UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-11906
MEASUREMENT SPECIALTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-2378738
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10 WASHINGTON AVE., FAIRFIELD, NJ 07004-3877
------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(973) 808-3020
------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
710 ROUTE 46 EAST, SUITE 206, FAIRFIELD, NJ 07004-3877
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act ).
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 13,426,549 shares of
common stock, no par value per share, at October 29, 2004.
PART I. FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . .3
ITEM 1. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED). . . . . .3
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED). . . . . . . . . . .4
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED).6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED). . . . . .7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) . . .8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OFOPERATIONS . . . . . . . . . . . . . . . . . 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . 23
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . 24
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 26
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2
ITEM 1. FINANCIAL STATEMENTS
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
For The Three Months For The Six Months
Ended September 30, Ended September 30,
----------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------
Net sales $ 36,211 $ 28,559 $ 64,231 $ 54,600
Cost of goods sold 21,082 16,252 36,525 29,704
----------------------------------------------------------
Gross profit 15,129 12,307 27,706 24,896
----------------------------------------------------------
Operating expenses (income):
Selling, general and administrative 8,474 7,508 15,748 15,002
Non-cash equity based compensation - 1,835 - 1,908
Research and development 848 854 1,657 1,760
Customer funded development (43) - (138) -
----------------------------------------------------------
Total operating expenses 9,279 10,197 17,267 18,670
----------------------------------------------------------
Operating income 5,850 2,110 10,439 6,226
Interest expense, net 108 135 97 300
Other (income) 75 2 66 (6)
----------------------------------------------------------
Income from continuing operations before income tax 5,667 1,973 10,276 5,932
Income tax 1,613 258 2,927 546
----------------------------------------------------------
Income from continuing operations 4,054 1,715 7,349 5,386
Discontinued operations:
Income from discontinued units - - - 112
----------------------------------------------------------
Net income $ 4,054 $ 1,715 $ 7,349 $ 5,498
==========================================================
Income per common share - Basic
Income from continuing operations $ 0.30 $ 0.14 $ 0.55 $ 0.44
Income from discontinued units - - - 0.01
----------------------------------------------------------
Net income $ 0.30 $ 0.14 $ 0.55 $ 0.45
==========================================================
Income per common share - Diluted
Income from continuing operations $ 0.29 $ 0.12 $ 0.52 $ 0.39
Income from discontinued units - - - 0.01
----------------------------------------------------------
Net income $ 0.29 $ 0.12 $ 0.52 $ 0.40
==========================================================
Weighted average shares outstanding - Basic 13,326,843 12,349,546 13,297,197 12,151,050
==========================================================
Weighted average shares outstanding - Diluted 14,188,500 13,844,523 14,168,655 13,587,597
==========================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
2004 2004
----------------------------------------------------------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 10,359 $ 19,274
Accounts receivable, trade, net of allowance for doubtful
accounts of $858 and $413 respectively 19,190 14,010
Inventories 17,371 10,170
Deferred income taxes - current 6,743 12,589
Prepaid expenses and other current assets 2,255 3,267
-------------- ----------
Total current assets 55,918 59,310
-------------- ----------
Property and equipment, net 11,518 10,628
-------------- ----------
Other assets:
Goodwill 18,976 4,191
Acquired and other intangibles 4,146 -
Deferred income tax 6,283 2,214
Other assets 1,063 657
-------------- ----------
30,468 7,062
-------------- ----------
Total assets $ 97,904 $ 77,000
============== ==========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, MARCH 31,
2004 2004
--------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,000 $ -
Current portion of deferred acquisition payment 1,400 -
Short-term debt 5,682 -
Accounts payable 11,788 7,919
Accrued compensation 2,335 3,224
Accrued expenses and other current liabilities 5,870 4,686
Accrued litigation expenses - 2,100
--------------- -----------
Total current liabilities 28,075 17,929
Other liabilities:
Deferred gain on sale of assets 5,290 6,744
Notes payable 2,000 -
Deferred acquisition payments 2,254 -
Other liabilities 1,251 1,487
--------------- -----------
Total liabilities 38,870 26,160
--------------- -----------
Shareholders' equity
Serial preferred stock; 221,756 shares authorized; none outstanding
Common stock, no par; 20,000,000 shares authorized; 13,257,084
and 13,282,874 shares issued and outstanding, respectively 5,502 5,502
Additional paid-in capital 54,361 53,509
Accumulated deficit (748) (8,097)
Accumulated other comprehensive loss (81) (74)
--------------- -----------
Total shareholders' equity 59,034 50,840
--------------- -----------
$ 97,904 $ 77,000
=============== ===========
5
MEASUREMENT SPECIALTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Additional Other
Common paid-in Accumulated Comprehensive Comprehensive
stock capital Deficit Loss Total Income (Loss)
------- ----------- ------------- --------------- -------- ---------------
Balance, April 1, 2004 $ 5,502 $ 53,509 $ (8,097) $ (74) $50,840
Net income - - 7,349 - 7,349 $ 7,349
Currency translation adjustment - - - (7) (7) (7)
---------------
Comprehensive income - - - - - $ 7,342
===============
Proceeds from exercise of stock options 573 573
Tax benefit from stock options - 279 - - 279
------- ----------- ------------- --------------- --------
Balance, September 30, 2004 $ 5,502 $ 54,361 $ (748) $ (81) $59,034
======= =========== ============= =============== ========
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
MEASUREMENT SPECIALTIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Sept. 30, 2004 Sept. 30, 2003
========================== ==========================
Cash flows from operating activities:
Net Income $ 7,349 $ 5,498
Adjustments to reconcile net income to net cash provided by
(used in) operating activities income:
Depreciation and amortization 1,402 1,454
Assets written-off 151 140
Deferred rent 5 (13)
Amortization deferred gain (1,454) -
Provision for bad debt 238 173
Provision for obsolete inventory 358 -
Non-cash equity based compensation - 1,908
Tax benefit from stock options 279 -
Net changes in operating assets and liabilities:
Accounts receivable, trade (2,656) (2,485)
Inventories (4,443) (291)
Deferred income tax asset 1,777 -
Prepaid expenses and other current assets 1,089 (472)
Other assets (191) 144
Accounts payable 72 2,009
Accrued litigation costs (2,100) (2,800)
Accrued expenses and other liabilities 130 882
-------------------------- --------------------------
Net cash (used in) provided by operating activities 2,006 6,147
-------------------------- --------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,152) (904)
Purchase of acquisitions, net of cash acquired (15,953) -
-------------------------- --------------------------
Net cash (used in) provided by investing activities (17,105) (904)
-------------------------- --------------------------
Cash flows from financing activities:
Borrowing under short-term debt and notes payable 5,613 3,000
Repayments of debt - (8,260)
Proceeds from exercise of options and warrants 573 795
-------------------------- --------------------------
Net cash used in financing activities 6,186 (4,465)
-------------------------- --------------------------
Net change in cash and cash equivalents, continuing operations (8,913) 778
Effect of exchange rates (2) (30)
Cash and cash equivalents, beginning of period 19,274 2,694
-------------------------- --------------------------
Cash and cash equivalents, end of period $ 10,359 $ 3,442
========================== ==========================
Supplemental Cash Flow Information:
Non cash:
Notes from acquisitions $ 3,000 $ -
Deferred acquisition payments $ 3,654 $ -
Purchases of property in accounts payable $ 230 $ -
Cash paid during the period for:
Interest $ 128 $ 313
Income taxes $ 372 $ 182
7
MEASUREMENT SPECIALTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATIONS:
Interim financial statements:
These interim financial statements and notes to condensed consolidated financial
statements were prepared pursuant to accounting principles for interim financial
information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of
the Rules and Regulations of the Securities and Exchange Commission, and have
not been audited. Accordingly, while they conform to the measurement and
classification provisions of accounting principles generally accepted in the
United States, they do not include the footnote information required by
accounting principles generally accepted in the United States for annual
financial statements. Preparation of these financial statements requires
management to make estimates and assumptions, which affect the amounts reported.
