following factors, if present, may trigger an impairment review:
i. Significant underperformance relative to expected historical or
projected future operating results;
ii. Significant negative industry or economic trends;
iii. Significant decline in stock price for a sustained period; and
iv. A change in market capitalization relative to net book value.
If the recoverability of these assets is unlikely because of the existence of
one or more of the above-mentioned factors, an impairment analysis is performed
using a projected discounted cash flow method at the appropriate level (lowest
level at which cash flows is identifiable).
Management must make assumptions regarding estimated future cash flows and other
factors to determine the fair value of these assets. Other factors could
include, among other things, quoted market prices, or other valuation techniques
considered appropriate based on the circumstances. If these estimates or related
assumptions change in the future, an impairment charge may need to be recorded.
Impairment charges would be included in our statements of operations, and would
result in reduced carrying amounts of the related assets on our balance sheet.
REVENUE RECOGNITION:
Revenue is recognized when earned, which occurs when the following four
conditions are met: (i) persuasive evidence of an arrangement exists; (ii)
delivery has occurred or services have been rendered; (iii) the price to the
buyer is fixed or determinable; and (iv) collectability is reasonably assured.
Certain consumer products may be sold with a provision allowing the customer to
return a portion of products. The Company provides for allowances for returns
based upon historical and estimated return rates. The amount of actual returns
could differ from estimates. Changes in estimated returns would be accounted for
in the period of change.
The Company utilizes manufacturing representatives as sales agents for certain
of its 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. The Company is not responsible for the ultimate sale to third
party customers and therefore records revenue upon shipment to the distributor.
Promotional rebates and other consideration provided to customers are reflected
as a reduction in revenue.
On January 30, 2004, Conair Corporation purchased certain assets of the
Company's Thinner(R) branded bathroom and kitchen scale business, including
worldwide rights to the Thinner(R) brand name and exclusive rights to the
Thinner(R) designs in North America. The Company has accounted for the sale of
this business under the guidance of EITF 00-21. As a significant portion of the
proceeds from the sale was in fact an up-front payment for future lost margins,
the majority of the gain on sale has been deferred and will be amortized into
revenues in future periods over the estimated remaining lives for those products
sold to Conair. (See Note 6 for a discussion of the sale of the business to
Conair).
ACCOUNTS RECEIVABLE:
F-10
The majority of the Company's accounts receivable are due from retailers and
manufacturers of electronic, automotive, military and industrial products.
Credit is extended based on an evaluation of a customers' financial condition
and, generally, collateral is not required. Accounts receivable are generally
due within 30 to 90 days and are stated at 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.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable when they become
uncollectible, and payments subsequently received on such receivables are
credited to the allowance for doubtful accounts.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers deteriorates, resulting in an
impairment of their ability to make payments, additional allowances may be
required. Actual uncollectible accounts could exceed the Company's estimates and
changes to its estimates will be accounted for in the period of change.
SHIPPING AND HANDLING:
The Company generally does not bill shipping and handling fees to its customers.
Shipping and handling costs are recorded in cost of sales.
ADVERTISING COSTS:
Advertising costs are included in selling, general and administrative expenses
and are expensed when the advertising or promotion is published. Advertising
expenses for the years ended March 31, 2005, 2004 and 2003 were approximately
$358, $322, and $539, respectively.
WARRANTY RESERVE:
The Company's sensor and consumer products generally are marketed under
warranties to end users of up to five years. Factors affecting the Company's
warranty liability include the number of products sold and historical and
anticipated rates of claims and cost per claim. The Company provides for
estimated product warranty obligations at the time of sale, based on its
historical warranty claims experience and assumptions about future warranty
claims. This estimate is susceptible to changes in the near term based on
introductions of new products, product quality improvements and changes in end
user application and/or behavior.
The following table summarizes the warranty reserve:
YEAR ENDED MARCH 31,
2005 2004 2003
Total Warranty Reserve (Beginning) (669) (762) (685)
Expense for Warranties issued during the period (110) (333) (641)
Costs to repair products 86 151 154
Costs to replace products 244 275 410
----------------------------
Total Warranty Reserve (Ending) $(449) $ (669) $ (762)
============================
COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) consists of net earnings or loss for the period, the
impact of unrealized foreign currency translation adjustments and unrealized
gains and losses on certain derivative financial instruments accounted for as
cash flow hedges.
F-11
STOCK BASED COMPENSATION
The Company has two stock-based employee compensation plans, which are described
more fully in Note 14. 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 2005, 2004 and 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", using the assumptions
described in Note 14, to its stock-based employee plans.
YEAR ENDED MARCH 31
2005 2004 2003
---------------------------
Net income (loss), as reported $14,826 $21,586 ($9,097)
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects - - -
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for awards granted, modified, or
settled, net of related tax effects 1,399 290 640
---------------------------
Pro forma net income (loss) $13,427 $21,296 ($9,737)
===========================
Earnings net income (loss) per share:
Basic - as reported $ 1.11 $ 1.73 ($0.76)
Basic - pro forma 1.00 1.73 (0.82)
Diluted - as reported 1.05 1.53 (0.76)
Diluted - pro forma 0.95 1.52 (0.82)
LEASES:
The Company follows SFAS No. 13, "Accounting for leases" to account for its
operating leases. In accordance with SFAS No. 13, lease costs, including
escalations, are provided for using the straight-line basis over the lease
period. The Company leases certain production equipment and automobiles which
under SFAS No. 13 are considered capital lease arrangements. SFAS No.13 requires
the capitalization of leases meeting certain criteria, with related asset being
recorded in property and equipment, and an offsetting amount recorded as a
liability.
The Company's Consumer distribution and warehouse space in Hampton, Virginia is
presently vacant due to the Conair transaction, as the Company no longer sells
the Thinner(R) brand of bath and kitchen scales to retailers. The Company is
presently attempting to sublease the unused space. The accounting for the
Hampton lease is in accordance with the requirements for FASB 146, "Accounting
for Costs Associated with Exit or Disposal Activities" whereby the Company did
not record a liability for the lease as part of the consummation of the
transaction with Conair because the Company still derives economic benefit from
the lease.
DERIVATIVE INSTRUMENTS:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 138 and SFAS No. 149, establishes accounting and reporting
standards for derivative instruments and hedging activities and requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measures those instruments at fair value.
Changes in the fair value of
F-12
those instruments will be reported in earnings or other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge
accounting. The accounting for gains and losses associated with changes in the
fair value of the derivative and the effect on the consolidated financial
statements will depend on its hedge designation and whether the hedge is highly
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged.
As part of the Company's refinancing plan, in October 2002 all derivative
financial instruments were satisfied. The cost of these financial instruments
for the fiscal year ended March 31, 2003 was $154 and has been included in
interest expense. Terraillon had certain foreign currency derivatives which
effects are included in discontinued operations in 2003. In 2005 the Company
purchased a number of existing foreign currency exchange contracts with the
acquisition of Humirel. (See Note 18)
RECENT ACCOUNTING PRONOUNCEMENTS:
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Statement No. 123R (Revised 2004), Share-Based Payment. The new FASB rule
requires that the compensation cost relating to share-based payment transactions
be recognized in financial statements, rather than disclosed in the footnotes to
the financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. The scope of Statement 123R includes
a wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123R replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. FASB Statement 123, as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that
statement permitted entities the option of continuing to apply the guidance in
Opinion 25, as long as the footnotes to the financial statements disclosed what
net income would have been had the preferable fair-value-based method been used.
Under the effective date provisions included in Statement 123R, registrants
would have been required to implement the Statement's requirements as of the
beginning of the first interim or annual period beginning after June 15, 2005,
or after December 15, 2005 for small business issuers. The new rule allows
registrants to implement Statement 123R at the beginning of their next fiscal
year, instead of the next interim period, that begins after June 15, 2005, or
December 15, 2005 for small business issuers. The Company will be required to
apply FASB 123R beginning with the quarter ending June 30, 2006. The Company is
currently quantifying the impact of FASB 123R, however, the Company does believe
the adoption of FASB Statement 123R will have a material effect on its financial
position and results of operations consistent with the pro-forma disclosures.
On November 24, 2004, the FASB issued FASB Statement No. 151, Inventory Costs -
An amendment of ARB No. 43, Chapter 4. This new standard is the result of a
broader effort by the FASB to improve financial reporting by eliminating
differences between GAAP in the United States and GAAP developed by the
International Accounting Standards Board ("IASB"). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. Statement 151 clarifies that abnormal amounts of idle facility
expense, freight, handling costs and spoilage should be expensed as incurred and
not included in overhead. Further, Statement 151 requires that allocation of
fixed production overheads to conversion costs should be based on normal
capacity of the production facilities. The provisions in Statement 151 are
effective for inventory costs incurred during fiscal years beginning after June
15, 2005. Companies must apply the standard prospectively. The Company does not
believe the adoption of FASB Statement 151 will have a material effect on its
financial position or results of operations.
On December 17, 2004, the FASB issued FASB Statement No. 153, Exchanges of
Nonmonetary Assets - An Amendment of APB Opinion No. 29. This new standard is
the result of a broader effort by the FASB to improve financial reporting by
eliminating differences between GAAP in the United States and GAAP developed by
the International Accounting Standards Board (IASB). As part of this effort, the
FASB and the IASB identified opportunities to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. Statement 153 amends APB Opinion No. 29, Accounting for Nonmonetary
Transactions, that was issued in 1973. The amendments made by Statement 153 are
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. Further, the amendments
eliminate the narrow exception for nonmonetary exchanges of similar productive
assets and replace it with a broader exception for exchanges of nonmonetary
assets that do not have "commercial substance." Previously, Opinion 29 required
that the accounting for an exchange of a productive asset for a similar
productive asset or an equivalent interest in the same or similar productive
asset should be based on the recorded amount of the asset relinquished. The
provisions in Statement 153 are effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Early application is
permitted and companies must apply the standard prospectively. The Company does
not believe the adoption of FASB Statement 153 will have a material effect on
its financial position or results of operations.
