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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MAY 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22183
----------------
MEADE INSTRUMENTS CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2988062
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6001 OAK CANYON, IRVINE, CA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(949) 451-1450
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
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 [ ]
Number of shares of common stock outstanding as of May 31, 2002 is
16,481,000.
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MEADE INSTRUMENTS CORP.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page No.
--------
Consolidated Balance Sheets (Unaudited)-- May 31, 2002 and February 28, 2002............................. 1
Consolidated Statements of Operations (Unaudited) -- Three Months Ended May 31, 2002 and 2001............ 2
Consolidated Statements of Cash Flows (Unaudited) -- Three Months Ended May 31, 2002 and 2001............ 3
Notes to Consolidated Financial Statements (Unaudited)................................................... 4
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 7
PART II -- OTHER INFORMATION
Other Information........................................................................................ 10
SIGNATURES............................................................................................... 13
i
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
MAY 31, FEBRUARY 28,
2002 2002
------------- -------------
Current assets:
Cash ...................................................................... $ 1,056,000 $ 1,249,000
Accounts receivable, less allowance for doubtful accounts of $2,196,000
at May 31, 2002 and $2,232,000 at February 28, 2002 .................... 15,216,000 12,184,000
Inventories ............................................................... 30,017,000 29,803,000
Deferred income taxes ..................................................... 7,011,000 7,011,000
Prepaid income taxes ...................................................... 3,389,000 3,118,000
Prepaid expenses and other current assets ................................. 634,000 661,000
------------- -------------
Total current assets ............................................ 57,323,000 54,026,000
Other assets .................................................................. 3,881,000 4,189,000
Property and equipment, net of accumulated depreciation of $7,578,000
at May 31, 2002 and $7,256,000 at February 28, 2002 ....................... 6,664,000 6,608,000
------------- -------------
$ 67,868,000 $ 64,823,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ....................................................... $ 4,894,000 $ 3,234,000
Accounts payable .......................................................... 6,120,000 4,671,000
Accrued liabilities ....................................................... 3,767,000 3,601,000
Current portion, long-term debt and capital lease obligations ............. 689,000 718,000
------------- -------------
Total current liabilities ....................................... 15,470,000 12,224,000
Long-term bank debt ........................................................... 2,417,000 2,463,000
Long-term capital lease obligations, net of current portion ................... -- 28,000
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized;
16,481,000 shares issued and outstanding at May 31, 2002 and
at February 28,2002 .................................................... 165,000 165,000
Additional paid-in capital ................................................ 32,574,000 32,574,000
Retained earnings ......................................................... 21,794,000 22,301,000
Accumulated other comprehensive income .................................... (399,000) (559,000)
------------- -------------
54,134,000 54,481,000
Unearned ESOP shares ...................................................... (4,153,000) (4,373,000)
------------- -------------
Total stockholders' equity ...................................... 49,981,000 50,108,000
------------- -------------
$ 67,868,000 $ 64,823,000
============= =============
See accompanying notes to consolidated financial statements.
1
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
-----------------------------
2002 2001
------------- -------------
Net sales .................................................. $ 20,053,000 $ 16,144,000
Cost of sales .............................................. 13,866,000 11,492,000
------------- -------------
Gross profit ........................................... 6,187,000 4,652,000
Selling expenses ........................................... 3,015,000 2,238,000
General and administrative expenses ........................ 2,787,000 2,449,000
ESOP contribution expense .................................. 250,000 308,000
Research and development expenses .......................... 730,000 597,000
------------- -------------
Operating (loss) ....................................... (595,000) (940,000)
Interest expense ........................................... 239,000 339,000
------------- -------------
Loss before income taxes ................................... (834,000) (1,279,000)
Benefit for income taxes ................................... (327,000) (481,000)
------------- -------------
Net loss ................................................... $ (507,000) $ (798,000)
============= =============
Basic earnings (loss) per share ............................ $ (0.03) $ (0.05)
============= =============
Diluted earnings (loss) per share .......................... $ (0.03) $ (0.05)
============= =============
Weighted average number of shares outstanding -- basic ..... 15,052,000 14,995,000
============= =============
Weighted average number of shares outstanding -- diluted ... 15,052,000 14,995,000
============= =============
See accompanying notes to consolidated financial statements.