Actual results could differ from those estimates. In the opinion of management,
these financial statements include all normal and accrual adjustments necessary
for a fair presentation. Reference is made to the annual financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 2004. Operating results for the three months and six months ended
September 30, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending March 31, 2005. These statements have been
prepared on a basis that is substantially consistent with the accounting
principles applied in our annual report on Form 10-K for the fiscal year ended
March 31, 2004.
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended March
31, 2004.
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, accelerometers, and optical
sensors.
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 Measurement
Specialties, Inc. and its wholly-owned subsidiaries (the "Subsidiaries").
In the quarter ended June 30, 2004, the Company reorganized its Asia 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) (formerly named Measurement Limited, organized in Hong Kong)
owns 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 the shares of MSI Sensors (Asia) and ML Cayman. All
the companies are included in the consolidated financial statements of the
group.
8
IC Sensors Inc., a California corporation ("IC Sensors") continues as a
wholly-owned subsidiary of the Company.
Elekon Industries USA, Inc., acquired on June 24, 2004, is a wholly-owned
subsidiary of the Company and is included in the consolidated financial
statement as of the date of acquisition. (See Note 7.)
Entran Devices, Inc. and Entran S.A., acquired on July 16, 2004 are subsidiaries
of the Company and are included in the consolidated financial statement as of
the date of acquisition (See Note 7).
The assets of Encoder Devices, LLC. "Encoder" were purchased on July 16, 2004.
The results of operations of Encoder are included in the condensed consolidated
statement of operations as of the date of acquisition, and the condensed
consolidated balance sheet reflects the assets and liabilities of Encoder at
September 30, 2004 (See Note 7).
All significant intercompany balances and transactions have been eliminated.
DEFERRED REVENUE:
The Company has recorded deferred revenue from the sale of the Company's Thinner
branded bathroom and kitchen scale business to Conair. The sale of this business
has been accounted for under the guidance of Emerging Issues Task Force (EITF)
00-21. As a significant portion of the proceeds from the sale was in fact
upfront payment for future lost margins, the majority of the gain on the sale
has been deferred and will be amortized into revenues in future period, over the
estimated remaining life of the Thinner branded scale models sold to Conair.
RECLASSIFICATIONS:
The presentation of certain prior year information has been reclassified to
conform with the current year presentation.
STOCK BASED COMPENSATION:
The Company has three stock-based employee compensation plans. The Company
applies APB Opinion 25, "Accounting for Stock Issued to Employees", and related
Interpretations in accounting for its plans. There was no compensation expense
recognized in the period of three months or six months of the fiscal year ending
March 31, 2005 or in the fiscal year ended March 31, 2004. The table below
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement 123, "Accounting
for Stock-Based Compensation".
For The Three Months For The Six Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
-------------------------- --------------------------
Net income, as reported $ 4,054 $ 1,715 $ 7,349 $ 5,498
add: Stock-based employee compensation expense included
in reported net income, net of related tax effects - - - -
Deduct: Total stock-based employee compensation under
fair value based method for awards granted,
net of related tax effects (163) (19) (328) (56)
-------------------------- --------------------------
Pro forma net income $ 3,891 $ 1,696 $ 7,021 $ 5,442
========================== ==========================
Net Income per share
Basic-as reported $ 0.30 $ 0.14 $ 0.55 $ 0.45
Basic Proforma 0.29 0.14 0.53 0.45
Diluted- as reported 0.29 0.12 0.52 0.40
Diluted proforma 0.27 0.12 0.50 0.40
RECENT ACCOUNTING PRONOUNCEMENTS:
In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation 46 (FIN 46), and amended April 2004, FIN46 (R)-4"Consolidation of
Variable Interest Entities". FIN 46 (R)-4 clarifies the application of
Accounting Research Bulletin 51, "Consolidated Financial Statements", for
certain entities that do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties or in which equity investors do not have the characteristics of a
controlling financial interest ("variable interest entities"). Variable interest
entities within the scope of FIN 46 (R)-4 will be required to be consolidated by
their primary beneficiary. The primary beneficiary of a variable interest entity
is determined to be the party that absorbs a majority of the entity's expected
losses, receives a majority of its expected returns, or both. FIN 46 (R)-4
applies immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company has determined that the adoption of FIN46(R)-4 will not have a
material effect on its financial position or results of operations.
9
In November 2002, the Emerging Issues Task Force reached a consensus opinion on
EITF 00-21, "Revenue Arrangements with Multiple Deliverables." The consensus
provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The consideration
for the arrangement should be allocated to the separate units of accounting
based on their relative fair values, with different provisions if the fair value
of all deliverables are not known or if the fair value is contingent on delivery
of specified items or performance conditions. Applicable revenue recognition
criteria should be considered separately for each separate unit of accounting.
EITF 00-21 is effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. Entities may elect to report the change as a
cumulative effect adjustment in accordance with APB Opinion 20, Accounting
Changes. On January 30, 2004, Conair Corporation purchased certain assets of the
Company's Thinner branded bathroom and kitchen scale business, and now owns
worldwide rights to the Thinner brand name and exclusive rights to the Thinner
designs in North America. The Company has accounted for the sale of this
business under the guidance of EITF 00-21. Except for the Conair transaction,
the Company does not believe that the adoption of EITF 00-21 will have a
material effect on its financial position or results of operations.
3. INVENTORIES:
Inventories net, consists of the following:
September 30, March 31,
2004 2004
-------------- ----------
Raw Materials $ 10,104 $ 6,777
Work-in-Process 2,867 1,210
Finished Goods 4,400 2,183
-------------- ----------
$ 17,371 $ 10,170
============== ==========
Inventory reserves were $5,154 at September 30, 2004 and $ 4,206 at March 31,
2004.
4. SHORT AND LONG-TERM DEBT:
CURRENT 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). The revolving credit facility is secured by a lien on
substantially all of the Company's assets. Interest accrues 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) or the maximum rate permitted by applicable law. As of September 30,
2004, the interest rate applicable to borrowings under the revolving credit
facility was 5.75%. The amount of borrowing available under the revolving credit
facility is determined in accordance with a formula based on certain of the
Company's accounts receivable and inventory. The revolving credit facility
expires on February 1, 2006. As of September 30, 2004, the outstanding
borrowings were $5,613 and the Company had the right to borrow an additional
$3,306 under the revolving credit facility. Commitment fees on the unused
balance are equal to .375% per annum of the average monthly amount by which
$15,000 exceeds the sum of the outstanding principal balance of the revolving
credit loans. Commitment fees paid during the quarter ended September 30, 2004
were $11.