F-13
In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and
Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle, unless it is impracticable to do so. Statement 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005. The Company does not believe the
adoption of FASB Statement 154 will have a material effect on its financial
position or results of operations.
In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP
109-1"),"Application of SFAS No. 109, "Accounting for Income Taxes", to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." FSP 109-1 is effective immediately. FSP 109-1 states that
the tax deduction of qualified domestic production activities, which is provided
by the American Jobs Creation Act of 2004 (the "Jobs Act"), will be treated as a
special deduction as described in SFAS No. 109. Consequently, the impact of the
deduction, which is effective January 1, 2005, will be reported in the period in
which the deduction is claimed on the Company's income tax returns. The Company
does not expect FSP 109-1 to have a material effect on its financial statements.
In December 2004, the FASB issued FASB Staff Position No. 109-2 ("FSP
109-2"),"Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004" ("Jobs
Act". FSP 109-2 provides accounting and disclosure guidance related to the Jobs
Act provision for the limited time 85% dividends received deduction on the
repatriation of certain foreign earnings. Although adoption is effective
immediately, FSP 109-2 states that a company is allowed time beyond the
financial reporting period to evaluate the effect of the Jobs Act on its plan
for reinvestment or repatriation of foreign earnings. The Company is evaluating
the impact of the repatriation provisions of the Jobs Act and will complete its
review by December 31, 2005. It is not expected that these provisions will have
a material impact on the Company's financial statements. Accordingly, as
provided for in FSP 109-2, the Company has not adjusted its tax expense or net
deferred tax assets to reflect the repatriation provisions of the Jobs Act.
F-14
3. INVENTORIES
Inventories are summarized as follows:
MARCH 31,
2005 2004
------- -------
RAW MATERIALS $10,679 $ 6,777
WORK-IN-PROCESS 2,008 1,210
FINISHED GOODS 7,595 2,183
------- -------
$20,282 $10,170
======= =======
Inventory reserves were $3,866 and $4,206 as of March 31, 2005 and 2004,
respectively.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are summarized as follows:
MARCH 31,
---------------------------------------------------
2005 2004 USEFUL LIFE
---------------------------------------------------
Production machinery and equipment $ 20,083 $ 14,616 5-7 years
Building 750 - 39 years
Tooling costs 4,635 3,846 5-7 years
Furniture and equipment 6,348 4,138 3-10 years
Leasehold improvements 2,219 1,780 Remaining term of the lease
Construction in progress 1,299 296 -
----------------------
Total 35,334 24,676
Less: accumulated depreciation and
amortization (20,410) (14,048)
----------------------
$ 14,924 $ 10,628
======================
Depreciation expense was $3,095 , $2,824 and $3,002 for the years ended March
31, 2005, 2004, and 2003, respectively. Included in property and equipment is
$646 in capital leases.
5. ACQUISITIONS, GOODWILL AND ACQUIRED INTANGIBLES
Recent Acquisitions:
As part of its growth strategy in the Sensors segment, the Company made six
acquisitions during the year ended March 31, 2005. Proforma financial statements
are not presented for Elekon, Entran, Encoder, MWS and Polaron acquisitions
because the test of significance for the acquired companies is below the
prescribed thresholds. Only the Humirel acquisition meets the test of
significance, and accordingly, proforma financial statements are presented
below.
Elekon:
On June 24, 2004, the Company acquired 100% of the capital stock of Elekon
Industries USA, Inc. ("Elekon") for $7,766 ($4,500 in cash at the closing,
$3,000 in unsecured Promissory Notes ("Notes") and $266 in acquisition costs).
The terms of the Notes amortize over a period of three years, are payable
quarterly and bear interest at a rate of 6%. If certain performance targets are
achieved, an additional $3,000 could be paid to the principals of Elekon. If
paid, these amounts will be treated as additional acquisition costs and will
increase the amount of goodwill associated with the acquisition. At this time,
it does not appear the performance targets for additional payments will be
achieved. Elekon is based in Torrance, California where it designs and
manufactures optical sensors primarily for the medical and security markets. The
transaction was recorded as a purchase, and is included in the consolidated
financial results from the date of acquisition through March 31, 2005. The
Company has recorded goodwill of $4,143. Included in the goodwill is $248
resulting from the recording of deferred tax liabilities as part of the
F-15
acquisition. Set forth below is a summary of the amount of purchase price
allocated to intangibles related to the Elekon acquisition:
Description Life Value
------------------------ ---------- ------
Customer relationships Indefinite $1,870
Patents 18.5 775
Proprietary technology 10 510
Covenants not-to-compete 3 620
------
$3,775
======
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
ELEKON INDUSTRIES, INC.
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
JUNE 24, 2004
Assets
Accounts Receivable $ 501
Inventory 829
Property and equipment 169
Others 20
-------
1,519
-------
Liabilities
Accounts Payable (1,321)
Others (102)
-------
(1,423)
-------
Net Assets Acquired $ 96
=======
Entran:
On July 16, 2004 the Company acquired 100% of the capital stock of Entran
Devices, Inc. and Entran SA ("Entran") for $10,841 ($6,000 in cash at the
closing, $1,195 in certain liabilities discharged at closing, $3,254 in deferred
payments and $392 in acquisition costs). The Company will pay a deferred payment
of $2,254 on July 16, 2006, and will pay an additional $1,000 upon the earlier
of October 31, 2005 or the date of the elimination of the lease expense and
certain other expenses related to the Fairfield, NJ Facility. Entran, based in
Fairfield, NJ and Les Clayes-sous-Bois, France, is a designer/manufacturer of
acceleration, pressure and force sensors sold primarily to the automotive crash
test and motor sport racing markets. The transaction was recorded as a purchase,
and is included in the consolidated financial results from the date of
acquisition through March 31, 2005. Included in total goodwill of $ 7,271 for
Entran is $320 resulting from the recording of deferred tax liabilities as part
of the acquisition. Set forth below is a summary of the amount of purchase price
allocated to intangibles related to the Entran acquisition:
Description Life Value
---------------------- ---- ------
Customer relationships 7 $ 700
Order Backlog 1 100
------
$ 800
======
F-16
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
ENTRAN DEVICES, INC. AND ENTRAN SA
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
JULY 16, 2004
Assets
Cash $ 246
Accounts Receivable 2,002
Inventory 1,513
Property, plant and
equipment 1,000
Others 273
-------
5,034
-------
Liabilities
Accounts Payable (1,735)
Others (209)
-------
(1,944)
-------
Net Assets Acquired $3,090
=======
Encoder:
On July 16, 2004 the Company acquired the assets of Encoder Devices, LLC
("Encoder") for $4,577 ($4,000 in cash at the closing, $400 in deferred payments
and $177 in acquisition costs). The Company will pay the deferred payment of
$400 on July 16, 2005. Encoder, based in Plainfield, IL, is a designer
/manufacturer of rotational sensors (encoders) utilizing magnetic encoding
technology. The Company recorded $ 3,852 of goodwill associated with the Encoder
acquisistion. The transaction was recorded as a purchase and is included in the
consolidated financial results from the date of acquisition through March
31,2005. Set forth below is a summary of the amount of purchase price allocated
to intangibles related to the Encoder acquisition:
Description Life Value
------------------------ ---- ------
Patents 19.5 $ 137
Covenants not-to-compete 3 283
------
$ 420
======
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
ENCODER DEVICES LLC
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
JULY 15, 2004
Assets
Accounts Receivable $ 96
Inventory 134
Property and equipment 251
Others 36
-----
F-17
517
-----
Liabilities
Accounts Payable (203)
Others (9)
-----
(212)
-----
Net Assets Acquired $305
=====
Humirel:
Effective on December 1, 2004, the Company acquired the stock of Humirel SA
("Humirel"), a designer/manufacturer of humidity sensors and assemblies based in
France, for 19,000 Euro, or $26,153 ($23,400 at close, $1,815 in deferred
payment, and $939 in acquisition costs). The deferred payment is due payable on
the second anniversary (less any applicable offsets) and bears interest at the
rate of 3% per annum. In addition, the sellers can earn up to an additional
6,300 Euro, or $8,400, if certain performance hurdles, including achieving
established net sales and gross margin levels in 2005, are achieved. Management
shareholders also received $476 of the closing consideration in restricted
stock, or 20,000 shares. The transaction was financed with a term credit
facility issued by a syndicate of lending institutions, led by a new lender for
the Company (See Note 7). The transaction was recorded as a purchase, and is
included in the consolidated financial results from the date of acquisition
through March 31, 2005. Set forth below is a summary of the amount of purchase
price allocated to intangibles related to the Humirel acquisition. The Company
has recorded goodwill of $19,029 for the acquisition and intangibles of $4,573.
Included in the goodwill is $655 resulting from the recording of deferred tax
liabilities as part of the acquisition:
Description Life Value
---------------------- ---- ------
Customer relationships 8 $2,623
Patents 13 1,455
Tradename 3 232
Backlog 1 261
------
$4,571
======
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
HUMIREL SA
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
DECEMBER 1, 2004
Assets
Cash $ 994
Accounts Receivable 1,513
Inventory 1,755
Property and equipment 1,472
Others 744
--------
6,478
--------
Liabilities
Accounts Payable
Current portion of long-term debt (1,268)
(588)
Long-term debt, net of current (1,914)
--------
F-18
(3,770)
--------
Net Assets Acquired $ 2,708
========
Since the Humirel acquisition meets the test of significance threshold for the
investment calculation, the following represents the Company's un-audited pro
forma consolidated results of operations for the period assuming the Humirel
acquisition had occurred as of April 1, 2004, giving effect to purchase
accounting adjustments. The pro forma data is for informational purposes only
and may not necessarily reflect results of operations had Humirel been operated
as part of the Company since April 1, 2003.
