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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, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Number of shares of common stock outstanding as of May 31, 2003 is
19,806,026.
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MEADE INSTRUMENTS CORP.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page No.
--------
Consolidated Balance Sheets (Unaudited) -- May 31, 2003 and February 28, 2003............................ 1
Consolidated Statements of Operations (Unaudited) -- Three Months Ended May 31, 2003 and 2002............ 2
Consolidated Statements of Cash Flows (Unaudited) -- Three Months Ended May 31, 2003 and 2002............ 3
Notes to Consolidated Financial Statements (Unaudited)................................................... 4
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 6
Quantitative and Qualitative Disclosures about Market Risk............................................... 8
Controls and Procedures.................................................................................. 9
PART II -- OTHER INFORMATION
Other Information........................................................................................ 11
Signatures............................................................................................... 13
Certifications........................................................................................... 14-17
i
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
MAY 31, FEBRUARY 28,
2003 2003
------------- -------------
Current assets:
Cash ................................................................ $ 3,605,000 $ 2,445,000
Accounts receivable, less allowance for doubtful accounts of $995,000
at May 31, 2003 and $714,000 at February 28, 2003 ................ 23,491,000 22,364,000
Inventories ......................................................... 38,646,000 40,050,000
Deferred income taxes ............................................... 5,889,000 5,240,000
Prepaid income taxes ................................................ 1,262,000 818,000
Prepaid expenses and other current assets ........................... 323,000 563,000
------------- -------------
Total current assets ...................................... 73,216,000 71,480,000
Other assets, net ....................................................... 625,000 818,000
Goodwill and acquisition-related intangible assets, net ................. 5,600,000 5,657,000
Property and equipment, net of accumulated depreciation of $9,797,000
at May 31, 2003 and $9,286,000 at February 28, 2003 ................. 5,553,000 5,842,000
------------- -------------
$ 84,994,000 $ 83,797,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ................................................. $ 10,779,000 $ 9,063,000
Accounts payable .................................................... 6,604,000 5,464,000
Accrued liabilities ................................................. 5,761,000 6,293,000
Current portion, long-term debt and capital lease obligations ....... 558,000 583,000
------------- -------------
Total current liabilities ................................. 23,702,000 21,403,000
Long-term bank debt ..................................................... 2,106,000 2,139,000
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized;
19,806,000 shares issued and outstanding at May 31, 2003 and
at February 28, 2003, respectively ............................... 198,000 198,000
Additional paid-in capital .......................................... 40,007,000 39,979,000
Retained earnings ................................................... 22,727,000 23,439,000
Accumulated other comprehensive income .............................. (509,000) 96,000
------------- -------------
62,423,000 63,712,000
Unearned ESOP shares ................................................ (3,237,000) (3,457,000)
------------- -------------
Total stockholders' equity ................................ 59,186,000 60,255,000
------------- -------------
$ 84,994,000 $ 83,797,000
============= =============
See accompanying notes to consolidated financial statements.
1
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
-----------------------------
2003 2002
------------- -------------
Net sales ................................................... $ 24,491,000 $ 20,053,000
Cost of sales ............................................... 18,758,000 13,866,000
------------- -------------
Gross profit ............................................ 5,733,000 6,187,000
Selling expenses ............................................ 3,327,000 3,015,000
General and administrative expenses ......................... 2,669,000 2,787,000
ESOP contribution expense ................................... 169,000 250,000
Research and development expenses ........................... 534,000 730,000
------------- -------------
Operating loss .......................................... (966,000) (595,000)
Interest expense ............................................ 216,000 239,000
------------- -------------
Loss before income taxes .................................... (1,182,000) (834,000)
Benefit for income taxes .................................... (470,000) (327,000)
------------- -------------
Net loss .................................................... $ (712,000) $ (507,000)
============= =============
Basic earnings (loss) per share ............................. $ (0.04) $ (0.03)
============= =============
Diluted earnings (loss) per share ........................... $ (0.04) $ (0.03)
============= =============
Weighted average number of shares outstanding -- basic ...... 18,788,000 15,052,000
============= =============
Weighted average number of shares outstanding -- diluted .... 18,788,000 15,052,000
============= =============
See accompanying notes to consolidated financial statements.