Cash receipts are applied from the Company's lockbox accounts directly against
the bank line of credit, and checks clearing the bank are funded from the line
of credit. The resulting overdraft balance, consisting of outstanding checks,
was $726 at September 30, 2004.
The Company's revolving credit agreement requires it to meet certain financial
covenants during the term of the revolving credit facility. In addition to
certain other affirmative and negative covenants, which include a restriction on
the payment of dividends, the Company is required to keep a minimum fixed charge
ratio of 1 to 1 at the end of each fiscal quarter. Fixed charge ratio is defined
as operating cash flow, which is EBITDA (earnings before interest, taxes,
depreciation and amortization) minus cash taxes paid and minus capital
expenditures, divided by the sum of scheduled principle payments and interest
expense during that period. The Company is currently in compliance with all
covenants in the agreement.
The Company is prohibited from making any cash payment in settlement of the
shareholder class action lawsuit, the DeWelt litigation or the previously
disclosed Hibernia litigation without the prior written consent of the lender
under its revolving credit facility. The Company settled the Hibernia lawsuit in
November 2003, and made payment after receiving approval from BOA. On April 1,
2004, the Company reached an agreement in principle to settle the shareholder
class action lawsuit, and made payment after receiving approval from BOA. On May
18, 2004, the Company reached an agreement in principle with the SEC which would
resolve the commission's investigation of the Company. The Company received
final court approval of its settlements of both the shareholder class action and
SEC investigation. See Note 9 for a detailed discussion of the terms and
conditions related to the shareholder class
10
action lawsuit and SEC investigation settlements.
As of September 30, 2004, the weighted average short-term interest rate on the
revolving credit facility was 5.45%. The average amount outstanding under this
agreement for the period from April 1, 2003 through March 31, 2004 was zero.
The average amount outstanding for the 3 months period ended June 30, 2004 was
264, and the average amount outstanding for the 3 months period ended September
30, 2004 was $3,681. The Company maintains a letter of credit for $34 to
guarantee the lease of its facility in Fairfield, NJ.
PROMISSORY NOTES
----------------
In connection with the acquisition of Elekon Industries USA, Inc. (See Note 7),
the Company issued unsecured Promissory Notes ("Notes") totaling $3,000. The
Notes amortize over a period of three years, are payable quarterly and bear
interest of 6%.
OTHER SHORT-TERM DEBT
---------------------
In connection with the acquisition of Entran Devices, Inc. and Entran S.A., the
Company has outstanding short-term borrowing of $69 at September 30, 2004. This
amount is included in short-term debt in the condensed consolidated balance
sheet.
5. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows:
SEPTEMBER 30, MARCH 31,
ESTIMATED USEFUL
2004 2004 LIFE
--------------- ----------- -----------------
Production machinery and equipment $ 16,884 $ 14,616 5-7 years
Tooling costs 4,118 3,846 5-7 years
Furniture and equipment 4,954 4,138 3-10 years
Leasehold improvements 1,935 1,780 Term of the lease
Construction in progress 794 296
--------------- -----------
Total 28,685 24,676
Less: accumulated depreciation and
amortization (17,167) (14,048)
--------------- -----------
$ 11,518 $ 10,628
=============== ===========
Depreciation expense was $752 and $1,402 for the three and six months period
ended September 30, 2004, respectively, and was $724 and $1,454 for the three
and six months period ended September 30, 2003, respectively.
6. PER SHARE INFORMATION AND STOCK OPTIONS ISSUED:
Basic per share information is computed based on the weighted average common
shares outstanding during each period. Diluted per share information
additionally considers the shares that may be issued upon exercise or conversion
of stock options and warrants, less the shares that may be repurchased with the
funds received from their exercise. There were no antidilutive shares in the
period presented.
The computation of the basic and diluted net income per share is as follows:
11
For The Three Months For The Six Months
Ended September 30, 2004 Ended September 30, 2004
Income Shares Per Share Income Shares Per Share
--------- ---------- ---------- -------- ---------- ----------
Income from continuing operations $ 4,054 13,326,843 $ 0.30 $ 7,349 13,297,197 $ 0.55
Basic EPS:
--------- ---------- ---------- -------- ---------- ----------
Income available to common
shareholders $ 4,054 13,326,843 $ 0.30 $ 7,349 13,297,197 $ 0.55
Effect of dilutive securities:
Stock options 861,657 871,458
--------- ---------- ---------- -------- ---------- ----------
Diluted EPS:
Income available to common
Stockholders
and assumed conversions $ 4,054 14,188,500 $ 0.29 $ 7,349 14,168,655 $ 0.52
========= ========== ========== ======== ========== ==========
7. ACQUISITIONS:
As part of its growth strategy in the Sensors segment, the Company has made
three acquisitions in the six months ended September 30, 2004. Proforma
financial statements are not presented for these acquisitions because the test
of sigificance for the acquired companies is below the prescribed thresholds.
On June 24, 2004 the Company acquired 100% of the capital stock of Elekon
Industries USA, Inc. ("Elekon") for $7,750 ($4,674 in cash at the closing,
$3,000 in unsecured Promissory Notes "Notes" and $250 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. 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 September 30, 2004. The Company had initially recorded
goodwill of approximately $6,555 for the acquisition in the quarter ended June
30, 2004. However, the purchase price allocation was not finalized until the
quarter ended September 30, 2004. The Company has allocated $3,155 as
personally held intangibles and $620 to a covenant not to compete from the
previously recorded goodwill. $1,870 of the personally held intangibles has an
indefinite life and is therefore not amortized. The remaining $1,285 of
personally held intangibles is for patented and proprietary technology and is
being amortized over the asset's estimated useful lives, ranging from 10 to 18.5
years. The covenant of not to compete is being amortized over its estimated
useful life of 3 years. Due to the timing of the acquisition, the purchase
price allocation has not been finalized.
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
JUNE 24, 2004
Assets
Cash $ 174
Accounts receivable 707
Inventory 1,418
Property and
equipment 168
Others 20
-------
2,487
-------
Liabilities
Accounts payable (1,286)
Others (6)
-------
(1,292)
-------
Net Assets Acquired $ 1,195
=======
12
On July 16, 2004 the Company acquired 100% of the capital stock of Entran
Devices, Inc. and Entran S.A. ("Entran") for $10,539 ($6,000 in cash at the
closing, $1,195 in certain liabilities discharging at closing, $3,254 in
deferred payments and $90 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 motorsport racing markets. The transaction was
recorded as a purchase, and is included in the consolidated financial results
from the date of acquisition through September 30, 2004. The Company has
recorded goodwill of $8,269 for the acquisition. Due to the timing of the
acquisition, the purchase price allocation has not been finalized.
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
JULY 15, 2004
Assets
Cash $ 246
Accounts receivable 2,002
Inventory 1,513
Property and equipment 489
Others 266
--------
4,516
--------
Liabilities
Accounts payable (2,085)
Others (161)
--------
(2,246)
--------
Net Assets Acquired $ 2,270
========
On July 16, 2004 the Company acquired the assets of Encoder Devices, LLC.