2005 2004
Net sales $145,961 $118,504
Net income 15,365 21,769
Net income per common share
Basic 1.15 1.77
Diluted 1.09 1.56
MWS Sensorik:
Effective January 1, 2005, the Company acquired MWS Sensorik GmbH ("MWS" or
"Sensorik"), for 900 Euro (650 Euro at close and 250 in deferred payments) or
approximately $1,200. The Company has placed this deferred payment into escrow
at closing. It will be released from escrow on the first anniversary. MWS, based
in Pfaffenhofen, Germany, integrates and distributes accelerometers and other
sensors, sold primarily to the automotive crash test market. MWS has
historically used MSI's silicon micromachined accelerometer as their die for
piezoresistive sensors. The transaction was recorded as a purchase, and is
included in the consolidated financial results from the date of acquisition
through March 31, 2005. The Company has recorded goodwill of $443 and
intangibles of $751 for the acquisition. Included in the goodwill is $257
resulting from the recording of deferred tax liabilities as part of the
acquisition. Set forth below is a summary of the amount of purchase price
allocated to intangibles related to the MWS acquisition:
Description Life Value
---------------------- ---- ------
Customer relationships 8 $ 700
Backlog 1 51
------
$ 751
======
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
MWS SENSORIK GMBH
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
JANUARY 1, 2005
Assets
Accounts Receivable $ 252
Inventory 189
Property and equipment 49
Others 6
------
496
------
F-19
Liabilities
Accounts Payable
Others $ (58)
(175)
------
(233)
------
Net Assets Acquired $ 263
======
Polaron:
Effective February 1, 2005, the Company has acquired certain assets of the
industrial pressure sensing business of Polaron Components Limited in the United
Kingdom, for GBP 1,200 or approximately $2,478 ($2,460 at close and $18 in
acquisition costs). The assets were acquired by the Company's Chinese
subsidiary, MSI Sensors (China) Limited. The transaction is a vertical
integration move for the Company, as Polaron distributed certain of the
Company's products in the UK and the Company distributed Polaron products in
North America and Asia. MSI had been manufacturing Polaron pressure products in
its wholly owned subsidiary in China. The transaction was recorded as a
purchase, and is included in the consolidated financial results from the date of
acquisition through March 31, 2005. The Company has recorded goodwill of $1,081
and intangibles of $1,003 for the acquisition. Set forth below is a summary of
the amount of purchase price allocated to intangibles related to the Polaron
acquisition:
Description Life Value
---------------------- ---- ------
Customer relationships 8 $ 900
Backlog 1 103
------
$1,003
======
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
POLARON COMPONENTS LTD.
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
FEBRUARY 1, 2005
Assets
Inventory $ 388
Property and equipment 7
-----
Net Assets Acquired $ 395
=====
Acquired Intangibles:
In connection with current and previous acquisitions, the company acquired
certain identifiable intangible assets, including customer relationships,
proprietary technology, patents, trade names, and order backlogs. The gross
amounts and accumulated amortization, along with the range of amortizable lives
is as follows:
F-20
2005 2004
-------------------------------------------------------------
Gross Accumulated Gross Accumulated
Life Amount Amortization Net Amount Amortization Net
-------------------------------------------------------------------------
Amortizable intangible assets:
Customer relationships 7-8 $ 4,923 ($230) $ 4,693 - - -
Patents 6-19.5 2,559 (221) 2,338 192 (146) 46
Tradenames 3 232 (41) 191 - - -
Backlogs 1 515 (177) 338 - - -
Covenants not-to-compete 3 903 (222) 681 - - -
Proprietary Technology 10 510 (38) 472 - - -
------- ------------- ------- ------- ------------ -----
9,642 (929) 8,713 192 (146) 46
Unamortizable intangible assets: - -
Customer relationships Indefinite 1,870 - 1,870 - - -
-------------------------------------------------------------
$11,512 ($929) $10,583 $ 192 ($146) $ 46
=============================================================
Amortization Expenses is expected to be as follows:
Year Amortization Expense
---- --------------------
2006 1,571
2007 1,220
2008 973
2009 840
2010 839
Therafter 3,270
Goodwill:
A summary of the goodwill is as follows:
SENSORS
BALANCE AS OF MARCH 31, 2002 $ 4,191
Impairment loss -
Other -
--------
BALANCE AS OF MARCH 31, 2003 4,191
Impairment loss -
--------
BALANCE AS OF MARCH 31, 2004 4,191
Elekon 4,143
Entran 7,271
Encoder 3,852
Humirel 19,029
MWS Sensorik 443
Polaron 1,081
Impairment loss -
--------
BALANCE AS OF MARCH 31, 2005 $ 40,010
========
Impairment Testing:
The fair value of the Company's reporting units was determined using the implied
fair value approach. This process was completed in the fiscal quarters ended
March 31, 2005, 2004 and 2003 for asset values as of these respective dates.
According to the guidelines established under SFAS 142, there was no impairment
for any of the Company's reporting units.
Deferred Acquisition Payments:
In connection with the acquisitions, following is a summary of the deferred
acquisition payments outstanding at March 31, 2005:
Current Long-term Total
-------- ---------- ------
Entran $ 1,000 $ 2,254 $3,254
Encoder 400 - 400
Humirel - 1,815 1,815
MWS Sensorik 320 - 320
----------------------------
$ 1,720 $ 4,069 $5,789
============================
F-21
6. DISCONTINUED OPERATIONS AND GAIN ON SALE OF ASSETS:
BACKGROUND: As more fully discussed below, the Company sold all of the
outstanding stock of Terraillon, previously a component of the Company's
Consumer Products segment, in September 2002, and placed Schaevitz UK previously
a component of the Company's Sensor segment, into receivership in June 2002. The
Company sold the assets, principally property and equipment, related to its IC
Sensors silicon wafer fab manufacturing operations, previously a component of
the Company's Sensor segment, in July 2002. The amounts for Schaevitz UK on the
consolidated statements of operations for the fiscal years ended March 31, 2004
and 2003 and the amounts for Terraillon for the fiscal years ended March 31,
2003 have been reclassified as discontinued operations to reflect the disposal
of these operating units.
SCHAEVITZ UK : The Company placed Schaevitz UK 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. Schaevitz UK's
landlord has a potential dilapidation claim of up to 350 Pounds Sterling 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 amounts for
Schaevitz UK on the consolidated statements of operations for the fiscal years
ended March 31, 2004 and 2003 have been reclassified as discontinued operations
to reflect the disposal of this operating unit. During the fiscal year ended
March 31, 2003, the Company incurred $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 $1,064, of which $439 is
reflected as gain on disposal of discontinued units. In the fiscal year ended
March 31, 2004, the Company recovered an additional $212 from the final
liquidation. This amount is reflected as income from discontinued operations.
IC SENSORS: In July 2002, the Company sold the assets, principally property and
equipment, related to its silicon wafer fab manufacturing operation in Milpitas,
CA to Silicon Microstructures, Inc. (SMI), a wholly-owned subsidiary of Elmos
Semiconductor AG. The wafer fab operation was formerly part of the Company's IC
Sensors division. The price paid by SMI for the assets was approximately $5,250,
consisting of approximately $3,370 in cash and $1,880 in prepaid credit for
products and services, subject to reduction under certain circumstances.
Approximately $900 of the cash purchase price was used to satisfy an outstanding
equipment lease obligation. The prepaid credit for products and services, as
utilized, has been accounted as a component of wafer costs. The gain on this
sale was approximately $159, net of tax, and has been reflected as "Gain on Sale
of Assets" for the fiscal year ended March 31, 2003.
TERRAILLON: In September 2002, the Company sold all of the outstanding stock of
Terraillon to Fukuda S.a.r.l, an investment holding company incorporated in
Luxembourg, for $22,819. On January 24, 2003 and February 19, 2003, the Company
received $1,384 and $152, respectively, 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 are no longer required, which is included in
gain on sale of discontinued units.
CONSUMER PRODUCTS THINNER(R) BRAND: On January 30, 2004, Conair Corporation
(Conair) purchased certain assets of the Company's Thinner(R) branded bathroom
and kitchen scale business. Under the terms of the Agreement of Purchase and
Sale of Assets, dated January 30, 2004, Conair Corporation acquired certain
assets associated with the sale of Thinner(R) brand bathroom and kitchen scales,
including worldwide rights to the Thinner(R) brand name and exclusive rights to
the Thinner(R) designs in North America. Assets sold to Conair included, among
other things, all inventories of finished scales, open customer purchase orders,
and patents. The Company previously sold its Thinner(R) branded scales directly
to retailers, predominately in the U.S. and Canada. On a going-forward basis,
the Company expects to supply these scales directly to Conair.
F-22
The Company has accounted for the sale of this business under the guidance of
EITF 00-21. As part of the asset purchase agreement with Conair, the Company has
agreed to supply Conair existing models of bathroom and kitchen scales at prices
that approximate cost to manufacture the product. Accordingly, a significant
portion of the $12,418 proceeds from the sale of the business was in fact an
up-front payment for future lost margins. Of the $12,418 proceeds, $11,418 was
received in February 2004, and additional $1,000 was released from escrow in
April 2004. The estimated total gain ("total gain"), prior to any deferral, was
approximately $8,565 and is subject to further adjustments. In order to arrive
at the amount of the total gain on sale that should be deferred and amortized
into future periods, the Company analyzed the estimated lost margins on an OEM
basis for the Thinner(R) branded bathroom and kitchen scale models sold to
Conair. The basis of the calculation was to determine the estimated remaining
product lives for those Thinner(R) branded bathroom and kitchen scale models
sold to Conair. Based upon this analysis, barring any new product introduction
or material change to the competitive landscape, it is estimated that the
Company would have been able to continue to sell these Thinner(R) branded
bathroom and kitchen scale models into the marketplace for approximately an
additional 4.25 years. Applying these factors, it was determined that $7,142 of
the total gain should be deferred and amortized over the remaining life cycle of
the Thinner(R) branded bathroom and kitchen scale models sold to Conair.
Accordingly, the Company recorded a gain on the sale of the assets of $1,424
(reflected as "Gain on Sale of Assets"), and included $2,978 and $398 in "net
sales" for the amortization of the deferred gain in the fiscal years ended March
31, 2005 and 2004. The balance of the deferred gain recorded on the balance
sheet at March 31, 2005 is $3,764.
