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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 QUARTERLY PERIOD ENDED AUGUST 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 August 31, 2002 is
16,490,000.
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MEADE INSTRUMENTS CORP.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page No.
--------
Consolidated Balance Sheets (Unaudited)-- August 31, 2002 and February 28, 2002......................... 1
Consolidated Statements of Operations (Unaudited) -- Three and Six Months Ended
August 31, 2002 and 2001............................................................................ 2
Consolidated Statements of Cash Flows (Unaudited) -- Three and Six Months Ended
August 31, 2002 and 2001........................................................................... 3
Notes to Consolidated Financial Statements (Unaudited)................................................... 4
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 8
PART II -- OTHER INFORMATION
Other Information........................................................................................ 14
SIGNATURES............................................................................................... 16
CERTIFICATIONS........................................................................................... 17-18
i
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
AUGUST 31, FEBRUARY 28,
2002 2002
------------- -------------
Current assets:
Cash ................................................................ $ 562,000 $ 1,249,000
Accounts receivable, less allowance for doubtful accounts of $613,000
at August 31, 2002 and $2,232,000 at February 28, 2002 ........... 23,241,000 12,184,000
Inventories ......................................................... 34,802,000 29,803,000
Deferred income taxes ............................................... 7,011,000 7,011,000
Prepaid income taxes ................................................ -- 3,118,000
Prepaid expenses and other current assets ........................... 606,000 661,000
------------- -------------
Total current assets ...................................... 66,222,000 54,026,000
Other assets ............................................................ 3,762,000 4,189,000
Property and equipment, net of accumulated depreciation of $8,094,000
at August 31, 2002 and $7,256,000 at February 28, 2002 .............. 6,411,000 6,608,000
------------- -------------
$ 76,395,000 $ 64,823,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ................................................. $ 9,463,000 $ 3,234,000
Accounts payable .................................................... 7,929,000 4,671,000
Accrued liabilities ................................................. 5,732,000 3,601,000
Current portion, long-term debt and capital lease obligations ....... 535,000 718,000
------------- -------------
Total current liabilities ................................. 23,659,000 12,224,000
Long-term bank debt ..................................................... 2,458,000 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;
16,490,000 and 16,481,000 shares issued and outstanding
at August 31, 2002 and at February 28, 2002, respectively ..... 165,000 165,000
Additional paid-in capital .......................................... 32,613,000 32,574,000
Retained earnings ................................................... 21,928,000 22,301,000
Accumulated other comprehensive income .............................. (421,000) (559,000)
------------- -------------
54,285,000 54,481,000
Unearned ESOP shares ................................................ (4,007,000) (4,373,000)
------------- -------------
Total stockholders' equity ................................ 50,278,000 50,108,000
------------- -------------
$ 76,395,000 $ 64,823,000
============= =============
See accompanying notes to consolidated financial statements.
1
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31,
---------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Net sales .............................. $ 24,035,000 $ 27,162,000 $ 44,088,000 $ 43,306,000
Cost of sales .......................... 16,653,000 19,260,000 30,519,000 30,752,000
------------- ------------- ------------- -------------
Gross profit ......................... 7,382,000 7,902,000 13,569,000 12,554,000
Selling expenses ....................... 3,066,000 3,111,000 6,081,000 5,349,000
General and administrative
expenses ............................. 2,936,000 2,128,000 5,723,000 4,577,000
ESOP expense ........................... 178,000 344,000 428,000 652,000
Research and development expenses ...... 750,000 589,000 1,480,000 1,186,000
------------- ------------- ------------- -------------