2
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
---------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net loss ................................................... $ (712,000) $ (507,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .............................. 629,000 502,000
ESOP contribution .......................................... 169,000 250,000
Allowance for doubtful accounts ............................ 47,000 (38,000)
Changes in assets and liabilities:
Increase in accounts receivable ......................... (1,100,000) (2,928,000)
Decrease in inventories ................................. 1,625,000 129,000
Increase in prepaid taxes, expenses and other assets .... (183,000) (217,000)
Increase in accounts payable ............................ 1,083,000 1,363,000
Increase (decrease) in accrued liabilities .............. (1,970,000) 54,000
------------ ------------
Net cash used in operating activities ............ (412,000) (1,392,000)
------------ ------------
Cash flows from investing activities:
Capital expenditures ....................................... (127,000) (207,000)
------------ ------------
Net cash used in investing activities ............ (127,000) (207,000)
------------ ------------
Cash flows from financing activities:
Net borrowings under bank line of credit ................... 1,693,000 1,582,000
Payments on long-term debt ................................. (113,000) (134,000)
Payments under capital lease obligations ................... (29,000) (56,000)
------------ ------------
Net cash provided by financing activities ........ 1,551,000 1,392,000
------------ ------------
Effect of exchange rate changes on cash ........................ 148,000 14,000
------------ ------------
Net increase (decrease) in cash ................................ 1,160,000 (193,000)
Cash at beginning of period .................................... 2,445,000 1,249,000
------------ ------------
Cash at end of period .......................................... $ 3,605,000 $ 1,056,000
============ ============
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, 2003.
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, 2003 and 2002, 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,
2003 2003
------------ ------------
Raw materials....................................................... $ 6,060,000 $ 7,442,000
Work-in-process..................................................... 5,030,000 4,972,000
Finished goods...................................................... 27,556,000 27,636,000
------------ ------------
$38,646,000 $40,050,000
============ ============
The composition of goodwill and acquisition-related intangible assets
is as follows:
MAY 31, FEBRUARY 28,
2003 2003
------------ ------------
Goodwill ........................................................... $ 1,548,000 $ 1,548,000
Brand names and customer relationships ............................. 3,431,000 3,431,000
------------ ------------
Total non-amortizing acquisition-related intangible assets ...... 4,979,000 4,979,000
------------ ------------
Trademarks ......................................................... 1,398,000 1,398,000
Accumulated amortization ........................................... (777,000) (720,000)
------------ ------------
Total amortizing acquisition-related intangible assets .......... 621,000 678,000
------------ ------------
Total goodwill and acquisition-related intangible assets ........ $ 5,600,000 $ 5,657,000
============ ============
Goodwill in the above table is shown net of $418,000 of amortization
accumulated prior to the Company's adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which
requires that goodwill and identifiable assets determined to have an indefinite
life no longer be amortized, but instead be tested for impairment at least
annually. The Company adopted SFAS No. 142 effective March 1, 2002.
C. COMMITMENTS AND CONTINGENCIES
In 2001 and 2002, the Company filed suits against Tasco Sales, Inc.
("Tasco") and Celestron International, Inc. ("Celestron"), charging the two
companies with patent infringement and unfair competition. The complaints allege
that a number of Tasco's and Celestron's consumer telescopes willfully infringe
certain 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 certain of the Company's patents.
Tasco and Celestron filed answers and certain counterclaims which deny the
Company's allegations. The counterclaim also alleges, among other things, that
the Company is infringing a Celestron design patent. In February and May 2003,
Celestron prevailed on partial Summary Judgments in which the court held that
Celestron did not literally or equivalently infringe one of the Company's
patents. 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.
4
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, results of operations
or cash flows of the Company.
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 85,000 and
280,000 have been excluded from diluted weighted average shares of common stock
for the three months ended May 31, 2003 and 2002, respectively, as the effect
would be anti-dilutive.