7. LONG-TERM DEBT:
Revolving Credit Facility
On December 17, 2004, the Company entered into a new, $35,000 five-year credit
agreement with GE Commercial Finance, Commercial & Industrial Finance ("GE"),
comprised of a $20,000 term loan and $15,000 revolving credit facility. JP
Morgan Chase Bank, N.A. and Wachovia Bank, National Association participated in
the syndication. Interest accrues on the principal amount of borrowings at a
rate based on either a London Inter-bank Offered Rate (LIBOR) rate plus a LIBOR
margin or at an Index (a prime based) Rate plus an Index Margin. The LIBOR or
Index Rate is at the election of the borrower. From the closing date to the
second anniversary date of the closing, the applicable LIBOR and Index Margins
are 4.50% and 2.75%, respectively, and from the second anniversary, the
applicable LIBOR and Index Margins are 4.25% and 2.50%, respectively, subject to
a 2% increase upon the occurrence of an event of default under the credit
agreement. The term loan is payable in nineteen equal quarterly installments
beginning on March 1, 2005 through December 17, 2009. Proceeds from the new
credit facility were primarily used to support the acquisition of Humirel (See
Note 5), ordinary working capital and general corporate needs and replaced the
$15,000 revolving credit facility with Bank of America Business Capital
(formerly Fleet Capital Corporation). The Company has provided a security
interest in substantially all of the Company's assets as collateral for the new
credit facilities. Borrowings under the line are subject to certain financial
covenants and restrictions on indebtedness, dividend payments, financial
guarantees, and other related items, with the most restricted covenant being
limitations on annual capital expenditures. At March 31, 2005, the Company was
in compliance with applicable debt covenants.
As of March 31, 2005, the Company utilized the LIBOR based Index Rate, and the
interest rate applicable to borrowings under the revolving credit facility was
8.5%. As of March 31, 2005, the outstanding borrowings on the term loan and
revolver, which is included in short-term debt, were $19,500 and $1,400,
respectively, and the Company had the right to borrow an additional $13,600
under the revolving credit facility. The revolving credit facility is not
directly based on any borrowing base requirements.
Previous Revolving Credit Facility
On January 31, 2003, the Company entered into a $15,000 revolving credit
facility with Bank of America Business Capital ("BOA") (formerly Fleet Capital
Corporation). On December 17, 2004, the revolving credit facility with BOA was
replaced by the new $35,000 credit agreement with GE. In connection with the
refinancing, the Company expensed in December 2004, the $125 in related deferred
financing costs, as well as a $100 early loan termination fee in selling,
general and administrative expenses. The BOA credit facility was secured by a
lien on substantially all of the Company's assets. Interest accrued on the
principal amount of borrowings under this facility at a fluctuating rate per
year equal to the lesser of BOA'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). As of December 17, 2004, the interest rate
applicable to borrowings under the old revolving credit facility was 6.25%.
Commitment fees on the unused balance were equal to .375% per annum of the
average monthly amount by which $15,000 exceeded the sum of the outstanding
principal balance of the revolving credit loans. Commitment fees paid during the
quarter ended December 31, 2004 were $5.
F-23
The weighted average interest rate for the above credit facilities was 7.26% for
the year ended March 31, 2005. The average amount outstanding under the
agreements for the year ended March 31, 2005 was $8,455. As of March 31, 2005,
the Company had interest of $243 accrued in Accrued Expenses and other Current
Liabilities.
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 the Company's obligations under its previous term loan and revolving credit
facility. The loan was evidenced by a Senior Secured Note originally due January
31, 2003. 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). The
warrant had a term of five years. On June 26, 2003, Castletop Capital exercised
its warrants to purchase 297,228 shares of stock at an exercise price of $1.64.
The relative estimated fair value of the warrant of $452 was recorded as a debt
discount, and was charged to interest expense in the fiscal year ended March 31,
2004, over the original term of the debt, which was originally due on January
31, 2003.
Amendment to bridge loan
In January 2003, the Company used a portion of the proceeds from the BOA
revolving credit facility to reduce the principal amount outstanding under the
bridge loan to $2,000.
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. 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 represented 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) (See Note 15). The revolving credit
agreement prohibited the Company from prepaying the bridge loan before September
30, 2003. In September 2003, with authorization from BOA, the Company retired
this facility by repaying $5,000 in borrowings to Castletop.
Promissory Notes
In connection with the acquisition of Elekon Industries USA, Inc. (See Note 5),
the Company issued unsecured Promissory Notes ("Notes") totaling $3,000, of
which $2,300 was outstanding and $1,200 considered current at March 31, 2005.
The Notes amortize over a period of three years, are payable quarterly and bear
interest at 6%.
F-24
Other Short-Term Debt
In connection with the acquisition of Entran and Humirel, the Company assumed
outstanding short-term borrowing. $685 of this assumed short-term borrowing
remains outstanding at March 31, 2005 and is included in short-term debt in the
consolidated balance sheet.
Short-term debt at March 31, 2005:
Revolver $1,400
Assumed European short-term
borrowings 685
------
$2,085
======
The following long-term debt and notes were outstanding at March 31, 2005:
Prime or LIBOR plus 2.75% five year term
loan payable in nineteen quarterly
installments of $500 through 2009 with a
final installment due on December 17, 2009. $19,500
Governmental loans from French agencies at
no interest and payable based on R&D
expenditures. 702
Term credit facility with six banks at an
interest rate of 4% payable through 2010. 1,036
6% Promissory notes payable in twelve equal
installments through September 20, 2007 2,300
-------
23,538
Less long-term debt and notes due currently 3,510
-------
$20,028
=======
The principal payments of long-term debt are as follows:
Term Sub- Promissory
Loan Other Total Notes Total
2006 $ 2,000 $ 310 $ 2,310 $ 1,200 $ 3,510
2007 2,000 295 2,295 1,000 3,295
2008 2,000 478 2,478 100 2,578
2009 2,000 380 2,380 - 2,380
2010 11,500 141 11,641 - 11,641
Thereafter - 134 134 - 134
----------------------------------------------
Total $19,500 $1,738 $21,238 $ 2,300 $23,538
F-25
8. SHAREHOLDERS' EQUITY:
The Company is authorized to issue 21,200,000 shares of capital stock, of which
221,756 shares have been designated as serial preferred stock and 20,000,000
shares have been designated as common stock. Each share of common stock has one
vote. The Board of Directors has not designated 978,244 authorized shares of
preferred stock.
In August 2001, the Company completed an underwritten offering of 2,530,000
shares of its common stock, including the exercise of the over allotment option.
The stock was priced at $13.50 per share resulting in proceeds of $30,874, net
of underwriting discount of $2,201 and expenses of $1,080. Of the proceeds,
$10,669 was used to fund the Terraillon acquisition (See Note 6), and $9,169 was
used to repay then outstanding principal on the former term loan.
In December 2001, the Company issued 314,081 shares of common stock in a private
placement to a member of the Board of Directors. The purchase price was $2,008
or $6.37 per share, which was an eight percent discount from the average closing
price for the twenty trading days preceding December 24, 2001, the effective
date of the purchase. These monies that were received in January 2002 were used
to fund operations and repay debt. The Company is required to file a
registration statement on Form S-3 to register the resale of these shares
following the first anniversary from the effective date. As of March 31, 2005
such form has not yet been filed.
On October 31, 2002, Castletop Capital, LP was issued warrants to purchase
297,228 shares of the Company's common stock in conjunction with the $9,300 loan
made to the Company on that date. The warrants had an exercise price of $1.64
per share, and had an exercise period of five years. The Company valued these
warrants using a Black-Scholes model at $452, recorded such value as debt
discount and charged the discount to interest expense over the life of the debt,
which was originally due on January 31, 2003 (See Note 7). On June 26, 2003,
Castletop exercised its warrant to purchase 297,228 shares of stock at an
exercise price of $1.64.
On various dates, warrants were issued to Corporate Revitalization Partners,
(CRP) for successfully achieving objectives outlined by the Company's Board of
Directors and Compensation Committee. In November 2002, warrants to purchase
87,720 shares of the Company's common stock were issued to CRP for the
successful negotiation and execution of a long-term forbearance agreement, and
for the Company being in compliance with the forbearance agreement as of
September 30, 2002. On January 31, 2003, warrants to purchase an additional
32,895 shares of the Company's common stock were issued to CRP for the
successful refinancing of the Company's lines of credit. Expense related to
these warrants for the fiscal year ended March 31, 2003 was calculated at $234
using a Black-Scholes model. All warrants issued to CRP had an exercise period
of three years and exercise prices equal to $2.28. On June 12 and 13, and July
14, 2003, CRP exercised its warrant to purchase all 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 ("Four Corners") to provide for the services of
Frank Guidone as Chief Executive Officer of the Company. In connection with the
retention of the services of Mr. Guidone, Four Corners was also issued a warrant
to purchase up to 600,000 shares of the Company's common stock at an exercise
price of $3.16 per share.
During the fiscal year ended March 31, 2004, we recorded a non-cash equity based
compensation charge of $6,483, or $.46 per share diluted, for the vesting of the
warrants issued to Four Corners Capital Partners LP, a limited partnership of
which Mr. Guidone is a principal. The vesting of these warrants was based on a
combination of time and performance factors. The warrants were scheduled to vest
beginning the last day of July 2003 through the last day of April 2007 at a rate
of 35%, 30%, 20% and 15%, respectively, in each of the four years following the
grant date of the warrant. The warrants provide the right to buy shares from
F-26
time to time until April 30, 2013 with the potential of a reduced vesting period
if the Company's stock price reached certain levels, as shown in the table
below:
Period Acceleration Price Number of Shares
Period One $ 7.50 210,000
Period Two $ 10.00 180,000
Period Three $ 12.00 120,000
Period Four $ 15.00 90,000
The vesting of the warrants was accelerated and became vested on September 18,
2003, October 24, 2003, November 28, 2003, and January 22, 2004, respectively,
because the Company's stock price increased to a level above the defined
acceleration prices (See Note 10). There will be no additional charges resulting
from these warrants issued to Four Corners as all the warrants vested in the
fiscal year ended March 31, 2004.