("Encoder") for $4,564 ($4,000 in cash at the closing, $400 in deferred payments
and $164 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 transaction was recorded as a purchase, and is included in the
consolidated financial results from the date of acquisition through September
30, 2004. The Company has recorded goodwill of $3,736 and intangibles of $420
for the acquisition. The intangibles, consisting of $137 of patents and a
covenant not to compete valued at $283, are estimated to have a useful life of
19.5 and 3 years, respectively, and are being amortized over those periods. Due
to the timing of the acquisition, the purchase price allocation has not been
finalized.
Below is a condensed balance sheet for the acquired business on the date of
acquisition:
CONDENSED BALANCE SHEET
OF ACQUIRED ENTITY AT
JULY 15, 2004
Assets
Accounts receivable $ 96
Inventory 134
Property and equipment 251
Others 7
--------
488
--------
Liabilities
Accounts payable (80)
--------
(80)
--------
Net Assets Acquired $ 408
========
The effect of acquisitions (opening balances) have been eliminated for the
statement of cash flows.
13
8. SEGMENT INFORMATION:
The Company has two business segments, a Sensor segment and a Consumer Products
segment.
The Company's Sensor segment designs and manufactures sensors for original
equipment manufacturers. These sensors are used for automotive, medical,
consumer, military/aerospace and industrial applications. These sensor products
include pressure and electromagnetic displacement sensors, piezoelectric polymer
film sensors, panel sensors, custom microstructures, load cells, accelerometers
and optical sensors.
The Company's Consumer Products segment designs and manufactures 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. The Company sold its branded bathroom
and kitchen scale business to Conair Corporation on January 30, 2003.
Accordingly, in the scale business, the Company now sells exclusively to the
original equipment manufacturer market.
Segment data have been presented on a basis consistent with how business
activities are reported internally to management.
The Company has no material intersegment sales.
The following is information related to industry segments:
For The Three Months Ended For The Six Months Ended
September 30, September 30,
---------------------------------------- -----------------------------------
2004 2003 % Change 2004 2003 % Change
---------------------------------------- -----------------------------------
Net sales
Sensors $ 23,553 $ 14,221 65.6% $40,694 $ 29,011 40.3%
Consumer Products 12,658 14,338 -11.7% 23,537 25,589 -8.0%
---------------------------------------- -----------------------------------
Total 36,211 28,559 26.8% 64,231 54,600 17.6%
---------------------------------------- -----------------------------------
Operating income
Sensors 5,444 3,690 47.5% 10,917 8,287 31.7%
Consumer Products 2,060 2,685 -23.3% 3,374 4,793 -29.6%
---------------------------------------- -----------------------------------
Total segment operating income 7,504 6,375 17.7% 14,291 13,080 9.3%
Unallocated expenses (1,654) (4,265) -61.2% (3,852) (6,854) -43.8%
---------------------------------------- -----------------------------------
Total operating income 5,850 2,110 177.2% 10,439 6,226 67.7%
Interest expense, net of interest income 108 135 -19.8% 97 300 -67.6%
Other (income) 75 2 3635.4% 66 (6) -1195.1%
---------------------------------------- -----------------------------------
Income from continuing operations before
income tax 5,667 1,973 187.2% 10,276 5,932 73.2%
Income Tax 1,613 258 525.1% 2,927 546 436.0%
---------------------------------------- -----------------------------------
Income from continuing operations 4,054 1,715 136.4% 7,349 5,386 36.4%
Income from Discontinued Operations - - 112 -100.0%
---------------------------------------- -----------------------------------
Net Income $ 4,054 $ 1,715 136.4% $ 7,349 $ 5,498 33.7%
======================================== ===================================
September 30, March 31,
-------------- ----------
2004 2004
Segment Assets
Consumer Products $ 12,484 $ 9,527
Sensor 60,425 30,326
Unallocated 24,995 37,147
-------------- ----------
Total $ 97,904 $ 77,000
============== ==========
14
9. COMMITMENTS AND CONTINGENCIES:
PENDING MATTERS
Robert L. DeWelt v. Measurement Specialties, Inc. et al., Civil Action No.
02-CV-3431. On July 17, 2002, Robert DeWelt, the former acting Chief Financial
Officer and general manager of our 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 we 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 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 the
Company to receive more than it would have received if the cases were cases
under Chapter 7 of the United States Bankruptcy Code. The action seeks to
disgorge the sum of 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 through review, the Company believes SEB's allegations of patent
infringement are without merit and it intends to defend its position vigorously.
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 management believes will have,
individually or in the aggregate, a material adverse effect on the Company's
business, financial condition, or operating results.
SETTLEMENT
In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No. 1071
(D.N.J.). On March 20, 2002, a class action lawsuit was filed on behalf of
purchasers of the Company's common stock in the United States District Court for
the District of New Jersey against the Company and certain of its present and
former officers and directors. The complaint was subsequently amended to include
the underwriters of the Company's August 2001 public offering as well as its
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 the caption In re: Measurement
Specialties, Inc. Securities Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs
filed a Consolidated Amended Complaint on September 12, 2002. The underwriters
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 Andersen, 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 its 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 paid 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.
15
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 its credit agreement had been obtained
when, in fact, its lenders had refused to grant such a waiver. Since February
2002, the Company and a special committee formed by its 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 the Company's 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.
U.S. Attorney Investigation. The Office of the United States Attorney for the
District of New Jersey has been conducting an inquiry into the matters being
investigated by the SEC. This inquiry has resulted in a guilty plea by the
Company's former CFO. The Company is not aware of any continuing investigation
into these matters.
10. RELATED PARTY TRANSACTIONS:
RESTRUCTURING SERVICES
In May 2002, the Company retained Corporate Revitalization Partners ("CRP") to
conduct its ongoing operational/financial restructuring efforts. In June 2002,
Frank Guidone, a Managing Director of CRP, became the Company's Chief Executive
Officer (See "Executive Services and Non-Cash Equity Based Compensation" below
for a discussion of the current agreement relating to Mr. Guidone's services as
Chief Executive Officer of the Company). As of March 31, 2004, on a cumulative
basis, the Company has incurred $3,613 in consulting fees and expenses to CRP.
The Company has not utilized the services of CRP since March 31, 2004.
In the fiscal year ended March 31, 2003, 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, 13, and July 14, 2003, CRP exercised its warrant to
purchase 120,615 shares of stock at an exercise price of $2.28.
EXECUTIVE SERVICES AND NON-CASH EQUITY BASED COMPENSATION
On April 21, 2003, the Compensation Committee of the Company's Board of
Directors reached a verbal agreement with Frank Guidone regarding his long term
retention as Chief Executive Officer. Definitive agreements memorializing this
arrangement were entered into on July 22, 2003, between the Company and Four
Corners Capital Partners, LP ("Four Corners"), a limited partnership of which
Mr. Guidone is a principal. Pursuant to this arrangement, Four Corners will make
Mr. Guidone available to serve as the Company's Chief Executive Officer for
which it will receive an annual fee of $400 (plus travel costs for Mr. Guidone)
and will be eligible to receive a performance-based bonus. The agreement is for
an indefinite period of time and both parties have the right to terminate the
agreement on sixty day's advance notice. Payments under this agreement to Four
Corners in the three months and six months ended September 30, 2004 were $116
($100 for executive services and $16 for expenses), and $241 ($200 for executive
services and $41 for expenses).