E. COMPREHENSIVE INCOME
Comprehensive income (loss) 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 and, at May 31, 2003, includes foreign
currency translation adjustments and adjustments to the fair value of highly
effective derivative instruments. For the quarter ended May 31, 2003, the
Company had other comprehensive income (loss) as follows:
THREE MONTHS
ENDED MAY 31,
2003
-------------
Net loss..................................................... $ (712,000)
Currency translation adjustment.............................. 362,000
Change in fair value of foreign currency forward contracts... (876,000)
Unrealized loss in marketable securities .................... (97,000)
Change in fair value of interest rate swap................... 6,000
-------------
Total other comprehensive income (loss)...................... $ (1,317,000)
=============
F. 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, 2003 FEBRUARY 28, 2003
---------------------------- --------------------------
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------ ------------
Interest rate swap agreement $ 1,400,000 $ (43,000) $ 1,505,000 $ (49,000)
Cash flow forward currency
contracts $ 8,385,000 $ (1,460,000) -- --
At May 31, 2003, 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, net of tax, as these items have been
designated and qualify as cash flow hedges. The settlement dates on the forward
currency contracts vary based on the underlying instruments through March 2004.
5
G. STOCK BASED COMPENSATION
The Company accounts for employee stock-based compensation in
accordance with the intrinsic value method described in Accounting Principles
Board Opinion No. 25 and related interpretations. The Company has adopted the
disclosure only provisions of SFAS No. 123. Accordingly, no compensation cost
has been recognized for the fixed stock option plans. Had compensation cost for
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans, consistent with the
method prescribed by SFAS No. 123, the Company's loss and loss per share would
have been increased to the pro forma amounts indicated below.
For the Quarter ended May 31,
2003 2002
------------ ------------
Reported loss............................................... $ (712,000) $ (507,000)
Pro forma compensation cost, net of income taxes............ (257,000) (442,000)
------------ ------------
Pro forma net loss.......................................... $ (969,000) $ (949,000)
============ ============
Reported loss per share - basic and diluted................. $ (0.04) $ (0.03)
============ ============
Pro forma loss per share - basic and diluted................ $ (0.05) $ (0.06)
============ ============
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, 2003 COMPARED TO THREE MONTHS ENDED MAY 31,
2002
Net sales for the first quarter of fiscal 2004 were $24.5 million
compared to $20.1 million for the first quarter of fiscal 2003, an increase of
24.2%. The increase in net sales over the prior year was principally due to
sales of over $7 million at the Simmons subsidiary (acquired in October 2002).
The principal offset to the increase from the Simmons sales was a reduction of
over $2 million in net sales of the Company's binoculars, primarily comprised of
CaptureView(TM). CaptureView was brought to market in the first quarter of
fiscal 2003, accompanied by a nation-wide marketing and advertising plan
sponsored by Meade in partnership with a nationally known retailer. While the
Company continued to offer its existing versions of CaptureView binoculars
during the first quarter of fiscal 2004, last year's unit and sales volumes were
not repeated as the Company prepared for the introduction, expected in the
second quarter of 2004, of a new line of completely redesigned CaptureView
binoculars.
Gross profit decreased from $6.2 million (30.9% of net sales) for the
first quarter of fiscal 2003 to $5.7 million (23.4% of net sales) for the first
quarter of fiscal 2004, a decrease of 7.3%. The decrease in gross margin (gross
profit as a percent of net sales) was due in part to pricing pressure on many of
Meade's telescope products. The reduction in CaptureView unit and sales volumes
negatively affected margins as well. With the new line of CaptureView binoculars
expected to reach the market in the second quarter, contribution from
CaptureView was reduced as customers awaited the new line of CaptureView
binoculars and the Company responded to competition by offering existing
versions of CaptureView at prices discounted from the prior year. Also
contributing to the decrease in gross margin were results at Simmons, which,
while meeting the Company's expectations, produced margins lower than the
Company has historically reported.
Selling expenses increased from $3.0 million (15.0% of net sales) for
the first quarter of fiscal 2003 to $3.3 million (13.6% of net sales) for the
first quarter of fiscal 2004, an increase of 10.3%. This increase was
principally due to selling expenses at Simmons (approximately $1.2 million),
partially offset by a decrease in advertising expenses. During the first quarter
of the prior year, the Company spent approximately $1.0 million in television,
radio and print advertising costs that were not duplicated during the first
quarter of fiscal 2004. Any future promotional expenses relating to the new line
of CaptureView binoculars will be incurred as the products are sold into the
market.