Operating income (loss) .............. 452,000 1,730,000 (143,000) 790,000
Interest expense ....................... 196,000 385,000 435,000 724,000
------------- ------------- ------------- -------------
Income (loss) before income taxes .... 256,000 1,345,000 (578,000) 66,000
Provision (benefit) for income taxes ... 122,000 585,000 (205,000) 104,000
------------- ------------- ------------- -------------
Net income (loss) ...................... $ 134,000 $ 760,000 $ (373,000) $ (38,000)
============= ============= ============= =============
Basic earnings (loss) per share ........ $ 0.01 $ 0.05 $ (0.02) $ 0.00
============= ============= ============= =============
Diluted earnings (loss) per share ...... $ 0.01 $ 0.05 $ (0.02) $ 0.00
============= ============= ============= =============
Weighted average number of shares
outstanding-- basic .................. 15,162,000 15,055,000 15,107,000 15,025,000
============= ============= ============= =============
Weighted average number of shares
outstanding-- diluted ................ 15,468,000 15,244,000 15,107,000 15,025,000
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
2
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
AUGUST 31,
-----------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net income (loss) ............................................... $ (373,000) $ (38,000)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................... 943,000 1,137,000
ESOP contribution ............................................... 428,000 652,000
Allowance for doubtful accounts ................................. 122,000 705,000
Changes in assets and liabilities:
Increase in accounts receivable .............................. (11,041,000) (14,783,000)
Decrease (increase) in inventories ........................... (4,415,000) 8,179,000
Decrease in prepaid expenses and other assets ................ 4,077,000 1,365,000
Increase in accounts payable ................................. 3,124,000 5,230,000
Increase in accrued liabilities .............................. 1,123,000 479,000
------------- -------------
Net cash provided by (used in) operating activities ... (6,012,000) 2,926,000
------------- -------------
Cash flows from investing activities:
Capital expenditures ............................................ (378,000) (1,521,000)
------------- -------------
Net cash used in investing activities ................. (378,000) (1,521,000)
------------- -------------
Cash flows from financing activities:
Net borrowings (payments) under bank lines of credit ............ 6,073,000 (2,019,000)
Borrowings on long-term bank notes .............................. -- 1,151,000
Payments on long-term bank notes ................................ (329,000) (500,000)
Payments under capital lease obligations ........................ (31,000) (146,000)
------------- -------------
Net cash provided by (used in) financing activities ... 5,713,000 (1,514,000)
------------- -------------
Effect of exchange rate changes on cash ............................. (10,000) (190,000)
------------- -------------
Net increase (decrease) in cash ..................................... (687,000) (299,000)
Cash at beginning of period ......................................... 1,249,000 1,186,000
------------- -------------
Cash at end of period ............................................... $ 562,000 $ 887,000
============= =============
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 holiday season. The results of operations
for the quarters ended August 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:
AUGUST 31, FEBRUARY 28,
2002 2002
---------------- ---------------
Raw materials............................... $ 7,991,000 $ 8,529,000
Work-in-process............................. 4,883,000 4,997,000
Finished goods.............................. 21,928,000 16,277,000
---------------- ---------------
$ 34,802,000 $ 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. In May 2002, Tasco and
Celestron transferred certain of their assets to an assignee in an assignment
for the benefit of creditors proceeding. The successor company to Celstron,
Celestron Acquisition LLC, and the assignee have become defendants in the above
described lawsuits. 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.
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 financial position or results of
operations of the Company.
4
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 half 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 six months of fiscal 2003, the Company continued to
make scheduled principal payments on its long-term debt and borrowed
approximately $6.1 million (net) 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 September
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.