2
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
---------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss ........................................................ $ (507,000) $ (798,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................... 502,000 562,000
ESOP contribution ............................................... 250,000 308,000
Allowance for doubtful accounts ................................. (38,000) 317,000
Changes in assets and liabilities:
Increase in accounts receivable .............................. (2,928,000) (1,235,000)
Decrease in inventories ...................................... 129,000 5,695,000
Increase in prepaid expenses and other assets ................ (217,000) (69,000)
Increase in accounts payable ................................. 1,363,000 250,000
Increase (decrease) in accrued liabilities ................... 54,000 (871,000)
Decrease in income taxes payable ............................. -- (295,000)
------------ ------------
Net cash provided by (used in) operating activities ... (1,392,000) 3,864,000
------------ ------------
Cash flows from investing activities:
Capital expenditures ............................................ (207,000) (1,510,000)
------------ ------------
Net cash used in investing activities ................. (207,000) (1,510,000)
------------ ------------
Cash flows from financing activities:
Net borrowings (payments) under bank line of credit ............. 1,582,000 (1,340,000)
Payments on long-term debt ...................................... (134,000) (250,000)
Payments under capital lease obligations ........................ (56,000) (76,000)
------------ ------------
Net cash provided by (used in) financing activities ... 1,392,000 (1,666,000)
------------ ------------
Effect of exchange rate changes on cash ............................. 14,000 118,000
------------ ------------
Net increase (decrease) in cash ..................................... (193,000) 806,000
Cash at beginning of period ......................................... 1,249,000 1,186,000
------------ ------------
Cash at end of period ............................................... $ 1,056,000 $ 1,992,000
============ ============
See accompanying notes to consolidated financial statements.
3
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. THE CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED BY THE COMPANY AND
ARE UNAUDITED.
In management's opinion, the information and amounts furnished in this
report reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for the fair presentation of the financial position and
results of operations for the interim periods presented. These financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 2002.
The Company has experienced, and expects to continue to experience,
substantial fluctuations in its sales, gross margins and profitability from
quarter to quarter. Factors that influence these fluctuations include the volume
and timing of orders received, changes in the mix of products sold, market
acceptance of the Company's products, competitive pricing pressures, the
Company's ability to meet demand and delivery schedules and the timing and
extent of research and development expenses, marketing expenses and product
development expenses. In addition, a substantial portion of the Company's net
sales and operating income typically occur in the third quarter of the Company's
fiscal year primarily due to disproportionately higher customer demand for
less-expensive telescopes during the Christmas holiday season. The results of
operations for the quarters ended May 31, 2002 and 2001, respectively, are not
necessarily indicative of the operating results for the entire fiscal year.
B. COMPOSITION OF CERTAIN BALANCE SHEET ACCOUNTS
The composition of inventories is as follows:
MAY 31, FEBRUARY 28,
2002 2002
--------------- -----------------
Raw materials.................... $ 8,562,000 $ 8,529,000
Work-in-process.................. 4,875,000 4,997,000
Finished goods................... 16,580,000 16,277,000
--------------- ---------------
$ 30,017,000 $ 29,803,000
=============== ===============
C. COMMITMENTS AND CONTINGENCIES
In October 2001 and June 2002, the Company filed suit against Tasco
Sales, Inc. ("Tasco") and Celestron International, Inc. ("Celestron"), and other
related parties, charging the defendants with patent infringement and unfair
competition. The complaints allege that a number of Tasco's and Celestron's
consumer telescopes willfully infringe two of the Company's U.S. patents. In
addition to seeking compensation for damages incurred, the suits seek to enjoin
Tasco and Celestron from continuing to manufacture or sell products that
infringe the Company's patents. Tasco and Celestron filed an answer to the
October 2001 suit and a counterclaim which deny the Company's allegations. The
counterclaim also alleges, among other things, that the Company is infringing a
Celestron design patent. Also in June 2002, the Company filed suit against
Tasco, Celestron and other related parties, charging the defendants, among other
things, with fraudulently obtaining a U.S. patent. Due to the uncertainties of
litigation, the Company is unable to provide an evaluation of the likelihood of
either a favorable or unfavorable outcome in these matters.
In May 2002, the Company was sued by two individuals for unfair
business practices. The complaint alleges, among other things that certain of
the Company's packaging and marketing materials are misleading. The Company has
not yet answered this compliant. While the Company believes the compliant is
without merit, due to the uncertainties of litigation, the Company is unable to
provide an evaluation of the likelihood of either a favorable or unfavorable
outcome in this matter.