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. 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. The Company recorded a non-cash
equity based compensation charge of $1,835 ($0.13 per share diluted) and $1,908
($0.14 per share diluted) during the three month and six month periods ended
September 30, 2004, representing the estimated fair value of the portion of the
warrant that vested.
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.
11. OTHER MATTERS:
DISCONTINUED OPERATIONS:
The Company placed its Schaevitz UK entity 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. In the quarter ended
June 30, 2003 the company received $112 from the liquidation of it MSS facility
in the United Kingdom. This amount is recorded in "income from discontinued
units". There was no receipt of funds from the liquidation of MSS in the six
months ended September 30, 2004.
16
RESTRUCTURING AND OTHER COSTS:
At March 31, 2004, the Company maintained an accrual of $440 to cover the
expected cost of a lease termination during its restructuring. The Company did
not make any payments in the six month period ended September 30, 2004 related
to these costs.
CONTRACTUAL OBLIGATIONS:
Payments Due By Period, as of 9/30/2004
----------------------------------------------------------------------------------
Contractual Obligations Total Less than one 1-3 Years 3-5 Years More than 5
year Years
Notes payable 3,069 1,069 2,000 - -
Deferred payments 3,654 1,400 2,254 - -
--------------------------------------------------------
6,723 2,469 4,254 - -
========================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FORWARD-LOOKING STATEMENTS
The following discussion of our results of operations and financial condition
should be read together with the other financial information, consolidated
financial statements and related notes included in this Quarterly Report on Form
10-Q. This discussion 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;
- Legal proceedings described below under "Item 1 - 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 Quarterly Report on Form 10-Q, whether as a result of new
information, future events, changes in assumptions or otherwise.
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, motion,
force, displacement, tilt/angle, flow and distance. We have two businesses, a
Sensor business and a Consumer Products business.
Our Sensor segment designs and manufactures sensors for original equipment
manufacturers. These sensors are used for automotive, medical, consumer,
military/aerospace and industrial applications. Our sensor products include
pressure and electromagnetic displacement sensors, piezoelectric polymer film
sensors, panel sensors, custom microstructures, load cells, accelerometers and
optical sensors.
Our Consumer Products segment designs and manufactures sensor-based consumer
products that we sell to retailers and distributors in both the United States
and Europe. Consumer products include bathroom and kitchen scales, tire pressure
gauges and distance estimators.
EXECUTIVE SUMMARY
Measurement Specialties has seen a significant amount of change over the last
several years. We experienced very poor historical
17
margin performance due mainly to under-absorption of the then in place overhead
structure. 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. With recent acquisitions of
Elekon Industries, Inc., Entran Devices, Inc. Entran SA. and Encoder Devices,
LLC (the "Acquisitions", see Note 7 to the Condensed Consolidated Financial
Statements included in this quarterly report on Form 10-Q) as part of our
strategic plans, 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. 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.
The following table sets forth, for the periods indicated, certain items in our
consolidated statements of income as a percentage of net sales:
For The Three Months Ended For The Six Months Ended
September 30, September 30,
----------------------------- ---------------------------
2004 2003 2004 2003
----------------------------------------------------------
Net Sales
Sensor 65.0% 49.8% 63.4% 53.1%
Consumer products 35.0% 50.2% 36.6% 46.9%
-------------- ------------- ------------ -------------
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 58.2% 56.9% 56.9% 54.4%
-------------- ------------- ------------ -------------
Gross profit 41.8% 43.1% 43.1% 45.6%
Expenses (income)
Selling, general, and administrative 23.4% 26.3% 24.5% 27.5%
Litigation expense 0.0% 0.0% 0.0% 0.0%
Non-cash equity based compensation 0.0% 6.4% 0.0% 3.5%
Research and development 2.3% 3.0% 2.6% 3.2%
Customer funded development -0.1% 0.0% -0.2% 0.0%
Restructuring costs 0.0% 0.0% 0.0% 0.0%
Interest expense, net 0.3% 0.5% 0.2% 0.5%
Gain on sale of wafer fab 0.0% 0.0% 0.0% 0.0%
Other expenses 0.2% 0.0% 0.1% 0.0%
-------------- ------------- ------------ -------------
26.1% 36.2% 27.1% 34.7%
Income from continuing operations before income taxes 15.6% 6.9% 16.0% 10.9%
Income tax provision 4.5% 0.9% 4.6% 1.0%
Income from discontinued units 0.0% 0.0% 0.0% 0.2%
-------------- ------------- ------------ -------------
Net income 11.2% 6.0% 11.4% 10.1%
============== ============= ============ =============
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 had created some channel conflicts historically. As part
of this focus, we sold certain assets associated with our Thinner branded
bathroom and kitchen scale business to Conair Corporation on January 30, 2004.
We previously sold our Thinner branded scales directly to retailers,
predominately in the U.S. and Canada. On a going-forward basis, we expect to
supply these scales directly to Conair and intend to continue our efforts in the
design, development and manufacture of innovative scale products for sale to our
worldwide base of OEM customers. Although our development focus is on the OEM
market, we intend to continue to develop and manufacture our tire pressure
gauges, which are sold directly to retail customers. As OEM margins have
historically been lower than margins on sales to retail customers, we expect our
Consumer Products segment margins will decline as a result of this transaction.
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, the Company has made the
three acquisitions referenced above since March 31, 2004, two of which were
subsequent to June 30, 2004.
18
In order to finance any potential acquisitions, we would consider loans from
financial institutions, the sale of equity securities, or the sale of existing
Company assets, including assets in our Consumer Products segment.
Establishment of Offshore Holding Companies. In the quarter ended June 30,
2004, we reorganized our Asia 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
future sale of assets of our Consumer Products business.
MSI Sensors (Asia) (formerly named Measurement Limited, organized in Hong Kong)
owns 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 the shares of MSI Sensors (Asia) and ML Cayman. All
the companies are included in the consolidated financial statements of the
group.