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. The sole difference
between the basic weighted average number of shares outstanding and the diluted
weighted average number of shares outstanding for the three months ended August
31, 2002 and 2001, reflects additional potential shares of common stock for
outstanding stock options. Due to the net losses for the six month periods
presented, potential shares of common stock of 293,000, and 94,000 have been
excluded from diluted weighted average shares of common stock for the six months
ended August 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 periods ended August 31, 2002, the Company had other
comprehensive income (loss) as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
AUGUST 31, AUGUST 31,
2002 2002
--------------- ---------------
Net income (loss).............................................. $ 134,000 $ (373,000)
Currency translation adjustment................................ 137,000 352,000
Change in fair value of foreign currency forward contracts..... (133,000) (193,000)
Change in fair value of interest rate swap..................... (26,000) (21,000)
--------------- ---------------
Total other comprehensive income (loss)........................ $ 112,000 $ (235,000)
=============== ===============
5
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. The
Company performed its initial impairment evaluation of goodwill as of the end of
August 31, 2002 and determined that no impairment had occurred. 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 and six months ended August 31, 2002
and 2001 and for the three most recently completed fiscal years:
THREE MONTHS ENDED SIX MONTHS ENDED
AUGUST 31, AUGUST 31, YEAR ENDED FEBRUARY 28(29)
---------------------------- ---------------------------- -------------------------------------------
2002 2001 2002 2001 2002 2001 2000
------------- ------------- ------------- ------------- ------------- ------------- -------------
Reported net income
(loss) ................. $ 134,000 $ 760,000 $ (373,000) $ (38,000) $ (1,442,000) $ 1,286,000 $ 11,955,000
Add back goodwill
amortization, net of
tax .................... -- 36,000 -- 72,000 144,000 144,000 72,000
------------- ------------- ------------- ------------- ------------- ------------- -------------
Adjusted net income
(loss) ................. $ 134,000 $ 796,000 $ (373,000) $ 34,000 $ (1,298,000) $ 1,430,000 $ 12,027,000
============= ============= ============= ============= ============= ============= =============
Reported basic
earnings (loss) per
share .................. $ 0.01 $ 0.05 $ (0.02) $ 0.00 $ (0.10) $ 0.09 $ 0.85
============= ============= ============= ============= ============= ============= =============
Reported diluted
earnings (loss) per
share .................. $ 0.01 $ 0.05 $ (0.02) $ 0.00 $ (0.10) $ 0.08 $ 0.80
============= ============= ============= ============= ============= ============= =============
Adjusted basic
earnings (loss) per
share .................. $ 0.01 $ 0.05 $ (0.02) $ 0.00 $ (0.09) $ 0.10 $ 0.85
============= ============= ============= ============= ============= ============= =============
Adjusted diluted
earnings (loss)
per share .............. $ 0.01 $ 0.05 $ (0.02) $ 0.00 $ (0.09) $ 0.09 $ 0.80
============= ============= ============= ============= ============= ============= =============
6
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.
AUGUST 31, 2002 FEBRUARY 28, 2002
--------------------------------------- --------------------------------------
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------------ -------------------- ------------------- ------------------
Interest rate swap agreement $ 1,715,000 $ (47,000) $ 1,925,000 $ (26,000)
Fair value forward currency
contracts $ 915,000 $ (4,000) -- --
Cash flow forward currency
contracts $ 4,550,000 $ (193,000) -- --
At August 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 February 2003.
7
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 AUGUST 31, 2002 COMPARED TO THREE MONTHS ENDED
AUGUST 31, 2001
Net sales for the second quarter of fiscal 2003 were $24.0
million compared to $27.2 million for the second quarter of fiscal 2002, a
decrease of 11.5%. Sales declined across most of the Company's major product
lines with the decrease from the prior year principally due to lower sales of
smaller-aperture, less-expensive telescopes. The majority of that decrease
related to one low-margin small-aperture product that was sold exclusively
through one retailer in the prior year that has been discontinued in the current
year, and thus those sales were not repeated. The remaining discontinued product
has been converted into a current selling product for the current year.
Offsetting the declines in telescope sales was an increase in binocular and
binocular/digital camera sales of approximately $2.0 million.
Gross profit decreased from $7.9 million (29.1% of net sales) for the
second quarter of fiscal 2002 to $7.4 million (30.7 % of net sales) for the
second quarter of fiscal 2003, a decrease of 6.6%. The increase in gross profit
as a percent of net sales was principally due to the change in product sales
mix.
Selling expenses remained flat at $3.1 million (12.7% of net sales) for
the second quarter of fiscal 2003 and $3.1 million (11.5% of net sales) for the
second quarter of fiscal 2002. General and administrative expenses increased
from $2.1million (7.8% of net sales) for the second quarter of fiscal 2002, to
$2.9 million (12.2% of net sales) for the second quarter of fiscal 2003, an
increase of 38.0%. This increase was principally due to increased legal,
professional and consulting fees, including approximately $400,000 incurred in
connection with the ongoing Tasco and Celestron patent infringement litigation
and $300,000 incurred in connection with the Company's effort to acquire certain
of the assets of Tasco and Celestron. The Company did not consummate such
proposed acquisition.
