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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 August 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22183
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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 September 30, 2003 is
19,896,026.
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MEADE INSTRUMENTS CORP.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page No.
--------
Consolidated Balance Sheets (Unaudited) -- August 31, 2003 and
February 28, 2003......................................................... 1
Consolidated Statements of Operations (Unaudited) -- Three and Six
Months Ended August 31, 2003 and 2002..................................... 2
Consolidated Statements of Cash Flows (Unaudited) -- Six Months Ended
August 31, 2003 and 2002.................................................. 3
Notes to Consolidated Financial Statements (Unaudited).................... 4
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 7
Quantitative and Qualitative Disclosures about Market Risk................ 11
Controls and Procedures................................................... 11
PART II -- OTHER INFORMATION
Legal Proceedings......................................................... 12
Changes in Securities and Use of Proceeds................................. 13
Defaults Upon Senior Securities........................................... 13
Submission of Matters to a Vote of Security Holders....................... 13
Other Information......................................................... 13
Exhibits and Reports on Form 8-K.......................................... 13
Signatures................................................................ 15
i
ITEM 1 FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
AUGUST 31, FEBRUARY 28,
2003 2003
------------- -------------
Cash ................................................................ $ 3,405,000 $ 2,445,000
Accounts receivable, less allowance for doubtful accounts of $861,000
at August 31, 2003 and $714,000 at February 28, 2003 ............. 27,278,000 22,364,000
Inventories ......................................................... 48,591,000 40,050,000
Deferred income taxes ............................................... 5,575,000 5,240,000
Prepaid income taxes ................................................ 782,000 818,000
Prepaid expenses and other current assets ........................... 449,000 563,000
------------- -------------
Total current assets ...................................... 86,080,000 71,480,000
Other assets ............................................................ 604,000 818,000
Goodwill and acquisition-related intangible assets, net ................. 5,543,000 5,657,000
Property and equipment, net of accumulated depreciation of $10,216,000
at August 31, 2003 and $9,286,000 at February 28, 2003 .............. 5,017,000 5,842,000
------------- -------------
$ 97,244,000 $ 83,797,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ................................................. $ 14,823,000 $ 9,063,000
Accounts payable .................................................... 14,274,000 5,464,000
Accrued liabilities ................................................. 6,238,000 6,293,000
Current portion, long-term debt and capital lease obligations ....... 535,000 583,000
------------- -------------
Total current liabilities ................................. 35,870,000 21,403,000
Long-term bank debt ..................................................... 1,907,000 2,139,000
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized;
19,811,000 and 19,806,000 shares issued and outstanding
at August 31, 2003 and at February 28, 2003, respectively ..... 198,000 198,000
Additional paid-in capital .......................................... 39,985,000 39,979,000
Retained earnings ................................................... 22,767,000 23,439,000
Accumulated other comprehensive income (loss)........................ (393,000) 96,000
------------- -------------
62,557,000 63,712,000
Unearned ESOP shares ................................................ (3,090,000) (3,457,000)
------------- -------------
Total stockholders' equity ................................ 59,467,000 60,255,000
------------- -------------
$ 97,244,000 $ 83,797,000
============= =============
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,
------------------------------- --------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales ........................... $ 28,284,000 $ 24,035,000 $ 52,775,000 $ 44,088,000
Cost of sales ....................... 20,123,000 16,653,000 38,881,000 30,519,000
------------- ------------- ------------- -------------
Gross profit ...................... 8,161,000 7,382,000 13,894,000 13,569,000
Selling expenses .................... 4,258,000 3,066,000 7,585,000 6,081,000
General and administrative
expenses .......................... 3,026,000 2,936,000 5,695,000 5,723,000
ESOP expense ........................ 125,000 178,000 294,000 428,000
Research and development expenses ... 455,000 750,000 989,000 1,480,000
------------- ------------- ------------- -------------
Operating income (loss) ........... 297,000 452,000 (669,000) (143,000)
Interest expense .................... 220,000 196,000 436,000 435,000
------------- ------------- ------------- -------------
Income (loss) before income taxes . 77,000 256,000 (1,105,000) (578,000)
Provision (benefit) for income taxes 37,000 122,000 (433,000) (205,000)
------------- ------------- ------------- -------------
Net income (loss) ................... $ 40,000 $ 134,000 $ (672,000) $ (373,000)
============= ============= ============= =============
Basic and diluted earnings (loss) per
share ............................. $ 0.00 $ 0.01 $ (0.04) $ (0.02)
============= ============= ============= =============
Weighted average number of shares
outstanding-- basic ............... 18,876,000 15,162,000 18,832,000 15,107,000
============= ============= ============= =============
Weighted average number of shares
outstanding-- diluted ............. 19,026,000 15,468,000 18,832,000 15,107,000