RESULTS OF OPERATIONS
THE FOLLOWING TABLE SETS FORTH CERTAIN ITEMS IN OUR CONSOLIDATED STATEMENTS OF
INCOME FOR THE THREE MONTHS AND SIX MONHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER
30, 2003, RESPECTIVELY:
For The Three Months Ended For The Six Months Ended
September 30, September 30,
-------------------------------- -------------------------------
% of % of
2004 2003 Change 2004 2003 Change
-----------------------------------------------------------------
Net Sales
Sensor 23,553 14,221 65.6 40,694 29,011 40.3
Consumer products 12,658 14,338 (11.7) 23,537 25,589 (8.0)
---------- --------- ---------- -------
Total net sales 36,211 28,559 64,231 54,600
Cost of Sales 21,082 16,252 29.7 36,525 29,704 23.0
---------- --------- ---------- -------
Gross profit 15,129 12,307 22.9 27,706 24,896 11.3
Expenses (income)
Selling, general, and administrative 8,474 7,508 12.9 15,748 15,002 5.0
Non-cash equity based compensation - 1,835 (100.0) - 1,908 (100.0)
Research and development 848 854 (0.6) 1,657 1,760 (5.9)
Customer funded development (43) - (138) -
Interest expense, net 108 135 (19.8) 97 300 (67.6)
Other expenses 75 2 3,635.4 66 (6) (1,195.1)
---------- --------- ---------- -------
9,462 10,334 17,430 18,964
Income from continuing operations before
income taxes 5,667 1,973 187.1 10,276 5,932 73.2
Income tax provision 1,613 258 525.1 2,927 546 436.3
Income from discontinued units - - - 112
---------- --------- ---------- -------
Net income 4,054 1,715 136.3 7,349 5,498 33.7
========== ========= ========== =======
19
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
The consolidated financial statements for the three month periods ended
September 30, 2004 and September 30, 2003 include the results of the ongoing
operations of Measurement Specialties, Inc.
NET SALES.
Sensor Business. The increase in net sales for our base Sensor business during
the three months ended September 30, 2004, is a result of increased demand in
our Microfused, Schaevitz, and Piezo product lines. Significant contributors to
the increase in net sales for our Microfused line are the expanded demand for
automotive sensors, as well as ramping sales of newly introduced pressure
products targeting the semiconductor processing market. The improved Schaevitz
sales are attributed to the application of existing electromagnetic fluid level
sensors to new automotive off road platforms, as well as a one time purchase of
spare parts by an aerospace customer. The Piezo line has seen increased sales
primarily in the area of our traffic sensor programs. Sales from the
Acquisitions contributed an additional $4,556.
Consumer Business. Lower tire gauge sales in the U.S. business accounted for
the majority of the decline in net sales for our Consumer Products division for
the three months ended September 30, 2004, as compared to the same period in the
prior fiscal year. The decrease is due to non-repeating promotional business
and changes in customer product assortments. Higher OEM sales in the bath scale
business more than offset the impact of the lower pricing structure resulting
from the Conair transaction.
GROSS MARGIN.
Gross margin as a percent of sales for the three months ended September 30, 2004
decreased to 41.8% from 43.1% for the three months ended September 30, 2003.
Sensor Business. Gross margin as a percent of sales for our base Sensor
business decreased from 53.5% for the quarter ending September 30, 2003 to 50.6%
for the quarter ending September 30, 2004. This decreased gross margin occurred
as the result of a shift in overall product mix to lower margin products, both
in automotive and non-automotive businesses. Including acquisition sales, gross
margin as a percent of sales for our Sensor business decreased to 48.6%, as the
acquired businesses are generally at lower margins than our historical base
business.
Consumer business. Gross margin as a percent of sales for our Consumer Products
business decreased to 27.6% for the three months ended September 30, 2004 from
31.5% for the same period ending September 30, 2003. Gross margin decreased as
a result of lower tire gauge sales. Tire gauge sales contribute a higher margin
than the scale business. Additionally, as a result of the Conair transaction,
the entire scale business is now realizing OEM margins, which are historically
lower than retail margins. Also contributing to the lower margins was the
effect of lower pricing and higher cost of sales in certain of our bath scale
lines.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
SELLING, GENERAL AND ADMINISTRATIVE.
The increase in selling, general and administrative expenses is primarily due to
the Acquisitions. These Acquisitions resulted in an increase of $1,564 for the
three months ended September 30, 2004 as compared to the three months ended
September 30, 2003. In addition, increased professional fees contributed to the
increase in selling, general, and administrative expenses due to, among other
things, costs associated with the implementation of Sarbanes-Oxley requirements.
These higher expenses were partially offset by lower expenses for employee
profit sharing and lower costs in the Consumer Products segment resulting from
the Conair transaction
NON-CASH EQUITY BASED COMPENSATION.
During the three months ended September 30, 2003, we recorded a non-cash equity
based compensation charge of $1,835, or $0.13 per share diluted, for the vesting
of the warrant issued to Four Corners Capital Partners LP, a limited partnership
of which Mr. Guidone is a principal. All warrants issued to Four Corners vested
in fiscal 2004, and there was no comparable charge in the three months ended
September 30, 2004. See Note 10 to the Condensed Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q for a discussion of
non-cash equity based compensation and the arrangement with Four Corners.
RESEARCH AND DEVELOPMENT
We had $43 of customer-funded development for the three months ended September
30, 2004 compared with zero for the three months ended September 30, 2003. On a
net basis, research and development costs decreased $49, or 5.7%, to $805 for
the three
20
months ended September 30, 2004 from $854 for the three months ended September
30, 2003.
INTEREST EXPENSE, NET.
Net interest expense decreased $27, or 20%, to $108 for the three months ended
September 30, 2004 from $135 for the three months ended September 30, 2003. The
decrease in interest expense to interest income is attributable to the Company
having average debt outstanding of $3,681 for the three months ended September
30, 2004, compared to $3,750 of debt outstanding for the three months ended
September 30, 2003.
INCOME TAXES.
The increase in the provision for income taxes is mainly due to the lower than
normal prior year balance. Based on the evaluation of relevant factors last
year, 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. The uncertainty with the then pending
litigation resulted in this assessment. However, as the situation improved by
the fiscal year ended March 31, 2004, a valuation allowance was determined to be
no longer necessary. Our provision for income taxes for the period ended
September 30, 2004 represents our estimate of the full year's tax rate based
upon the expected taxable income taxed at the applicable jurisdiction. The
utilization of a portion of the Company's net operating loss carry forward of
$26,681 at March 31, 2004 will greatly reduce the Company 's cash payment for
the U.S. portion of the provision for income taxes.
SIX MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
2003
The consolidated financial statements for the six month period ended September
30, 2004 and September 30, 2003 include the results of the ongoing operations of
Measurement Specialties, Inc.
NET SALES.
Sensor Business. Sales generally increased along all product lines in the base
Sensor segment. A significant contributor to the increase in net sales for our
Sensor business for the six month period ending September 30, 2004 is higher
displacement sales in the automotive sector for our Schaevitz product line, as
one of our products has been designed into a new platform. In addition,
Microfused product line sales increased significantly as compared to the same
period in the prior fiscal year. The improved sales in this product line are
primarily due to expanded demand for automotive sensors. Piezo product line
sales increased as a result of increased traffic sensor programs. Sales from
the acquisitions contributed an additional $4,639.
Consumer Business. The drivers of the decline in Consumer Business sales are
essentially for the same reasons detailed in the three months ended September
30, 2004 compared to the three months ended September 30, 2003 discussion above,
except that we supplied one tire gauge promotion offered by a warehouse club
customer in the six months ended September 30, 2003. Higher OEM sales in the
bath scale business more than offset the impact of the lower pricing structure
resulting from the Conair transaction.
GROSS MARGIN.
Gross margin as a percent of sales for the six months ended September 30, 2004
decreased to 43.1% from 45.6% for the six months ended September 30, 2003.