ESOP contribution expense decreased from $344,000 (1.3% of net sales)
for the second quarter of fiscal 2002 to $178,000 (1.0% of net sales) for the
second quarter of fiscal 2003, a decrease of 48.3%. The decrease in this
non-cash charge was due to decreases in the number of shares and 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 number of shares allocated and the market value of the Company's common
stock changes.
Research and development expenses increased from $589,000 (2.2% of net
sales) for the second quarter of fiscal 2002 to $750,000 (3.1% of net sales) for
the second quarter of fiscal 2003, an increase of 27.3%. This increase was
principally due to increased outside consulting costs. The Company continues to
pursue the development of telescope and other consumer related products, as well
as industrial products in the areas of free space optics and digital imaging.
Therefore, research and development costs are expected to continue to increase.
Interest expense decreased from $385,000 for the second quarter of
fiscal 2002 to $196,000 for the second quarter of fiscal 2003, a decrease of
49.1%. This decrease was due to lower average bank borrowings and lower cost of
funds as compared to the prior years' quarter.
8
SIX MONTHS ENDED AUGUST 31, 2002 COMPARED TO SIX MONTHS ENDED AUGUST
31, 2001
Net sales for the six months ended August 31, 2002 were $44.1 million
compared to $43.3 million for the comparable prior year period, an increase of
1.8%. Sales of a recently introduced binocular with an integrated digital
camera, accounted for approximately $6.0 million of the Company's net sales
during the six months ended August 31, 2002. That increase in sales over the
prior year was offset by sales of smaller-aperture, less-expensive telescopes
which have fallen approximately $6.0 million during the six months ended August
31, 2002 as compared to the prior year period. The majority of that decrease
related to one low-margin small-aperture product that was sold exclusively
through one retailer in the prior year that has been discontinued in the current
year, and thus those sales were not repeated. The remaining discontinued product
has been converted into a current selling product for the current year.
Gross profit increased from $12.6 million (29.0% of net sales) for the
six months ended August 31, 2001 to $13.6 million (30.8% of net sales) for the
comparable current year period, an increase of 8.1%. The increase in gross
profit as a percent of net sales was due to the change in product sales mix.
Selling expenses increased from $5.3 million (12.4% of net sales) for
the six months ended August 31, 2001 to $6.1 million (13.8% of net sales) for
the comparable current year period, an increase of 13.7%. This increase was
primarily due to television, radio and print advertising costs associated with
the introduction of a binocular with an integrated digital camera. The Company
does not expect marketing and advertising costs to continue to increase at this
rate over the remainder of the fiscal year. The promotional campaign associated
with the launch of the new binocular/digital camera was completed principally in
first-quarter of fiscal 2003.
General and administrative expenses increased from $4.6 million (10.6%
of net sales) for the six months ended August 31, 2001 to $5.7 million (13.0% of
net sales) for the comparable current year period, an increase of 25.0%. This
increase was principally due to increased legal, professional and consulting
fees including approximately $500,000 incurred in connection with the ongoing
Tasco and Celestron patent infringement litigation and $700,000 incurred in
connection with the Company's effort to acquire certain of the assets of Tasco
and Celestron. The Company did not consummate such proposed acquisition.
ESOP contribution expense decreased from $652,000 (1.5% of net sales)
for the six months ended August 31, 2001 to $428,000 (1.0% of net sales) for the
comparable current year period, a decrease of 34.4%. The decrease in this
non-cash charge was due to decreases in the number of shares and in the average
market price of the Company's stock allocated to the Employee Stock Ownership
Plan during the period. The non-cash ESOP contribution expense may fluctuate as
the number of shares allocated and the market value of the Company's common
stock changes.
Research and development expenses increased from $1.2 million (2.7% of
net sales) for the six months ended August 31, 2001 to $1.5 million (3.4% of net
sales) for the comparable current year period, an increase of 24.8%. This
increase was principally due to increased outside consulting costs. The Company
continues to pursue the development of telescope and other consumer related
products, as well as industrial products in the areas of free space optics and
digital imaging. Therefore, research and development costs are expected to
continue to increase.