For the three months ended March 31, 2004, the warrant was valued using the
Black-Scholes option pricing model, using a risk free rate of 0.95%, volatility
of 0.27, and warrant life of two months. On March 29, 2004, Four Corners has
exercised the warrant to purchase an aggregate of 600,000 shares of common stock
and elected to pay the exercise price of the warrant by having the Company
withhold a number of shares having a fair market value to the exercise price.
Based on the closing price of $19.11 on March 29, 2004, Four Corners received
500,785 shares of common stock from this transaction. See Note 13 for impact on
diluted earnings per share of the 600,000 warrant shares issued to Four Corners.
See Note 10 for related party discussion.
Other Comprehensive Income:
The following table summarizes the components of accumulated other comprehensive
income:
2005 2004 2003
---------------------
Cumulative translation adjustment $(435) $ (4) $ 365
Changes in fair value of derivatives
for hedging 9 - -
---------------------
Other comprehensive income (426) (4) 365
=====================
9. BENEFIT PLANS:
Defined Contribution Plans:
The Company has a defined contribution plan qualified under Section 401(k) of
the Internal Revenue Code. Substantially all of its U.S. employees are eligible
to participate after completing three months of service. Participants may elect
to contribute a portion of their compensation to the plan. Under the plan, the
Company has the discretion to match a portion of participants' contributions.
The Company intends to match $249 to the plan for the fiscal year ended March
31, 2005. For the fiscal year ended March 31, 2004, the Company's matching
contribution was $362. For the fiscal year ended March 31, 2003 there were no
matching contributions to the plan.
F-27
Defined Benefit Plans:
The Company's European operations maintain certain supplemental defined benefit
plans for substantially all of its employees. The gross amount of the future
benefit to be paid for pension and retirement will be fully covered through a
specific contract subscribed through an insurance company. Annual payments for
this obligation total approximately $15.
10. RELATED PARTY TRANSACTIONS:
As part of the Elekon acquisition, (See Note 5) the Company has a long-term
contract with Opto Circuits India, which defines a fixed pricing agreement, as
well as providing intellectual property protections. Opto Circuits, a supplier
of photo optic products, is a public company in India. Approximately 30% is
owned by the public and 13% is owned by current employees of the Company
(formerly employees of Elekon). For the fiscal year ended March 31, 2005,
payments of $2,211 were made to Opto for inventory purchases. Accrual for
payments due to Opto for receipts of inventory prior to March 31, 2005 was
$1,240 and is on the balance sheet as a part of Accounts Payable.
Restructuring Services
In May 2002, the Company retained Corporate Revitalization Partners ("CRP") to
conduct its ongoing operational/financial restructuring efforts. In June 2002,
Frank Guidone, a Managing Director of CRP, became the Company's Chief Executive
Officer (See "Executive Services and Non-Cash Equity Based Compensation" below
for a discussion of the current agreement relating to Mr. Guidone's services as
Chief Executive Officer of the Company). The Company no longer utilizes the
services of CRP as of the end of March 2004. As of March 31, 2004, on a
cumulative basis, the Company had incurred $3,613 in consulting fees and
expenses to CRP (excluding the success fees described in this paragraph). For
the fiscal years ended March 31, 2004 and 2003, the Company incurred $1,011 and
$2,602, respectively, in fees to CRP.
In addition to consulting fees based on hours billed by CRP consultants (at
hourly rates that range from $175 to $275 and that are capped at a maximum of 50
hours per consultant each week), CRP earned an aggregate "success fee" of $138
and warrants exercisable to purchase an aggregate of 120,615 shares of the
Company's common stock (at an exercise price of $2.28/share) as a result of the
achievement of certain goals in connection with the Company's restructuring
program. On June 12 and 13, and July 14, 2003, CRP exercised its warrant to
purchase 120,615 shares of stock at an exercise price of $2.28. During the
fiscal years ended March 31, 2004 and 2003 the Company expensed $6,483 and $234
relating to the CRP warrants (See Note 8).
Executive Services and Non-Cash Equity Based Compensation
On April 21, 2003, the Compensation Committee of the Company's Board of
Directors reached a verbal agreement with Frank Guidone regarding his long term
retention as Chief Executive Officer. Definitive agreements memorializing this
arrangement were entered into on July 22, 2003, between the Company and Four
Corners Capital Partners, LP ("Four Corners"), a limited partnership of which
Mr. Guidone is a principal. Pursuant to this arrangement, Four Corners will make
Mr. Guidone available to serve as the Company's Chief Executive Officer for
which it will receive an annual fee of $400 (plus travel costs for Mr. Guidone)
and will be eligible to receive a performance-based bonus. The agreement is for
an indefinite period of time and both parties have the right to terminate the
agreement on sixty day's advance notice. Through March 31, 2004, the Company
paid an aggregate of $333 and $78 for compensation and for the reimbursement of
travel costs, respectively, to Four Corners under this agreement. During fiscal
year 2005, the Company paid an aggregate of $400 for compensation and $96 for
the reimbursement of travel costs, respectively, to Four Corners under this
agreement.
In connection with the retention of the services of Mr. Guidone, Four Corners
was also issued a warrant to purchase up to 600,000 shares of the Company's
common stock at an exercise price of $3.16 per share. Subject to the continued
service of Mr. Guidone, the right to purchase the shares was originally
scheduled to vest at a rate of 35%, 30%, 20% and 15%, respectively, in each of
the four years following the grant date of the warrant, with the potential of a
reduced vesting period if certain performance targets are achieved. As a result
of the performance of the Company's common stock, all warrant shares became
vested during the fiscal year ended March 31, 2004. As a result of the
performance of the Company's common stock, the 35%, 30%, 20% and 15% of the
warrant shares became vested on September 18, 2003, October 24, 2003, and
November 28, 2003, and January 22, 2004, respectively.
F-28
During the fiscal year ended March 31, 2004, we recorded a non-cash equity based
compensation charge of $6,483, or $.46 per share diluted, for the vesting of the
warrants issued to Four Corners Capital Partners LP, a limited partnership of
which Mr. Guidone is a principal. The vesting of these warrants was based on a
combination of time and performance factors. The warrants were scheduled to vest
beginning the last day of July 2003 through the last day of April 2007 at a rate
of 35%, 30%, 20% and 15%, respectively, in each of the four years following the
grant date of the warrant. The warrants provide the right to buy shares from
time to time until April 30, 2013 with the potential of a reduced vesting period
if the Company's stock price reached certain levels, as shown in the table
below:
Period Acceleration Price Number of Shares
Period One $ 7.50 210,000
Period Two $ 10.00 180,000
Period Three $ 12.00 120,000
Period Four $ 15.00 90,000
The vesting of the warrants was accelerated and became vested on September 18,
2003, October 24, 2003, November 28, 2003, and January 22, 2004, respectively,
because the Company's stock price increased to a level above the defined
acceleration prices. There will be no additional charges resulting from these
warrants issued to Four Corners as all the warrants vested in the fiscal year
ended March 31, 2004.
For the each of the quarters in the fiscal year ended March 31, 2004, the
warrant was valued using the Black-Scholes option pricing model, using a risk
free rate, volatility factor, and warrant life as detailed in the chart below.
WARRANT VALUATION
YEAR ENDED MARCH 31, 2004
Q1 Q2 Q3 Q4
Shares Vested - 210,000 300,000 90,000
Option Value $ 5.28 $ 10.36 $ 9.17-$17.28 $ 18.43
Volatility 62.79% 45.84% 25.07%-43.82% 27.23%
Risk-Free Interest Rate 1.08% 1.01% 0.95%-1.04% 0.95%
On March 29, 2004, Four Corners exercised the warrant to purchase an aggregate
of 600,000 shares of common stock and elected to pay the exercise price of the
warrant by having the Company withhold a number of shares having a fair market
value equal to the exercise price. Based on the closing price of $19.11 on March
29, 2004, Four Corners received 500,785 shares of common stock from this
transaction. See Note 13 for impact on diluted earnings per share of the 600,000
warrant shares issued to Four Corners. See Note 8 for impact on Shareholder's
equity.
In addition, in connection with this arrangement, Mr. Guidone entered into a
non-competition agreement and Four Corners was granted registration rights
relating to any shares purchased under the warrant.
See Note 7 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.
F-29
In September 2001, the Company loaned $125 to Steven Petrucelli, a former member
of its Board of Directors. The loan, which was subsequently memorialized by a
Promissory Note dated August 1, 2002, accrues interest at a rate of 6% per year.
Bimonthly payments of principal and interest in the amount of $1,000 are payable
until September 15, 2006. Under the terms of the Promissory Note, Mr. Petrucelli
was able to reduce the outstanding balance of the loan by the amount of any
un-submitted business expenses. In April 2003, Mr. Petrucelli submitted prior
business expenses totaling $49, which were used to reduce the balance of the
loan. At March 31, 2004 there was $43 outstanding under the loan. Mr. Petrucelli
fully repaid the loan during the fiscal year ended March 31, 2005.
In connection with the resignation of the former Chief Executive Officer of the
Company, Joseph R. Mallon, Jr., effective February 4, 2003, the Company agreed
to make a severance payment of $225 (one year's salary) to Mr. Mallon and to
provide continued medical insurance coverage under its group plan for one year
following the date of his termination. The Company also agreed to extend the
exercise period for certain options held by Mr. Mallon until January 31, 2004,
and to reimburse for up to $25 in tuition for continuing business education. An
aggregate of $286 was included in selling, general and administrative expenses
during the year ended, March 31, 2003 relating to such severance.
11. RESTRUCTURING AND OTHER COSTS:
During the fiscal year ended March 31, 2005, the Company had no restructuring
costs. For the fiscal year ended March 31, 2004, the Company recorded a charge
of $506 for additional costs relating to its restructuring plan. This charge
resulted from the settlement of litigation related to its former facility in
Valley Forge, Pennsylvania. The following table summarizes the restructuring
charges. Please refer to Note 6 for discussion on the outstanding Schaevitz
restructuring accrual.