The Company is involved from time to time in litigation incidental to
its business. Management believes that the outcome of such litigation will not
have a material adverse effect on the Company.
The Company continues to be impacted by softness in the consumer market
as well as competitive pricing pressures, despite improved gross margins during
the first quarter of fiscal year 2003. During the fiscal year ended February 28,
2002, the Company generated cash flow from operations sufficient to reduce
amounts outstanding under its lines of credit and long-term debt by $12.7
million. During the first quarter of fiscal 2003, the Company continued to make
scheduled principal payments on its long-term debt and borrowed approximately
$1.6 million on its lines of credit to support its working capital needs. In
order for the Company to return to profitability, it will need to continue to
increase sales or reduce costs, and manage its working capital to generate cash
flow from operations. The Company continues to depend upon operating cash flow
and availability under its bank lines of credit to provide short-term liquidity.
Availability under its bank lines of credit at June 30, 2002 was over $8
million. Management believes that operating cash flow and bank borrowing
capacity should provide sufficient liquidity for the Company's obligations for
the next twelve months. Should the Company be unable to return to profitability
and sustain its cash flows, it may be required to seek additional sources of
capital; however there can be no assurance that such additional sources of
capital will be available on reasonable terms, if at all.
4
D. NET INCOME PER SHARE
Basic earnings (loss) per share amounts exclude the dilutive effect of
potential shares of common stock. Basic earnings (loss) per share is based upon
the weighted-average number of shares of common stock outstanding. Diluted
earnings (loss) per share is based upon the weighted-average number of shares of
common stock and dilutive potential shares of common stock outstanding for each
period presented. Potential shares of common stock include outstanding stock
options which are included under the treasury stock method. Due to the net loss
in each quarter presented, potential shares of common stock of 280,000, and
94,000 have been excluded from diluted weighted average shares of common stock
for the three months ended May 31, 2002 and 2001, respectively, as the effect
would be anti-dilutive.
E. COMPREHENSIVE INCOME
Comprehensive income is defined as a change in the equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. In addition to net income (loss), comprehensive income
in the accompanying financial statements includes foreign currency translation
adjustments and adjustments to the fair value of highly effective derivative
instruments. For the quarter ended May 31, 2002, the Company had other
comprehensive income (loss) as follows:
THREE MONTHS
ENDED MAY 31,
2002
---------------
Net loss.................................................... $ (507,000)
Currency translation adjustment............................. 215,000
Change in fair value of foreign currency forward contracts.. (60,000)
Change in fair value of interest rate swap.................. 5,000
---------------
Total other comprehensive income (loss)..................... $ (347,000)
===============
F. GOODWILL
In June 2001, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 141, Business Combinations, ("SFAS 141") and Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
SFAS 141 established new accounting and reporting standards for business
combinations that require the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS 142 established new
standards for goodwill acquired in a business combination, eliminated
amortization of goodwill and set forth methods for periodically evaluating
goodwill for impairment. The Company adopted the provisions of these statements
in the quarter ended May 31, 2002. The implementation of SFAS 142 resulted in a
reduction of goodwill amortization of approximately $60,000 per quarter.
Implementation of SFAS 141 was not material to the Company's financial position
or results of operations. The following pro forma summary presents the Company's
net income (loss) and per share information as if the Company had been
accounting for its goodwill under SFAS No. 142 for the three months ended May
31, 2002 and 2001 and for the three most recently completed fiscal years:
THREE MONTHS ENDED
MAY 31, YEAR ENDED FEBRUARY 28 (29)
--------------------------------- --------------------------------------------------
2002 2001 2002 2001 2000
---------------- ---------------- ---------------- ---------------- ---------------
Reported net income (loss)..... $ (507,000) $ (798,000) $ (1,442,000) $ 1,286,000 $ 11,955,000
Add back goodwill amortization,
net of tax..................... -- 36,000 144,000 144,000 72,000
---------------- ---------------- ---------------- ---------------- ---------------
Adjusted net income (loss)..... $ (507,000) $ (762,000) $ (1,298,000) $ 1,430,000 $ 12,027,000
================ ================ ================ ================ ===============
Reported basic earnings (loss)
per share...................... $ (0.03) $ (0.05) $ (0.10) $ 0.09 $ 0.85
================ ================ ================ ================ ===============
Reported diluted earnings (loss)
per share...................... $ (0.03) $ (0.05) $ (0.10) $ 0.08 $ 0.80
================ ================ ================ ================ ===============
Adjusted basic earnings (loss)
per share...................... $ (0.03) $ (0.05) $ (0.09) $ 0.10 $ 0.85
================ ================ ================ ================ ===============
Adjusted diluted earnings (loss)
per share...................... $ (0.03) $ (0.05) $ (0.09) $ 0.09 $ 0.80
================ ================ ================ ================ ===============
5
MEADE INSTRUMENTS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
G. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company utilizes a variety of derivative financial instruments to
manage its currency exchange rate and interest rate risks as summarized below.