Interest expense decreased from $724,000 for the six months ended
August 31, 2001 to $435,000 for the comparable current year period, a decrease
of 39.9%. This decrease was due to lower average bank borrowings and lower cost
of funds as compared to the prior year period.
The income tax provision was 157.6% of income before income taxes for
the six months ended August 31, 2001. The income tax benefit for the six months
ended August 31, 2002 was 35.5% of the loss before income taxes. The
fluctuations in the income tax provision/benefit are due to the tax effect of
the non-deductible portion of the ESOP charge.
9
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended August 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 was used by increases in accounts
receivable and inventories that were partially offset by a decrease in prepaid
and other expenses and increases in accounts payable. Net cash used in operating
activities was approximately $6.0 million. Accounts receivable increased due to
the timing and amount of shipments as compared to the period ended February 28,
2002. Inventories increased in preparation for expected increasing seasonal
demand for the Company's products. Prepaid and other current assets decreased
principally due to the receipt of income tax refunds. The increase in accounts
payable was due to cash disbursement management. Net working capital totaled
approximately $42.6 million at August 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 $378,000 and $1,521,000 for the six months ended August 31, 2002 and
2001, respectively. The Company had no material capital expenditure commitments
at August 31, 2002.
The Company recently announced that it has signed a definitive
agreement to acquire (the "Simmons Acquisition") all the outstanding common
stock of Simmons Outdoor Corporation ("Simmons"), the wholly owned consumer
sports optics subsidiary of ATK (Alliant Techsystems), for approximately $20
million in an all cash transaction. It is anticipated that the acquisition --
subject to customary closing conditions and the Company's securing requisite
financing -- will be completed during the Company's quarter ending November 30,
2002. The Company expects to finance the acquisition with a combination of
senior bank debt (including a portion from the Company's current availability
under its bank line of credit) and proceeds from the sale of its common stock.
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 half 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 six months of fiscal 2003, the Company continued to
make scheduled principal payments on its long-term debt and borrowed
approximately $6.1 million (net) 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 and/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
September 30, 2002 was over $8 million. Management believes that operating cash
flow and bank borrowing capacity in connection with the Company's existing
business and the business of Simmons (should the Simmons Acquisition be
consummated) 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, SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS, SFAS No. 145, RESCISSION OF FASB STATEMENTS No. 4,44,64,
AMENDMENT OF SFAS No. 13 AND TECHNICAL CORRECTIONS, and SFAS No. 146, ACCOUNTING
FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, in August and October
2001, and April and June 2002, 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.
10
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 its financial position or results
of operations upon adoption.
SFAS 145, among other matters, rescinds SFAS No.4, REPORTING GAINS AND
LOSSES FROM EXTINGUISHMENT OF DEBT, thereby eliminating the requirement that
gains and losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect. As a
result, the criteria in APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS
- - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND
EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, will
be used to classify those gains and losses. SFAS No. 145 is effective for
financial statements for fiscal years beginning after May 15, 2002. The Company
is currently evaluating the provisions of SFAS No. 145 but expects that the
provisions will not have a material effect on its financial position or results
of operations upon adoption.
SFAS No. 146 addresses significant issues relating to the recognition,
measurement and reporting costs associated with exit and disposal activities,
including restructuring activities, and nullifies the guidance in Emerging
Issues Task Force Issue No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE
TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY INCLUDING CERTAIN
COSTS INCURRED IN A RESTRUCTURING. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002, with early adoption permitted. The
Company is currently evaluating the provisions of SFAS No. 146 but expects that
the provisions will not have a material effect on its 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;
the Company's expectation that its proposed acquisition of Simmons will be
completed during its fiscal quarter ended November 30, 2002; 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
11
failure of the Company to penetrate the binocular market and achieve meaningful
sales; any significant interruption of the Company's manufacturing abilities in
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; with
respect to the Simmons Acquisition, the inherent risks associated with
acquisitions , such as integration risks, as well as the risk that the parties
to the underlying acquisition agreement will not be able to satisfy all of the
closing conditions to the acquisition, including but not limited to, the
Company's ability to obtain adequate financing: 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, however, 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
six months ended August 31, 2002, the Company entered into fair value forward
currency contracts with notional amounts aggregating $1.9 million and cash flow
forward currency contracts with notional amounts aggregating $4.6 million. The
fair value of these contracts at August 31, 2002 were ($4,000), and ($193,000),
respectively.