Sensor Business. Gross margin as a percent of sales for our base Sensor
business decreased from 55.3% for the six month period September 30, 2003 to
53.5% for the same period ending September 30, 2004. Including acquisition
sales, gross margin as a percent of sales for our Sensor business decreased to
52.0%. The drivers of the margin decline are for essentially the same reasons
detailed in the three months ended September 20, 2004 compared to the three
months ended September 30, 2003 discussion above.
Consumer Business. Gross margin as a percent of sales for our Consumer Products
business decreased to 26.1% for the six months ended September 30, 2004 from
32.6% for the six months ended September 30, 2003. The drivers of the margin
decline are essentially for the same reasons detailed in the three months ended
September 30, 2004 compared to the three months ended September 30, 2003
discussion above.
On a continuing basis our gross margin in the Sensor and Consumer Products
businesses may vary due to product mix, sales volume, availability of raw
materials and other factors.
SELLING, GENERAL AND ADMINISTRATIVE.
The increase in selling, general and administrative expenses is primarily due to
the Acquisitions. These Acquisitions resulted in an
21
increase of $1,583 for the six months ended September 30, 2004 as compared to
the six months ended September 30, 2003. The drivers of the increased selling,
general and administration costs are essentially for the same reasons detailed
in the three months ended September 30, 2004 compared to the three months ended
September 30, 2003 discussion above.
NON-CASH EQUITY BASED COMPENSATION.
During the six months ended September 30, 2003, we recorded a non-cash equity
based compensation charge of $1,908, or $0.14 per share diluted, for the vesting
of the warrant issued to Four Corners Capital Partners LP, a limited partnership
of which Mr. Guidone is a principal. All warrants issued to Four Corners vested
in fiscal 2004, and there was no comparable charge in the six months ended
September 30, 2004. See Note 10 to the Condensed Consolidated Financial
Statements included in this Quarterly Report on Form 10-Q for a discussion of
non-cash equity based compensation and the arrangement with Four Corners.
RESEARCH AND DEVELOPMENT
We had $138 of customer-funded development for the six months ended September
30, 2004 compared with zero for the six months ended September 30, 2003. On a
net basis, research and development costs decreased $241, or 13.6%, to $1,519
for the six months ended September 30, 2004 from $1,760 for the six months ended
September 30, 2003.
INTEREST EXPENSE, NET.
Net interest expense decreased $203, or 67.7%, to $97 for the six months ended
September 30, 2004 from $300 for the six months ended September 30, 2003. The
decrease in interest expense is attributable to the Company having an average
debt outstanding of $2,103 for the six months ended September 30, 2004, compared
to $4,482 of debt outstanding for the six months ended September 30, 2003.
INCOME TAXES.
The drivers of the higher tax provision are essentially for the same reasons
detailed in the three months ended September 30, 2004 compared to the three
months ended September 30, 2003 discussion above.
LIQUIDITY AND CAPITAL RESOURCES
Operating working capital (accounts receivable plus inventory less accounts
payable) increased by $8,512 from $16,261 as of March 31, 2004 to $24,773 as of
September 30, 2004. The increase was attributable to an increase in accounts
receivable of $5,180 from $14,010 at March 31, 2004 to $19,190 at September 30,
2004 an increase in inventory of $7,201 from $10,170 at March 31, 2004 to
$17,371 at September 30, 2004 and offset by an increase in accounts payable of
$3,869 from $7,919 at March 31, 2004 to $11,788 at September 30, 2004.
Contributing to the increase in working capital was the acquisition of Elekon,
Entran and Encoder, which added $2,524 to accounts receivable, $2,758 in
inventory and $3,797 in accounts payable at September 30, 2004. Excluding the
effect of acquisitions, accounts receivable increased as a result of higher
sales in Consumer products business due to the seasonal nature of our Consumer
business, and an increase in sales in the Sensor business. The increase in
inventory is attributable to the seasonal nature of our Consumer Products
business, which is in a period of building inventory, resulting in higher
inventory levels and a higher account payable from March 31, 2004. In addition,
Sensor inventory, excluding acquisitions, increased as a result of the
implementation of a change to our supply chain strategy. These changes will
cause a temporary increase in inventory as we shift buffer stocks from finished
goods to raw materials.
Cash provided from operating activities was $2,006 for the six months ended
September 30, 2004 as compared to $6,147 provided for the six months ended
September 30, 2003. Included in cash provided from operations for the six month
period ended September 30, 2004 is $2,100 of costs paid to settle our SEC and
securities class action legal actions (See Note 9 to the Condensed Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q.).
Investing activities included cash payments of $15,953 for the acquisition of
Elekon, Entran and Encoder. In addition, capital spending increased to $1,152
for the six months ended September 30, 2004 from $904 for the six months ended
September 30, 2003. The increase in capital spending is primarily attributable
to investment in revenue generating projects at our Shenzen, China facility.
Financing activities for the six months ended September 30, 2004 provided
$6,186, reflecting financing for the acquisitions, and proceeds from the
exercise of employee stock options.
REVOLVING CREDIT FACILITY
On January 31, 2003, we entered into a $15,000 revolving credit facility with
Bank of America Business Capital ("BOA") (formerly known as Fleet Capital
Corporation). The revolving credit facility is secured by a lien on
substantially all of our assets. Interest
22
accrues on the principal amount of our 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) or the maximum rate permitted by
applicable law. As of September 30, 2004, the interest rate applicable to
borrowings under the revolving credit facility was 5.75%. The amount of
borrowing available under the revolving credit facility is determined in
accordance with a formula based on certain of our accounts receivable and
inventory. The revolving credit facility expires on February 1, 2006.
Our revolving credit agreement requires us to meet certain financial covenants
during the term of the revolving credit facility. In addition to certain other
affirmative and negative covenants, which include a restriction on the payment
of dividends, we are required to keep a minimum fixed charge ratio of 1 to 1 at
the end of each fiscal quarter. Fixed charge ratio is defined as operating cash
flow, which is EBITDA (earnings before interest, taxes, depreciation and
amortization) minus cash taxes paid and minus capital expenditures, divided by
the sum of scheduled principle payments and interest expense during that period.
We are currently in compliance with all covenants in the agreement. As of
September 30, 2004, the outstanding borrowings were $5,613 and the Company had
the right to borrow an additional $3,306 under the revolving credit facility.
LIQUIDITY
At October 29, 2004, we had approximately $9,417 of available cash and $4,405 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 borrowing capacity from June 30, 2004 reflects the use of
$7,539 of cash and borrowings of $3,803 to fund the Entran and Encoder
acquisitions. See Note 7 included as part of the Company's Condensed
Consolidated Financial Statements included in the quarterly report on form 10-Q
for a discussion on these acquisitions.
DIVIDENDS
We have not declared cash dividends on our common equity. Additionally, the
payment of dividends is prohibited under our credit agreement. If permitted
under applicable law and consented to by our lenders, we may, in the future,
declare dividends under certain circumstances.
At present, there are no material restrictions on the ability of our Hong Kong
subsidiary to transfer funds to us in the form of cash dividends, loans,
advances, or purchases of materials, products, or services. Chinese laws and
regulations, including currency exchange controls, restrict distribution and
repatriation of dividends by our China subsidiary.
SEASONALITY
Our sales of consumer products are seasonal, with highest sales during the
second and third fiscal quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Dollars in Thousands)
FOREIGN CURRENCY EXCHANGE RISK
We are exposed to a certain level of foreign currency exchange risk.