PAYMENT
MADE
RESTRUCTURING PAYMENTS DURING
COST FOR THE MADE DURING RESTRUCTURING THE YEAR
BALANCE AS YEAR ENDED THE YEAR ENDED BALANCE AS COST FOR THE YEAR ENDED BALANCE AS
OF MARCH MARCH 31, MARCH 31, OF MARCH ENDED MARCH 31, MARCH OF MARCH
31, 2003 2004 2004 31, 2004 2005 31, 2005 31, 2005
Lease termination $ 1,359 $ 506 $ (1,425) $ 440 $ - $ - $ 440
====================================================================================================
12. INCOME TAXES:
Income (loss) before income taxes and the cumulative effect of accounting change
consists of the following:
2005 2004 2003
-------------------------------
Domestic $ 8,475 $ 2,533 $(10,534)
Foreign $10,601 6,579 4,694
-------------------------------
$19,076 $ 9,112 $ (5,840)
===============================
F-30
The income tax provision (benefit) consists of the following:
2005 2004 2003
-------------------------------
Current
Federal $ 1,006 1,087 -
Foreign 1,258 1,009 345
State 314 310 138
-------------------------------
Total $ 2,578 $ 2,406 $ 483
-------------------------------
Deferred
Federal 1,540 (12,468) -
Foreign (322) - -
State 454 (2,200) -
-------------------------------
Total 1,672 (14,668) -
-------------------------------
$ 4,250 $(12,262) $ 483
===============================
Differences between the federal statutory income tax rate and the effective tax
rates are as follows:
2005 2004 2003
-------------------------------
Statutory tax rate 34.0% 34.0% -34.0%
Fine - 3.7% -
Options - 1.9% -
Effect of foreign taxes -14.1% -13.2% -1.4%
State taxes and other 2.4% 2.2% 1.0%
Over under - -3.0% 0.0%
Valuation allowance - -157.3% 39.9%
Other - 0.2% -
-------------------------------
22.3% -131.5% 5.5%
===============================
The difference between the Federal Statutory rate and the effective tax rate
relates primarily to reduced income tax applied to pre-tax income generated by
the Company's foreign subsidiaries and also changes to the valuation allowance
during the fiscal years ended March 31, 2003 and 2004. The Company's share of
cumulative undistributed earnings of its foreign subsidiaries was approximately
$20,200 and $10,200 at March 31, 2005 and 2004 (as restated), respectively. No
provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of foreign subsidiaries because such earnings are
expected to be reinvested indefinitely in the subsidiaries' operations. It is
not practical to estimate the amount of additional tax that might be payable on
these foreign earnings in the event of distribution or sale. However, under
existing law, foreign tax credits would be available to substantially reduce,
U.S. taxes payable.
The Company has received on an annual basis over the past 8 years certain tax
reductions from the tax authorities in China, as the Company qualifies as a
high-technology and export business enterprise. This special tax status provides
the Company, among other things, reductions in our national and local tax rates
in China from approximately 15% to approximately 10%. These reduced tax rates
have resulted in tax reductions of approximately $171, or $0.01 per share, $222,
or $0.02 per share, and $288, or $0.02 per share for fiscal years ended March
31, 2003, 2004 and 2005, respectively. These special tax status and tax holidays
are renewed annually.
The Hong Kong corporate tax rate, at which MSI Sensors (Asia) Limited earnings
are taxed, is 17.5 percent.
F-31
The significant components of the net deferred tax assets consist of the
following:
YEAR ENDED MARCH 31,
--------------------------
2005 2004
---------- --------------
Current Deferred Tax Assets:
Net operating loss 2,892 4,401
Accounts receivable allowance 74 163
Inventory 718 657
Accrued expenses 770 802
AMT credit 85 -
Other 230 169
---------- --------------
Total $ 4,769 $ 6,192
Current Deferred Tax Liabilities:
Basis difference in acquired intangible assets $ (485) -
---------- --------------
Total $ (485) $ -
---------- --------------
Net Current Deferred Tax Assets $ 4,284 $ 6,192
========== ==============
Long-Term Deferred Tax Assets (Liabilities):
Deferred Gain $ 1,505 $ 2,697
Warranty - 75
Basis difference in fixed assets 422 -
Net operating loss 7,874 6,272
---------- --------------
Total long term asset 9,801 9,044
Long-Term Deferred Tax Liability
Basis difference in fixed assets (878) (568)
Basis difference in acquired intangible assets (1,733) -
---------- --------------
Total long term liability (2,611) (568)
Valuation allowance - -
---------- --------------
Net long term deferred tax asset (liability) $ 7,190 $ 8,476
========== ==============
---------- --------------
Total net deferred tax asset $ 11,474 $ 14,668
========== ==============
In 2003, the Company had a pre-tax loss for financial reporting purposes.
Recognition of deferred tax assets required generation of future taxable income.
Since there was no assurance that the Company would generate profits at the end
of March 2003, a valuation allowance was established for $15,414.
The Company has reversed this valuation allowance for the year ended March 31,
2004. The analysis of positive evidence supporting the conclusion that the
valuation allowance was no longer applicable included the assessment of three
key issues that principally lead to the allowance: Substantial operating losses,
debt and pending litigation. The analysis supporting the reversal of the
valuation allowance was straight-forward, as the positive evidence which could
be objectively verified outweighed the negative evidence. Current and expected
results of the Company, as well as taking into account the status of litigation
at that time, indicated that the valuation allowance was not needed. The Company
had fully executed a restructuring whereby the Company returned to
profitability, as supported by the strong earnings during fiscal 2004, coupled
with the elimination of debt, a forecast indicating the Company would generate
more than enough taxable income to realize the deferred tax assets and the
status of litigation, the Company reversed the valuation allowance for the
deferred tax assets. The Company has determined no valuation allowances is
required for deferred assets for the year ended March 31, 2005.
F-32
The Company has federal net operating loss carryforwards of approximately
$25,326, which expire beginning in fiscal year 2022. The Company evaluated the
Federal net operating loss carryforwards during fiscal year ended March 31,
2005. The Company believes the use of its Federal net operating loss
carryforwards is not subject to limitation under section 382 of the Internal
Revenue Code.
The Company also has net operating loss carryforwards for state tax purposes
which expire beginning in the fiscal year ending March 31, 2010.
13. PER SHARE INFORMATION:
Basic per share information is computed based on the weighted-average common
shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or conversion
of stock options, less the shares that may be repurchased with the funds
received from their exercise. Potentially dilutive securities are not included
in earnings per share for the years ended March 31, 2005, 2004 and 2003 as their
inclusion would be anti-dilutive.
The following is a reconciliation of the numerators and denominators of basic
and diluted EPS computations for the year ended March 31, 2005:
Income (Loss)
from continuing Weighted Average
operations Shares (000)
(Numerator) (Denominator) Per-Share Amount
--------------------------------------------------------
March 31, 2005
Basic per share information $ 14,826 13,392 $ 1.11
Effect of dilutive securities - 703 $ 0.06
------------------------------------
Diluted per-share information $ 14,826 14,095 $ 1.05
====================================
March 31, 2004
Basic per share information $ 21,586 12,333 $ 1.75
Effect of dilutive securities - 1,664 $ 0.21
------------------------------------
Diluted per-share information $ 21,586 13,997 $ 1.54
====================================
March 31, 2003
Basic per share information $ (9,097) 11,911 $ (0.76)
Effect of dilutive securities - - -
------------------------------------
Diluted per-share information $ (9,097) 11,911 $ (0.76)
====================================
For the years ended March 31, 2005, 2004 and 2003, respectively, an aggregate of
327,550, 1,217,000 and 665,000 options and warrants respectively, were excluded
from the earnings per share calculation because the effect would be
anti-dilutive.
14. STOCK OPTION PLANS:
Options to purchase up to 1,828,000 common shares were eligible to be granted
under MSI's 1995 Stock Option Plan and its predecessor plan (together the "1995
Plan"), until its expiration on September 8, 2005.
F-33
Shares issuable under 1995 Plan grants which expire or otherwise terminate
without being exercised become available for later issuance. All shares eligible
for grant were issued prior to April 1, 1999.
Options to purchase up to 1,500,000 shares may be granted under the Company's
1998 Stock Option Plan, (the "1998 Plan") until its expiration on October 19,
2008. Shares issuable under 1998 Plan grants which expire or otherwise terminate
without being exercised become available for later issuance. A total of 941,499,
1,246,694, and 1,411,070 options to purchase shares were outstanding at March
31, 2005, 2004 and 2003, respectively under the 1998 plan.
On July 28, 2003, the Board of Directors adopted the Measurement Specialties,
Inc. 2003 Stock Option Plan, which was approved by shareholders at the 2003
Annual Meeting on September 23, 2003. Options to purchase up to 1,000,000 common
shares were eligible to be granted under the 2003 stock option plan, and as of
March 31, 2005, 564,450 stock options were issued under the 2003 stock option
plan.
Options under all Plans generally vest over service periods of up to five years,
and expire no later than ten years from the date of grant. Options may, but need
not, qualify as "incentive stock options" under section 422 of the Internal
Revenue Code. Tax benefits are recognized upon nonqualified exercises and
disqualifying dispositions of shares acquired by qualified exercises. There were
no changes in the exercise prices of outstanding options, through cancellation
and re-issuance or otherwise, for 2005, 2004, or 2003.
The number of shares remaining for future issuance under equity compensation
plans totaled 768,975 and 1,028,330 as of March 31, 2005 and 2004, respectively.