Under the terms of the Company's bank agreement, the Company was
required to enter into an interest-rate swap to convert the variable interest
rate on its long-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 six months ended August 31, 2002 was a
loss of $21,000 which is included in other comprehensive income for the six
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.
12
ITEM 4. CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures.
The Company's chief executive officer and chief financial officer have
concluded that the Company's disclosure controls and procedures (as defined in
Rule 13a-14 (c), promulgated under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act")) are sufficiently effective to ensure that the
information required to be disclosed by the Company in the reports it files
under the Exchange Act is gathered, analyzed and disclosed with adequate
timeliness, accuracy and completeness, based on an evaluation of such controls
and procedures conducted within 90 days prior to the date hereof.
B. Changes in internal controls.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referred to above.
13
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. Meade has filed a
summary judgment motion on infringement and validity issues and Celestron has
filed a summary judgment motion on non-infringement and invalidity issues. Both
motions are still in briefing and are expected to be heard by the court later
this year. 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, ("the '799 lawsuit") 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,
("the `942 lawsuit) 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.
Celestron and Tasco, in May 2002, transferred certain of their assets
in an assignment for the benefit of creditors proceeding to James Feltman, an
assignee. Assignee James Feltman subsequently sold the assets on or around June
24, 2002 to a new Celestron entity, Celestron Acquisition LLC. Celestron
Acquisition LLC, along with Celestron and Tasco, is a defendant in the
above-referenced lawsuits. James Feltman is also a named defendant in the `799
lawsuit, but not the `942 lawsuit.
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 financial position or results of
operations of the Company.
14
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In connection with the Company's Annual Meeting of
Stockholders, held on July 11, 2002, the stockholders of the Company (1)
re-elected Michael P. Hoopis and Vernon L. Fotheringham as directors for a
three-year term expiring at the Company's Annual Meeting to be held in 2005.
The voting results were as follows:
FOR WITHHELD
--- --------
Re-election of Michael P. Hoopis to the Company's Board of
Directors....................................................... 15,698,609 47,752
Re-election of Vernon L. Fotheringham to the Company's Board
of Directors.................................................... 15,699,476 46,885
ITEM 5. OTHER INFORMATION
Not applicable.
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.
15
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: October 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 Exchange Act, 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 October 15, 2002
- ----------------------------- Executive Officer
John C. Diebel (Principal Executive Officer)
/s/ STEVEN G. MURDOCK Director, President, October 15, 2002
- ----------------------------- Chief Operating Officer and Secretary
Steven G. Murdock
/s/ BRENT W. CHRISTENSEN Senior Vice President, Finance and October 15, 2002
- ----------------------------- Chief Financial Officer
Brent W. Christensen (Principal Financial and Accounting Officer)
/s/ TIMOTHY C. MCQUAY Director October 15, 2002
- -----------------------------
Timothy C. McQuay
/s/ HARRY L. CASARI Director October 15, 2002
- -----------------------------
Harry L. Casari
Director
- -----------------------------
Michael P. Hoopis
Director
- -----------------------------
Vern L. Fotheringham
16
CERTIFICATIONS
I, John C. Diebel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Meade
Instruments Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
By: /s/ JOHN C. DIEBEL, CHAIRMAN AND CEO
- ----------------------------------------
17
CERTIFICATIONS
I, Brent W. Christensen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Meade
Instruments Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 15, 2002
By: /s/ BRENT W. CHRISTENSEN, SENIOR VICE PRESIDENT AND CFO
- -----------------------------------------------------------
18