The Company does not enter into these arrangements for trading or speculation
purposes.
MAY 31, 2002 FEBRUARY 28, 2002
--------------------------------------- --------------------------------------
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
------------------ -------------------- ------------------- ------------------
Interest rate swap agreement ....... $ 1,820,000 $ (21,000) $ 1,925,000 $ (26,000)
Fair value forward currency
contracts ........................ $ 800,000 $ (35,000) -- --
Cash flow forward currency
contracts ........................ $ 1,400,000 $ (60,000) -- --
At May 31, 2002, the fair values of forward currency contracts and
interest rate swap agreements are recorded in accrued liabilities on the
accompanying balance sheets. Changes in the fair value of the interest rate swap
agreement and the cash flow forward currency contracts have been recorded as a
component of other comprehensive income as these items have been designated and
qualify as cash flow hedges. The change in the fair value of the fair value
forward currency contracts has been recorded in earnings. The settlement dates
on the forward currency contracts vary based on the underlying instruments
through November 2002.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The nature of the Company's business is seasonal. Historically, sales
in the third quarter have been higher than sales achieved in each of the other
three fiscal quarters of the year. Thus, expenses and, to a greater extent,
operating income vary by quarter. Caution, therefore, is advised when appraising
results for a period shorter than a full year, or when comparing any period
other than to the same period of the previous year.
THREE MONTHS ENDED MAY 31, 2002 COMPARED TO THREE MONTHS ENDED MAY 31,
2001
Net sales for the first quarter of fiscal 2003 were $20.1 million
compared to $16.1 million for the first quarter of fiscal 2002, an increase of
24.2%. The increase in sales was principally due to sales of the Company's
CaptureViewTM, a recently introduced binocular that features a built-in digital
camera.
Gross profit increased from $4.7 million (28.8% of net sales) for the
first quarter of fiscal 2002 to $6.2 million (30.9% of net sales) for the first
quarter of fiscal 2003, an increase of 33.0%. The increase in gross profit as a
percent of net sales was due to margin contribution from the CaptureView at
levels higher than those of many of the Company's other products and a shift in
product mix to higher margin manufactured products.
Selling expenses increased from $2.2 million (13.9% of net sales) for
the first quarter of fiscal 2002 to $3.0 million (15.0% of net sales) for the
first quarter of fiscal 2002, an increase of 34.7%. The increase was due to
television, radio and print advertising costs associated with the launch of
CaptureView. The Company does not expect marketing and advertising expenses to
continue to increase at this rate over the remainder of the fiscal year. The
promotional campaign associated with the CaptureView was principally a
first-quarter event.
General and administrative expenses increased from $2.4 million (15.2%
of net sales) for the first quarter of fiscal 2002 to $2.8 million (13.9% of net
sales) for the first quarter of fiscal 2003, an increase of 13.8%. This increase
was due to legal and other costs associated with negotiations and due diligence
regarding the possible acquisition of the assets of Tasco Worldwide Inc. and
Celestron International Inc. Those negotiations were terminated prior to the end
of the quarter.
ESOP contribution expense decreased from $308,000 (1.9% of net sales)
for the first quarter of fiscal 2002 to $250,000 (1.2% of net sales) for the
first quarter of fiscal 2003, a decrease of 18.8%. The decrease in this non-cash
charge was due to decreases in the average market price of the Company's stock
allocated to the Employee Stock Ownership Plan during the quarter. The non-cash
ESOP contribution expense may fluctuate as the market value of the Company's
common stock changes.
Research and development expenses increased from $597,000 (3.7% of net
sales) for the first quarter of fiscal 2002 to $730,000 (3.6% of net sales) for
the first quarter of fiscal 2003, an increase of 22.3%. The Company expects
research and development expenses to continue to increase as the Company
continues to introduce new consumer related products and leverage its core
competencies into the development of industrial products for application in the
areas of free-space optics and digital imaging.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended May 31, 2002 the Company funded its
operations with short-term bank borrowings. Internally generated cash flow from
the net loss adjusted for non-cash charges decreased due to increases in
accounts receivable that were partially offset by increases in accounts payable.