A summary of the status of stock options as of March 31, 2005, 2004, and 2003
and changes during the years ended on those dates is presented below:
NUMBER OUTSTANDING OF SHARES
EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICE
OUTSTANDING EXERCISABLE OUTSTANDING EXERCISABLE
March 31, 2002 1,049,670 514,660 $ 9.39 $ 4.55
Granted at market 971,400 2.32
Forfeited (252,100) 16.40
Exercised (58,000) 2.30
March 31, 2003 1,710,970 539,530 4.59 5.70
------------------------------------------------------------------
Granted at market 153,000 12.92
Forfeited (112,700) 6.38
Exercised (420,026) 2.59
March 31, 2004 1,331,244 560,760 6.00 6.03
------------------------------------------------------------------
Granted at market 564,450 22.68
Forfeited (6,610) 11.16
Exercised (298,485) 4.02
March 31, 2005 1,590,599 629,165 12.38 7.12
------------------------------------------------------------------
Summarized information about stock options outstanding at March 31, 2005
follows:
STOCK OPTIONS OUTSTANDING AT MARCH 31, 2005
F-34
NUMBER OF UNDERLYING SHARES WEIGHTED-AVERAGE
EXERCISE PRICE
AVERAGE
REMAINING
EXERCISE CONTRACT
OUTSTANDING EXERCISABLE PRICE RANGE OUTSTANDING EXERCISABLE LIFE
653,049 373,790 $ 1.38 $ 3.81 $ 1.85 $ 1.92 7.79
71,000 59,625 $ 5.25 $ 9.50 $ 7.05 $ 7.33 7.35
229,000 124,800 $ 13.39 $18.80 $ 15.04 $ 14.86 7.12
637,550 70,950 $ 18.90 $26.69 $ 22.81 $ 20.72 6.38
----------------------------- ----------------------------------------
1,590,599 629,165 $ 12.38 $ 7.12 7.60
============================= ========================================
Based on calculations using the Black-Scholes option pricing model, the
weighted-average fair value of options granted in 2005, 2004, and 2003 at the
date of grant was $8.10 , $12.74, and $2.29 per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model (single grant assumption with straight-line
amortization) with the following weighted-average assumptions:
BLACK-SCHOLES OPTION-PRICING MODEL ASSUMPTION
2005 2004 2003
Expected volatility 33.26% 205.80% 205.7%
Risk-free interest rate 1.85% 1.80% 2.80%
Dividend yield. -- -- --
Expected life in years. 4 5 5
15. COMMITMENTS AND CONTINGENCIES:
LEASES. The Company leases certain property and equipment under non-cancelable
operating leases expiring on various dates through July 2011. Company leases
that include escalated lease payments are straight-lined over that base lease
period, in accordance with SFAS 13. Rent expense, including real estate taxes,
insurance and maintenance expenses associate with net operating leases
approximate $2,044 for 2005, $2,138 for 2004, and $969 for 2003. At March 31,
2005, total minimum rent payments under leases with initial or remaining
non-cancelable lease terms of more than one year were and were recorded in
Accrued Expenses and Other Current Liabilities and Other long-term liabilities:
YEAR ENDING MARCH 31,
----------- -----------
2006 $ 1,992
2007 1,348
2008 777
2009 686
2010 696
Thereafter $ 717
The Company leases certain equipment under capital lease arrangements. Below is
a schedule of future payments under capital leases:
TOTAL 2006 2007 2008 THEREAFTER
CAPITAL LEASE OBLIGATIONS $ 645 $ 264 $ 345 $ 36 $ 0
F-35
Litigation:
Pending matters:
Robert L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No.
02-CV-3431. On July 17, 2002, Robert DeWelt, the former acting Chief Financial
Officer of the Company and former acting general manager of the Company's
Schaevitz Division, filed a lawsuit against the Company and certain of its
officers and directors in the United States District Court of the District of
New Jersey. Mr. DeWelt resigned on March 26, 2002 in disagreement with
management's decision not to restate certain of the Company's financial
statements. The lawsuit alleges a claim for constructive wrongful discharge and
violations of the New Jersey Conscientious Employee Protection Act. Mr. DeWelt
seeks an unspecified amount of compensatory and punitive damages. The Company
filed a Motion to Dismiss this case, which was denied on June 30, 2003. The
Company has answered the complaint and is engaged in the discovery process. This
litigation is ongoing and the Company cannot predict its outcome at this time.
In re Service Merchandise Company, Inc. (Service Merchandise Company, Inc.
v. Measurement Specialties, Inc.), United States Bankruptcy Court for the Middle
District of Tennessee, Nashville Division, Case No. 399-02649, Adv. Pro. No.
301-0462A. The Company is currently the defendant in a lawsuit filed in March
2001 by Service Merchandise Company, Inc. ("SMC") and its related debtors
(collectively, the "Debtors") in the United States District Court for the Middle
District of Tennessee in the context of the Debtors' Chapter 11 bankruptcy
proceedings. The Bankruptcy Court entered a stay of the action in May 2001,
which was lifted in February 2002. On March 30, 2004, the court entered an order
allowing written discovery in the form of interrogatories and requests for
production of documents to begin. All other discovery remains stayed. The action
alleges that the Company received approximately $645 from one or more of the
Debtors during the ninety (90) day period before the Debtors filed their
bankruptcy petitions, that the transfers were to the Company's benefit, were for
or on account of an antecedent debt owed by one or more of the Debtors, made
when one or more of the Debtors were insolvent, and that the transfers allowed
the Company to receive more than the Company would have received if the cases
were cases under Chapter 7 of the United States Bankruptcy Code. The action
seeks to disgorge the sum of approximately $645 from the Company. It is not
possible at this time to predict the outcome of the litigation or estimate the
extent of any damages that could be awarded in the event that the Company is
found liable to the estates of SMC or the other Debtors.
SEB Patent Issue. On December 12, 2003, Babyliss, SA, a wholly owned
subsidiary of Conair Corporation, received notice from the SEB Group ("SEB")
alleging that certain bathroom scales manufactured by the Company and sold by
Babyliss in France violated certain patents owned by SEB. On May 19, 2004, SEB
issued a Writ of Summons to Babyliss and the Company, alleging patent
infringement and requesting the Tribunal de Grande Instance de Paris to grant
them unspecified monetary damages and injunctive relief. Pursuant to the
indemnification provisions of the Conair transaction, the Company has assumed
defense of this matter. After thorough review, the Company believes SEB's
allegations of patent infringement are without merit and the Company intends to
defend the Company's position vigorously. On November 9, 2004, the Company
requested of the Tribunal de Grande Instance de Paris a declaration of
non-infringement of the SEB patent with regard to certain weighing sensor design
known as an "M" design included in certain of the Company's bathroom scales
other than those to which SEB has alleged infringement. On March 14, 2005, the
Company filed pleadings with the Tribunal seeking nullity of the SEB patent and
a ruling of non-infringement of the SEB patent with respect to the "M" design.
At this time, the Company cannot predict the outcome of this matter.
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 our business,
financial condition, or operating results.
Settled matters:
F-36
Exeter Technologies, Inc. and Michael Yaron v. Measurement Specialties, Inc.
(Arbitration). Exeter Technologies, Inc. ("Exeter") and Michael Yaron alleged
underpayments of approximately $322 relating to a January 5, 2000 Product Line
Acquisition Agreement. The Company maintained that the claim failed to
recognize our rights to certain contractual allowances and offsets. In March
2004, the parties settled this matter for a $300 payment by the Company.
Measurement Specialties, Inc. Securities Litigation. On March 20, 2002, a class
action lawsuit was filed on behalf of purchasers of 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 Company's
August 2001 public offering as well as the Company's former auditors. The
lawsuit alleged violations of the federal securities laws. The lawsuit sought
an unspecified award of money damages. After March 20, 2002, nine additional
similar class actions were filed in the same court. The ten lawsuits were
consolidated into one case under caption In re: Measurement Specialties, Inc.
Securities Litigation, 02 Civ. No. 1071 (D.N.J.). Plantiffs filed a
Consolidated Amended Compliant on September 12, 2002. The underwriters made a
claim for indemnification under the underwriting agreement.
On April 1, 2004, the Company reached an agreement in principle to settle this
class action lawsuit. On July 20, 2004, the court approved the settlement
agreement. Pursuant to the agreement, the case has been settled as to all
defendants in exchange for payments of $7,500 from the Company and $590 from
Arthur Anderson, the Company's former auditors. Both the Company's primary and
excess D&O insurance carriers initially denied coverage for this matter. After
discussion, the Company's primary D&O insurance carrier agreed to contribute
$5,000 and the Company's excess insurance carrier agreed to contribute $1,400 to
the settlement of this case. As part of the arrangement with the Company's
primary carrier, the Company agreed to renew its D&O coverage for the period
from April 7, 2003 through April 7, 2004. The $3,200 renewal premium
represented a combination of the market premium for an aggregate of $6,000 in
coverage for this period plus a portion of the Company's contribution toward the
settlement.
SEC 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, its board of directors and its auditors
that a waiver of a covenant default under our credit agreement had been obtained
when, in fact, the Company's lenders had refused to grant such a waiver. Since
February 2002, the Company and a special committee formed by our board of
directors have been cooperating with the staff of the SEC. In June, 2002, the
staff of the Division of Enforcement of the SEC informed the Company that it was
conducting a formal investigation relating to matters reported in our Quarterly
Report on Form 10-Q for the quarter ended December 31, 2001. On June 28, 2004,
the Company reached a definitive settlement agreement with the SEC which
resolved the SEC's investigation of the Company. On June 30, 2004, the court
approved the settlement agreement. Pursuant to the definitive settlement
agreement, the Company paid one dollar in disgorgement and $1,000 in civil
penalties.
16. SEGMENT INFORMATION:
The Company's reportable segments are strategic business units that operate in
different industries and are managed separately. Management has organized the
business based on the nature of their respective products and services. For a
description of the products and services included in each segment, see Note 1.
The accounting policies of the segments are substantially the same as those
described in the summary of significant accounting policies.
The Company has no material inter-segment sales.
At March 31, 2005, the foreign subsidiaries' total assets aggregated $53,265 of
which, $15,395 was in Hong Kong and $7,149 was in China, and $30,721 was in
Europe. At March 31, 2004 the foreign subsidiaries' total assets aggregated
$24,097 million of which, $8,919 million was in Hong Kong and $15,184 million in
China, we had no assets in Europe. The Company is potentially subject to the
risks of foreign currency transaction and translation losses, which might result
from fluctuations in the values of the Euro, Hong Kong dollar and the Chinese
renminbi. The foreign subsidiaries' operations reflect intercompany transfers
of costs and expenses.