The majority of our net sales are priced in United States dollars. Our costs and
expenses are priced in United States dollars, Hong Kong dollars, Chinese
renminbi and Euros. Accordingly, the competitiveness of our products relative to
products produced domestically (in foreign markets) may be affected by the
performance of the United States dollar compared with that of our foreign
customers' currencies. Additionally, we are exposed to the risk of foreign
currency transaction and translation losses, which might result from adverse
fluctuations in the values of the Hong Kong dollar, the Chinese renminbi and the
Euros. At September 30, 2004, we had net assets of approximately $22,559 subject
to fluctuations in the value of the Hong Kong dollar, net assets of
approximately $6,247 subject to fluctuations in the value of the Chinese
renminbi, net assets of approximately $1,840 subject to fluctuations in the
value of the Euro, and net assets of approximately $14 subject to fluctuations
in the value of the British pound. At March 31, 2004, we had net assets of
approximately $4,836 subject to fluctuations in the value of the Hong Kong
dollar and the net assets of approximately $7,330 subject to fluctuations in the
value of Chinese renminbi.
Fluctuations in the value of the Hong Kong dollar have not been significant
since October 17, 1983, when the Hong Kong government tied the value of the Hong
Kong dollar to that of the United States dollar. However, there can be no
assurance that the value of the Hong Kong dollar will continue to be tied to
that of the United States dollar. China adopted a floating currency system on
January 1, 1994, unifying the market and official rates of foreign exchange.
China approved current account convertibility of the Chinese renminbi on July 1,
1996, followed by formal acceptance of the International Monetary Fund's
Articles of Agreement on December 1, 1996. These regulations eliminated the
requirement for prior government approval to buy foreign exchange for ordinary
trade transactions, though approval is still required to repatriate equity or
debt, including interest thereon.
23
There can be no assurance that these currencies will remain stable or will
fluctuate to our benefit. To manage our exposure to foreign currency and
translation risks, we may purchase currency exchange forward contracts, currency
options, or other derivative instruments, provided such instruments may be
obtained at suitable prices. However, to date we have not done so.
INTEREST RATE RISK
Interest on our revolving credit facility accrues on the principal amount of our
borrowings under the facility at a fluctuating rate per year equal to the lesser
of 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) or the maximum rate permitted by applicable law. Our results will be
adversely affected by any increase in interest rates. For example, for every
$1,000 of debt outstanding, an annual interest rate increase of 100 basis points
would increase interest expense and thus decrease our after tax profitability by
$10.
We do not hedge this interest rate exposure.
CAUTIONARY STATEMENT
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended. Forward looking statements may be
identified by such words or phrases as "believe," "expect," "intend,"
"estimate," "anticipate," "project," "will," "may" and similar expressions. All
statements that address operating performance, events or developments that we
expect or anticipate will occur in the future are forward-looking statements.
The forward-looking statements above are not guarantees of future performance
and involve a number of risks and uncertainties. Factors that might cause actual
results to differ materially from the expected results described in or
underlying our forward-looking statements include:
- Conditions in the general economy and in the markets served by us;
- Competitive factors, such as price pressures and the potential emergence of
rival technologies;
- Interruptions of suppliers' operations or the refusal of our suppliers to
provide us with component materials;
- Timely development, market acceptance, and warranty performance of new
products;
- Changes in product mix, costs, yields and fluctuations in foreign currency
exchange rates;
- Uncertainties related to doing business in Hong Kong and China;
- The continued decline in the European consumer products market; and
- The risk factors listed from time to time in our SEC reports.
This list is not exhaustive. Except as required under federal securities laws
and the rules and regulations promulgated by the SEC, we do not have any
intention or obligation to update publicly any forward-looking statements after
the filing of this Quarterly Report on Form 10-Q, whether as a result of new
information, future events, changes in assumptions or otherwise.
ITEM 4. CONTROLS AND PROCEDURES
The company's management, with the participation of the company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the company's disclosure controls and procedures as of September 30, 2004.
Based on this evaluation, the company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective for gathering, analyzing and disclosing the information
the company is required to disclose in the reports it files under the Securities
Exchange Act of 1934, within the time periods specified in the SEC's rules and
forms. Such evaluation did not identify any change in the Company's internal
control over financial reporting that occurred during the quarter ended
September 30, 2004 that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting,
except that relating to the acquisitions of Elekon., Entran and Encoder The
Company will be making changes to the internal controls of these newly acquired
companies as part of the integration into the Company. However, for purposes of
this evaluation, the impact of these three acquisitions on the Company's
internal controls over financial reporting have been excluded. The total of
these three acquisitions represents approximately $4,639 in net sales; $295 in
operating income for the six months ended September 30, 2004 and $26,846 in
total assets and $17,963 in total liabilities at September 30, 2004 included as
part of the Company's Condensed Consolidated Financial Statements included in
this Quarterly Report on Form 10-Q.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(DOLLARS IN THOUSANDS)
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 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 on 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 (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 through review, we
believe SEB's allegations of patent infringement are without merit and we intend
to defend our position vigorously. 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.
SETTLEMENT
In re: Measurement Specialties, Inc. Securities Litigation, 02 Civ. No. 1071
(D.N.J.). On March 20, 2002, a class action lawsuit was filed on behalf of
purchasers of our common stock in the United States District Court for the
District of New Jersey against the company and certain of our present and former
officers and directors. The complaint was subsequently amended to include the
underwriters of 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 the caption In re: Measurement
Specialties, Inc. Securities Litigation, 02 Civ. No. 1071 (D.N.J.). Plaintiffs
filed a Consolidated Amended Complaint on September 12, 2002. The underwriters
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.
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 Andersen,
its 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
paid 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 us 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.
25
On June 28, 2004, we 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, we paid one dollar in disgorgement and $1,000 in civil penalties.
U.S. Attorney Investigation. The office of the United States Attorney for the
District of New Jersey has been conducting as inquiry into the matters being
investigated by the SEC. This inquiry has resulted in a guilty plea by our
former CFO. We are not aware of any continuing investigation into these matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
SEE EXHIBIT INDEX.
(b) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed during the three months ended
September 30, 2004:
On July 23, 2004, we filed a current report on Form 8-K pursuant to Item 2
(Acquisition or Disposition of Assets) to attach a press release reporting our
purchase of the capital stock of Entran Devices, Inc. and Entran S.A.
On July 23, 2004, we filed a current report on Form 8-K pursuant to Item 2
(Acquisition or Disposition of Assets) to attach a press release reporting our
purchase of the assets of Encoder Devices, LLC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEASUREMENT SPECIALTIES, INC.
(Registrant)
/s/ John P. Hopkins
----------------------------
Date: November 8, 2004 John P. Hopkins
Chief Financial Officer
(authorized officer and
principal financial officer)
26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
31.1 Certification of Frank D. Guidone required by Rule 13a-14(a)
or Rule 15d-14(a)
31.2 Certification of John P. Hopkins required by Rule 13a-14(a)
or Rule 15d-14(a)
32.1 Certification of Frank D. Guidone and John P. Hopkins required by Rule
13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350
27