With increased sales during the quarter, accounts receivable increased. The
increase in accounts payable was due to a mix of longer payment terms from
selected vendors of selected products as well as cash disbursement management.
Net working capital totaled approximately $41.9 million at May 31, 2002,
compared to $41.8 million at February 28, 2002. Working capital requirements
fluctuate during the year due to the seasonal nature of the business. These
requirements are typically financed through a combination of internally
generated cash flow from operating activities and short-term bank borrowings.
Capital expenditures, including financed purchases of equipment,
aggregated $207,000 and $1,510,000 for the three months ended May 31, 2002 and
2001, respectively. The Company had no material capital expenditure commitments
at May 31, 2002.
7
The Company continues to be impacted by softness in the consumer market
as well as competitive pricing pressures, despite improved gross margins during
the first quarter of fiscal year 2003. During the fiscal year ended February 28,
2002, the Company generated cash flow from operations sufficient to reduce
amounts outstanding under its lines of credit and long-term debt by $12.7
million. During the first quarter of fiscal 2003, the Company continued to make
scheduled principal payments on its long-term debt and borrowed approximately
$1.6 million on its line of credit to support its working capital needs. In
order for the Company to return to profitability, it will need to continue to
increase sales or reduce costs, and manage its working capital to generate cash
flow from operations. The Company continues to depend upon operating cash flow
and availability of its bank lines of credit to provide short-term liquidity.
Availability under its bank lines of credit at June 30, 2002 was over $8
million. Management believes that operating cash flow and bank borrowing
capacity should provide sufficient liquidity for the Company's obligations for
the next twelve months. Should the Company be unable to return to profitability
and sustain its cash flows, it may be required to seek additional sources of
capital; however there can be no assurance that such additional sources of
capital will be available on reasonable terms, if at all.
NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement of Accounting Financial Standards No. 143
("SFAS No. 143"), ACCOUNTING FOR OBLIGATIONS ASSOCIATED WITH THE RETIREMENT OF
LONG-LIVED ASSETS, and SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL
OF LONG-LIVED ASSETS, in August and October 2001, respectively.
SFAS No. 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS No. 143 is
effective for fiscal years beginning after June 15, 2002, with early adoption
permitted. The Company is currently evaluating the provisions of SFAS No. 143
but expects that the provisions will not have a material effect on its financial
position or results of operations upon adoption.
SFAS No. 144 establishes a single accounting model for the impairment
or disposal of long-lived assets and new standards for reporting discontinued
operations. SFAS No. 144 is effective in fiscal years beginning after December
15, 2001 and, in general, is to be applied prospectively. The Company is
currently evaluating the provisions of SFAS No. 144 but expects that the
provisions will not have a material effect on it financial position or results
of operations upon adoption.
FORWARD-LOOKING INFORMATION
The preceding "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section contains various "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,
which represent the Company's reasonable judgment concerning the future and are
subject to risks and uncertainties that could cause the Company's actual
operating results and financial position to differ materially, including the
following: the Company's ability to expand the markets for telescopes,
binoculars and other optical products; the Company's ability to continue to
develop and bring to market new and innovative products; the Company's ability
to further develop its wholly-owned manufacturing facility in Mexico in
combination with its existing manufacturing capabilities; the Company expanding
its distribution network; the Company's ability to further develop the business
of Meade Europe, the Company's European subsidiary, in combination with the
Company's existing business; the Company experiencing fluctuations in its sales,
gross margins and profitability from quarter to quarter consistent with prior
periods; the Company's expectation that its contingent liabilities will not have
a material effect on the Company's financial position or results of operations;
the extent to which the Company will be able to leverage its design and
manufacturing expertise in the areas of free-space optics and digital imaging;
and the Company's expectation that it will have sufficient funds to meet any
working capital requirements during the foreseeable future with internally
generated cash flow and borrowing ability.