F-37
The following is information related to industry segments:
FOR THE YEAR ENDED MARCH 31,
2005 2004 2003
Net sales
Consumer Products $ 48,673 $ 52,566 $ 55,350
Sensors $ 92,268 60,247 52,326
-------------------------------
Total $140,941 $112,813 $107,676
-------------------------------
Operating income (loss)
Consumer Products 6,621 9,715 8,334
Sensors 21,865 16,459 6,931
-------------------------------
Total segment operating income (loss) 28,486 26,174 15,265
Corporate expenses (8,850) (18,305) (19,540)
-------------------------------
Total operating income (loss) 19,636 7,869 (4,275)
Interest expense, net of interest income 637 323 2,057
Gain on wafer fab sales - (1,424) (159)
Other expense (income) (77) (142) (333)
-------------------------------
Income (loss) from continuing operations before
income taxes and cumulative effect of accounting change 19,076 9,112 (5,840)
Income tax 4,250 (12,262) 483
-------------------------------
Income (loss) from continuing operations before
cumulatvie effect of accounting change 14,826 21,374 (6,323)
-------------------------------
Discontinued Operations:
Income (loss) from operations of discontinued units (net
of income tax benefit) - 212 (3,910)
Gain on disposition of discontinued units (net
of income tax benefit) - - 1,136
-------------------------------
Loss from discontinued units - 212 (2,774)
-------------------------------
Income (loss) before cumulative effect of accounting change 14,826 21,586 (9,097)
-------------------------------
Cumulative effect of accounting change, net of taxes -
Net income (loss) $ 14,826 $ 21,586 $ (9,097)
===============================
Depreciation and amortization:
Consumer Products $ 822 $ 829 $ 887
Sensors 3,047 1,995 2,444
-------------------------------
Total $ 3,869 $ 2,824 $ 3,331
===============================
MARCH 31,
-----------------------------
2005 2004 2003
-------- ---------- -------
Segment Assets
Consumer products $ 16,812 $ 11,518 $11,478
Sensors 74,029 31,474 34,391
Corporate 35,163 34,008 299
-------- ---------- -------
Total $126,004 $ 77,000 $46,168
======== ========== =======
F-38
Capital Expenditures:
Consumer products 908 523 817
Sensors 3,321 1,176 701
Corporate 402 244 -
-------- ---------- -------
Total $ 4,631 $ 1,943 $ 1,518
======== ========== =======
Geographic information for revenues, based on country of origin, and
long-lived assets, which include property, plant and equipment, but excludes
intangible assets and goodwill, net of related depreciation and amortization
follows:
2005 2004 2003
----------------------------
Net Sales:
United States $ 93,831 $ 77,537 $ 81,795
European Union 36,498 22,459 19,258
Asia and Other 10,612 12,817 6,623
----------------------------
Total: $140,941 $112,813 $107,676
============================
Long-lived assets:
2005 2004 2003
----------------------------
United States $ 4,017 $ 7,315 $ 8,117
European Union $ 2,748 $ - $ -
China 9,089 8,136 8,649
----------------------------
Total: $ 15,854 $ 15,451 $ 16,766
============================
17. CONCENTRATIONS:
Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, are principally cash, long-term debt and trade
accounts receivable.
The Company generally maintains its cash equivalents at major financial
institutions in the United States, Europe, Hong Kong, and China. Cash
held in foreign institutions amounted to $4,229 and $3,255 at March 31, 2005 and
2004, respectively. The Company periodically evaluates the relative credit
standing of financial institutions considered in its cash investment strategy.
MSI Senors (China) Ltd. is subject to certain Chinese government regulations,
including currency exchange controls, which limit cash dividends and loans to
MSI Sensors (Asia) Limited and MSI. At March 31, 2005 and 2004 MSI Senors
(China) Ltd restricted net assets approximated $10,457 and $5,806 respectively.
Accounts receivable are concentrated in United States and European distributors
and retailers of consumer products. To limit credit risk, the Company evaluates
the financial condition and trade payment experience of customers to whom credit
is extended. The Company generally does not require customers to furnish
collateral, though certain foreign customers furnish letters of credit.
F-39
The Company manufactures the substantial majority of its sensor products, and
most of its sensor subassemblies used in its consumer products, in leased
premises located in Shenzhen, China. Sensors are also manufactured at the
Company's United States facilities located in Virginia, and California.
Additionally, certain key management, sales and support activities are conducted
at leased premises in Hong Kong. Substantially all of the Company's consumer
products are assembled in China, primarily by a single supplier, River Display,
Limited ("RDL"), although the Company is utilizing alternative Chinese
assemblers. There are no agreements, which would require the Company to make
minimum payments to RDL, nor is RDL obligated to maintain capacity available for
the Company's benefit, though the Company accounts for a significant portion of
RDL's revenues. Additionally, most of the Company's products contain key
components, which are obtained from a limited number of sources. These
concentrations in external and foreign sources of supply present risks of
interruption for reasons beyond the Company's control, including, political,
economic and legal uncertainties resulting from the Company's operations in
China.
A United States manufacturer and distributor of electric housewares and a United
States OEM automotive supplier each accounted for approximately 10%, of net
sales for the fiscal year ended March 31, 2005. No other customers accounted for
more than 10% during the fiscal years ended March 31, 2004 and 2003.
18. FOREIGN EXCHANGE RISK MANAGEMENT:
The Company acquired a number of foreign currency exchange contracts with the
purchase of Humirel. These currency contracts have a total notional amount of
$9,650 with exercise dates through December 31, 2005 at an average exchange rate
of $1.27 (Euro to US dollar conversion rate). These derivatives are designated
as cash-flow hedges, and changes in their fair value are carried in accumulated
other comprehensive income until the hedged transaction affects earnings. When
the hedged transaction affects earnings, the appropriate gain or loss from the
derivative designated as a hedge of the transaction is reclassified from
accumulated other comprehensive income to cost of sales. As of March 31, 2005,
the amount that will be reclassified from accumulated other comprehensive income
to cost of sales over the next twelve months is an unrealized loss of $7. There
is no ineffective portion of the derivatives.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Presented below is a schedule of selected quarterly operating results.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
ENDED JUNE 30 ENDED SEPT. 30 ENDED DEC. 31 ENDED MARCH 31
YEAR ENDED MARCH 31, 2005
As Reported
Net sales $ 28,020 $ 36,211 $ 36,016 $ 40,694
Gross profit $ 12,577 $ 15,129 $ 15,118 $ 16,582
Net income (loss) $ 3,293 $ 4,054 $ 3,587 $ 3,892
Income (loss)
EPS basic 0.25 0.30 0.27 0.29
EPS diluted 0.23 0.29 0.25 0.28
YEAR ENDED MARCH 31, 2004
As Reported
Net sales $ 26,041 $ 28,559 $ 31,869 $ 26,344
Gross profit $ 12,589 $ 12,307 $ 14,046 $ 11,358
Net income (loss) $ 3,783 $ 1,715 $ 888 $ 15,200
Income (loss)
EPS basic $ 0.32 $ 0.14 $ 0.07 $ 1.20
F-40
EPS diluted $ 0.30 $ 0.12 $ 0.06 $ 1.08
Earnings per share are computed independently for each of the quarters
presented, on the basis described in Note 13. The sum of the quarters may not be
equal to the full year earnings per share amounts. Quarterly results have a
degree of variability due to seasonality of the Company's business, especially
the Consumer business, where sales during the first quarter and last quarter are
lower due to retail customer buying cycles and lead times for holiday sales.
Also impacting quarterly results during fiscal 2005, the Company made several
acquisitions, the timing of which had a larger impact during the third and
fourth quarters. During the fourth quarter of fiscal 2005, the Company recorded
the provision for income taxes which included a number of year end adjustments
resulting in a lower effective tax rate (21.2% versus 28.5%). These year end
adjustments primarily related to: (i) adjustments with the allocation of income
to jurisdictions with lower tax rates based on the review of various transfer
pricing factors, (ii) the recordation of additional deferred tax assets and
(iii) the amortization of certain deferred tax liabilities associated with
recent acquisitions. The Company assessed the impact of these adjustments
relative to the first three quarters and prior year, and determined there was no
material impact of the periods reported.
F-41
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED MARCH 31, 2005, 2004, AND 2003
COL. A COL. B COL. C COL. D COL. E
----------------------------------- ------------------------------------------------------ ------------------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS- BALANCE AT END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------------------------------- ------------- ----------- ----------- ------------- ------------------
Year ended March 31, 2005
Deducted from asset accounts:
Allowance for doubtful accounts $ 327 $ 56 $ 7 (a) $ 390
Sales reserve $ 168 $ 5 $ (93) (b) $ 80
Inventory allowance $ 4,206 $ 216 $ (556) (c) $ 3,866
Valuation allowance for deferred
taxes $ - $ -
Warranty Reserve $ 669 $ 110 $ (330) (e) $ 449
Year ended March 31, 2004
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,038 $ 245 $ (956) (a) $ 327
Sales reserve $ 515 $ 1,409 $ (1,756) (b) $ 168
Inventory allowance $ 4,996 $ 358 $ (1,148) (c) $ 4,206
Valuation allowance for deferred
taxes $ 15,414 $ (15,414) (d) $ -
Warranty Reserve $ 762 $ 333 $ (426) (e) $ 669
Year ended March 31, 2003*
Deducted from asset accounts:
Allowance for doubtful accounts $ 658 $ 842 $ (462) (a) $ 1,038
Sales reserve $ 389 $ 1,703 $ (1,577) (b) $ 515
Inventory allowance $ 5,106 $ 1,285 $ (1,395) (c) $ 4,996
Valuation allowance for deferred
taxes $ 13,014 $ 2,400 $ - (d) $ 15,414
Warranty Reserve $ 685 $ 641 $ (564) (e) $ 762
(a) Bad debts written off, net of
recoveries
(b) Actual returns received
(c) Inventory sold or destroyed
(d) Reverse valuation allowance
(e) Costs of product repaired or
replaced
* As Restated
S-1