General and administrative expenses decreased from $2.8 million (13.9%
of net sales) for the first quarter of fiscal 2003 to $2.7 million (10.9% of net
sales) for the first quarter of fiscal 2004, a decrease of 4.2%. During the
first quarter of fiscal 2003, the Company incurred approximately $0.4 million in
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 proposed acquisitions were not consummated. Similar
costs were not incurred during the first quarter of fiscal 2004. General and
administrative expenses at Simmons for the current quarter were approximately
$0.3 million.
ESOP contribution expense decreased from $0.3 million for the first
quarter of fiscal 2003 to $0.2 million for the first quarter of fiscal 2004, a
decrease of 32.4%. 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 in the future as the market value of the Company's common stock
changes.
Research and development expenses decreased from $0.7 million (3.6% of
net sales) for the first quarter of fiscal 2003 to $0.5 million (2.2% of net
sales) for the first quarter of fiscal 2004, a decrease of 26.8%. The decrease
was principally due to a reduction in engineering personnel in response to
diminished demand for the Company's industrial optical products.
Interest expense remained relatively flat, approximately $0.2 million
in each of the quarters reported. Higher average borrowings were more than
offset by lower borrowing rates during the first quarter of fiscal 2004 as
compared to the prior year.
7
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended May 31, 2003 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 and decreases in accrued liabilities that were partially
offset by increases in accounts payable and decreases in inventories. Accounts
receivable increased as expected with increased sales during the quarter.
Accrued liabilities decreased with the payment of certain accrued expenses
including legal expenses, management incentive compensation and advertising
expenses. The increase in accounts payable was principally due to cash
disbursement management and inventories decreased principally due to increased
sales. Net working capital totaled approximately $49.5 million at May 31, 2003,
compared to $50.1 million at February 28, 2003. 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.
The Company continues to depend on operating cash flow and availability
under its bank lines of credit to provide short-term liquidity. Availability
under its bank lines of credit at May 31, 2003 was approximately $8.7 million.
In the event the Company's plans require more capital than is presently
anticipated, additional sources of liquidity such as debt or equity financings,
may be required to meet its capital needs. There can be no assurance that such
additional sources of capital will be available on reasonable terms, if at all.
However, management believes that operating cash flow and bank borrowing
capacity in connection with the Company's business should provide sufficient
liquidity for the Company's obligations for at least the next twelve months.
Capital expenditures, including financed purchases of equipment,
aggregated $0.1 million and $0.2 million for the three months ended May 31, 2003
and 2002, respectively. The Company had no material capital expenditure
commitments at May 31, 2003.
The Company provides reserves for the estimated cost of product
warranty-related claims at the time of sale, and periodically adjusts the
provision to reflect actual experience. The amount of warranty liability accrued
reflects management's best estimate of the expected future cost of honoring
Company obligations under its warranty plans. Additionally, from time to time,
specific warranty accruals may be made if unforeseen technical problems arise.
Meade and Bresser branded products are generally covered by a one-year limited
warranty. Many of the Simmons products have lifetime limited warranties. Changes
in the warranty liability during the quarter ended May 31, 2003 follows.
Balance at February 28, 2003.................... $ 1,794,000
Warranty accrual................................ 123,000
Labor and material usage........................ (173,000)
-------------
Balance at May 31, 2003......................... $ 1,744,000
=============
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Company adopted SFAS 146, which addresses accounting
for costs associated with exit or disposal activities. In addition, the FASB
issued FIN 46, which requires that certain variable interest entities be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have a controlling financial interest or do not have
sufficient equity at risk. FIN 46 is effective immediately for all variable
interest entities created after January 31, 2003. For all such entities created
prior to February 1, 2003, FIN 46 is effective for interim or annual fiscal
periods ending after June 15, 2003. The Company does not expect the adoption of
these statements to have a material effect on the Company's financial position
or results of operations.
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, riflescopes, microscope and other optical products; the Company's
ability to continue to develop and bring to market new and innovative products,
including, without limitation the new line of CaptureView binoculars; the
Company's ability to integrate, develop and grow the Simmons business; the
8
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 its European subsidiary; 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; 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:
Our business is vulnerable to changing economic conditions, including:
o a decline in general economic conditions;
o uncertainties affecting consumer spending; and
o changes in interest rates causing a reduction of investment income
or in the value of market interest rate sensitive instruments.