In addition to other information in this report, the Company cautions
that certain factors, including, without limitation, the following, should be
considered carefully in evaluating the Company and its business and that such
factors may cause the Company's actual operating results to differ materially
from those set forth in the forward looking statements described above or to
otherwise be adversely affected: any significant decline in general economic
conditions or uncertainties affecting consumer spending; any general decline in
demand for the Company's products; any inability to continue to design and
manufacture products that will achieve and maintain commercial success; any
failure of the Company to penetrate the binocular market and achieve meaningful
sales; any significant interruption of the Company's manufacturing abilities in
8
its domestic or Mexican facilities or in any of its suppliers located in the far
east; greater than anticipated competition; any loss of, or the failure to
replace, any significant portion of the sales made to any significant customer
of the Company; the inherent risks associated with international sales,
including variations in local economies, fluctuating exchange rates increased
difficulty of inventory management, greater difficulty in accounts receivable
collections, costs and risks associated with localizing products for foreign
countries, changes in tariffs and other trade barriers, adverse foreign tax
consequences, cultural differences affecting product demand and customer service
and burdens of complying with a variety of foreign laws; the inherent risks
associated with products manufactured or assembled outside of the United States,
including, among other things, imposition of quotas or trade sanctions,
fluctuating exchange rates, shipment delays or political instability and
increasing ESOP charges in the event the market price of the Company's stock
increases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain levels of market risks, including
changes in foreign currency exchange rates and interest rates. Market risk is
the potential loss arising from adverse changes in market rates and prices, such
as foreign currency exchange and interest rates.
The Company conducts business in a number of foreign currencies,
principally in Europe. These currencies have been relatively stable against the
U.S. dollar for the past several years. As a result, foreign currency
fluctuations have not had a material impact historically on Meade's revenues or
results of operations. There can be no assurance that foreign currencies will
remain stable relative to the U.S. dollar or that future fluctuations in the
value of foreign currencies will not have a material adverse effect on the
Company's business, operating results, revenues and financial condition.
The Company has adopted a foreign currency hedging program that
utilizes foreign currency forward contracts to hedge variable cash flows
associated with recognized liabilities and to hedge exposure to changes in the
fair value of unrecognized firm commitments. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The instruments that Meade uses for hedging are readily marketable traded
forward contracts with financial institutions. Meade expects that the changes in
fair value of such contracts will have a high correlation to the price changes
in the related hedged cash flow. Any gains and losses on these hedge contracts
are expected to offset changes in the value of the related exposures. During the
three months ended May 31, 2002, the Company entered into fair value forward
currency contracts with notional amounts aggregating $800,000 and cash flow
forward currency contracts with notional amounts aggregating $1.4 million. The
fair value of these contracts at May 31, 2002 were ($35,000), and ($60,000),
respectively.
Under the terms of the U.S. Credit Agreement, the Company was required
to enter into an interest-rate swap to convert the variable interest rate on its
U.S. Term Loan to a fixed interest rate. The resulting cost of funds (7.9% per
annum) is currently higher than that which would have been available if the
variable rate had been applied during the period. Under the interest-rate swap
contract, the Company has agreed with the bank to exchange, at specified
intervals, the difference between variable-rate and fixed-rate interest amounts,
calculated by reference to agreed-upon notional amounts. The change in the fair
value of the interest rate swap for the three months ended May 31, 2002 was a
gain of $5,000 which is included in other comprehensive income for the three
months then ended.
The Company's financial instruments consist of cash, accounts
receivable, accounts payable, and long-term obligations. The Company's exposure
to market risk for changes in interest rates relates primarily to short-term
investments and short-term obligations. As a result, the Company does not expect
fluctuations in interest rates to have a material impact on the fair value of
these instruments.
9
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 17, 2001, the Company filed suit against Tasco Sales, Inc.
("Tasco") and Celestron International, Inc. ("Celestron"), charging the two
companies with patent infringement and unfair competition. The complaint, filed
in the United States District Court, Central District of California, Southern
Division (Case No. SA-CV 01-976 (GLT)), alleges that Tasco and Celestron
willfully infringed Meade's Patent No. 6,304,376, entitled "Fully Automated
Telescope System With Distributed Intelligence." In addition to seeking
compensation for damages incurred, including enhanced damages, the suit seeks to
enjoin Tasco and Celestron from continuing to manufacture or sell products that
infringe Meade's patent. On or around November 7, 2001, the defendants filed an
answer, subsequently amended, to the complaint in which it denied the Company's
allegations and set forth various affirmative defenses. On or around November
19, 2001, Defendants filed a counterclaim, also subsequently amended, against
the Company for declaratory judgment of non-infringement of the Company's
patent, for declaratory judgment that the Company's patent is unenforceable and
invalid, and for claims that the Company is infringing a Celestron design
patent, U.S. Patent No. D438,221, and Celestron's trade dress. The counterclaim
further alleges that the Company has willfully infringed Celestron's design
patent and seeks an unspecified amount of damages, enhanced damages, and an
injunction and other unspecified relief against the Company. Due to the
uncertainties of litigation, the Company is unable to provide an evaluation of
the likelihood of either a favorable or unfavorable outcome in these cases.