Our intellectual property rights are subject to risks, including:
o the potential that we may be unable to obtain and maintain patents
and copyrights to protect our computerized telescope and other
product technology;
o competitors' infringement upon Meade's existing intellectual
property; and
o approval of competitors' patent applications that may restrict our
ability to compete effectively.
Our business is subject to other risks, including:
o a general decline in demand for the Company's products;
o an inability to continue to design and manufacture products that
will achieve and maintain commercial success;
o the potential that we may fail to penetrate the binocular and
riflescope markets and achieve meaningful sales;
o any significant interruption of our manufacturing abilities in our
domestic or Mexican facilities or in any of our suppliers located
in the Far East;
o greater than anticipated competition;
o discovery of facts not presently known to Meade or determinations
by judges, juries or other finders of fact which do not accord
with Meade's evaluation of the possible liability or outcome of
existing litigation;
o any loss of, or the failure to replace, any significant portion of
the sales made to any significant customer of the Company; and
o 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.
9
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, 2003, the Company entered into cash flow forward
currency contracts with notional amounts aggregating $8.4 million. The fair
value of these contracts at May 31, 2003 was ($1.5 million).
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, 2003 was a
gain of $6,000 which is included in other comprehensive income for the three
months then ended.
The Company's financial instruments consist of 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.
ITEM 4. CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures.
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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.
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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.
10
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. However, Celestron
recently dismissed its design-patent counterclaim with prejudice as to Meade
products on sale up to that time. On February 28, 2003, a partial Summary
Judgment issued in favor of Celestron in which the Court held that Celestron did
not literally infringe Meade's `376 patent. On May 23, 2003, a further partial
Summary Judgment was issued in favor of Celestron in which the Court held that
Celestron did not infringe Meade's `376 patent under the doctrine of
equivalents. Meade is currently evaluating its options with respect to an appeal
of these rulings. 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.
In July 2003, Celestron and the other defendants filed a motion for Summary
Judgment that the defendants' products do not infringe Meade's Telescope
Alignment Technology, both literally or under the doctrine of equivalents. The
Company intends to continue to vigorously assert the `799 patent against
Celestron, Tasco, and the other defendants and to vigorously defend against
their counterclaims. 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
Meade 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 November 21, 2002, Celestron filed an action alleging that Meade
products infringe United States Patent No. 6,467,738 entitled "Tripod Structure
for Telescopes." The complaint seeks injunctive relief, compensatory and treble
damages in an unspecified amount, and attorneys' fees and costs. Meade has filed
an answer denying all claims in Celestron's complaint. 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.
11
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, results of
operations or cash flows of the Company.
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a) Exhibits filed with this Form 10-Q.
1. Exhibit 99.1 Sarbanes-Oxley Act Section 906 Certification by
Steven G. Murdock
2. Exhibit 99.2 Sarbanes-Oxley Act Section 906 Certification by
Brent W. Christensen
6(b) Reports on Form 8-K.
The Company filed or furnished the following Reports with the SEC on
the following dates
1. Form 8-K, filed on April 22, 2003, covering (1) the
resignation of John C. Diebel as Chairman of the Board and
Chief Executive Officer, (2) the appointment of Steven G.
Murdock as the Chief Executive Officer, and (3) the
appointment of Harry L. Casari as Chairman of the Board.
2. Form 8-K, furnished on April 22, 2003, covering a press
release announcing the Company's financial results for the
quarterly period and fiscal year ended February 28, 2003.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 15, 2003
MEADE INSTRUMENTS CORP.
By: /s/ STEVEN G. MURDOCK
----------------------------------
Steven G. Murdock
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND SECRETARY
By: /s/ BRENT W. CHRISTENSEN
----------------------------------
Brent W. Christensen
SENIOR VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
13
CERTIFICATIONS
I, Steven G. Murdock, 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: July 15, 2003
By: /s/ STEVEN G. MURDOCK, PRESIDENT, CEO AND SECRETARY
- -------------------------------------------------------
14
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: July 15, 2003
By: /s/ BRENT W. CHRISTENSEN, SENIOR VICE PRESIDENT AND CFO
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15