On June 4, 2002, the Company filed suit against Celestron, Tasco and
other related or affiliated parties charging the defendant with patent
infringement. The complaint, filed in the United States District Court, Central
District of California, Southern Division (Case No. SA CV 02-544 (GLT)), alleges
that the defendants willfully infringed Meade's Patent No. 6,392,799, entitled
"Fully Automated Telescope System With Distributed Intelligence." The patent
covers the Company's "level the telescope and point it North" alignment
technology (the "Telescope Alignment Technology"), which allows a telescope user
to easily align a computer operated telescope. In addition to seeking
compensation for damages incurred, including enhanced damages, the suit seeks to
enjoin Tasco, Celestron and the other defendants from continuing to manufacture
or sell products that infringe Meade's telescope alignment patent. Due to the
uncertainties of litigation, the Company is unable to provide an evaluation of
the likelihood of either a favorable or unfavorable outcome in this case.
On June 7, 2002, the Company filed suit against Celestron, Tasco and
other related or affiliated parties, charging the defendants with correction of
patent inventorship, false and misleading representations in violation of the
Lanham Act, unfair competition and fraudulent business practices. The complaint,
filed in the United States District Court, Central District of California,
Southern Division (Case No. SA-CV 02-558 (GLT)), alleges that the defendants
misappropriated the Company's Telescope Alignment Technology and subsequently
conspired to obtain United States Patent No. 6,369,942, entitled "Auto-alignment
tracking telescope mount" ("the `942 Patent"), by fraudulently representing
themselves as the inventors and owners of the Telescope Alignment Technology. In
addition to other remedies, the suit seeks to establish that the Company
invented the Telescope Alignment Technology and that equitable and legal title
to the `942 Patent should be vested in the Company. Due to the uncertainties of
litigation, the Company is unable to provide an evaluation of the likelihood of
either a favorable or unfavorable outcome in this case.
On May 17, 2002, two individuals filed a complaint for unfair business
practices against the Company in their capacity as consumers, within the meaning
of the Consumer Legal Remedies Act, and in their capacity as private attorneys
general suing to enforce the provisions of California Business and Professions
Code Section 17200. The complaint, which has not been formally served on the
Company but was filed in the Superior Court of California, County of Ventura
(Case No. CIV211644), claims that certain of the Company's packaging and
marketing materials are misleading. The plaintiffs' seek, among other remedies,
an order requiring the Company to offer various remedies to past consumers of
the Company's products. While the Company believes the complaint is without
merit, due to the uncertainties of litigation, the Company is unable to provide
an evaluation of the likelihood of either a favorable or unfavorable outcome in
this case.
The Company is also involved from time to time in litigation incidental
to its business. Management believes that the outcome of such litigation will
not have a material adverse effect on the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a) Exhibits filed with this Form 10-Q.
None.
6(b) Reports on Form 8-K.
None.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 15, 2002
MEADE INSTRUMENTS CORP.
By: /s/ JOHN C. DIEBEL
---------------------------
John C. Diebel
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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
--------- ----- ----
/s/ JOHN C. DIEBEL Chairman of the Board and Chief July 15, 2002
- ------------------------------------ Executive Officer
John C. Diebel (Principal Executive Officer)
/s/ STEVEN G. MURDOCK Director, President, July 15, 2002
- ------------------------------------ Chief Operating Officer and Secretary
Steven G. Murdock
/s/ BRENT W. CHRISTENSEN Vice President, Finance and July 15, 2002
- ------------------------------------ Chief Financial Officer
Brent W. Christensen (Principal Financial and Accounting Officer)
/s/ TIMOTHY C. MCQUAY Director July 15, 2002
- ------------------------------------
Timothy C. McQuay
/s/ HARRY L. CASARI Director July 15, 2002
- ------------------------------------
Harry L. Casari
Director
- ------------------------------------
Michael P. Hoopis
Director
- ------------------------------------
Vern L. Fotheringham
13