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
2
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
AUGUST 31,
--------------------------------
2003 2002
------------- -------------
Cash flows from operating activities:
Net income (loss) ............................................. $ (672,000) $ (373,000)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization ................................. 989,000 943,000
ESOP contribution ............................................. 294,000 428,000
Changes in assets and liabilities:
Increase in accounts receivable ............................ (5,005,000) (10,919,000)
Increase in inventories .................................... (8,566,000) (4,415,000)
Decrease in prepaid expenses and other assets .............. 362,000 4,077,000
Increase in accounts payable ............................... 8,910,000 3,124,000
Increase (decrease) in accrued liabilities ................. (593,000) 1,123,000
------------- -------------
Net cash provided by (used in) operating activities . (4,281,000) (6,012,000)
------------- -------------
Cash flows from investing activities:
Capital expenditures .......................................... (282,000) (378,000)
------------- -------------
Net cash used in investing activities ............... (282,000) (378,000)
------------- -------------
Cash flows from financing activities:
Net borrowings under bank lines of credit .. ........ 5,733,000 6,073,000
Payments on long-term bank notes .............................. (256,000) (329,000)
Payments under capital lease obligations ...................... (25,000) (31,000)
------------- -------------
Net cash provided by (used in) financing activities . 5,452,000 5,713,000
------------- -------------
Effect of exchange rate changes on cash ........................... 71,000 (10,000)
------------- -------------
Net increase (decrease) in cash ................................... 960,000 (687,000)
Cash at beginning of period ....................................... 2,445,000 1,249,000
------------- -------------
Cash at end of period ............................................. $ 3,405,000 $ 562,000
============= =============
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 holiday season. The results of operations
for the quarters ended August 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:
AUGUST 31, FEBRUARY 28,
2003 2003
--------------- ---------------
Raw materials.................................................. $ 7,613,000 $ 7,442,000
Work-in-process................................................ 4,418,000 4,972,000
Finished goods................................................. 36,560,000 27,636,000
--------------- ---------------
$ 48,591,000 $ 40,050,000
=============== ===============
The composition of goodwill and acquisition-related intangible assets
is as follows:
AUGUST 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....................................... (834,000) (720,000)
--------------- ---------------
Total amortizing acquisition-related intangible assets...... 564,000 678,000
--------------- ---------------
Total goodwill and acquisition-related intangible assets.... $ 5,543,000 $ 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.
4
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. Meade subsequently filed a notice of appeal in connection with the
partial summary judgments obtained by Celestron. Due to the uncertainties of
litigation, the Company is unable to provide an evaluation of the likelihood
of either a favorable or unfavorable outcome in these matters.
In September 2003, the Company and Celestron agreed to pursue
non-binding mediation of the outstanding litigation between the parties. The
parties are in the early stages of the mediation process.
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. 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, 2003 and 2002, 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 74,000, and 293,000 have been
excluded from diluted weighted average shares of common stock for the six months
ended August 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 August 31, 2003, includes foreign
currency translation adjustments and adjustments to the fair value of highly
effective derivative instruments. For the periods ended August 31, 2003, the
Company had other comprehensive income (loss) as follows:
THREE MONTHS
ENDED SIX MONTHS ENDED
AUGUST 31, 2003 AUGUST 31, 2003
--------------- ---------------
Net income (loss)...................................................... $ 40,000 $ (672,000)
Currency translation adjustment........................................ (366,000) (4,000)
Change in fair value of foreign currency forward contracts, net of tax. 471,000 (405,000)
Unrealized loss in marketable securities, net of tax................... - (97,000)
Change in fair value of interest rate swap............................. 11,000 17,000
--------------- ---------------
Total other comprehensive income (loss)................................ $ 156,000 $ (1,161,000)
=============== ===============
5
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.
AUGUST 31, 2003 FEBRUARY 28, 2003
--------------------------------------- --------------------------------------
NOTIONAL NOTIONAL
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------------------------------------- --------------------------------------
Interest rate swap agreement $ 1,295,000 $ (32,000) $ 1,505,000 $ (49,000)
Cash flow forward currency
contracts $ 8,315,000 $ (675,000) -- --
At August 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.
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.
Three months ended Six months ended
August 31, August 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Reported income (loss).................................. $ 40,000 $ 134,000 $ (672,000) $ (373,000)
Pro forma compensation cost, net of
income taxes (281,000) (422,000) (540,000) (864,000)
------------ ------------ ------------ ------------
Pro forma net loss...................................... $ (241,000) $ (288,000) $(1,212,000) $(1,237,000)
============ ============ ============ ============
Reported income (loss) per share - basic and diluted.... $ 0.00 $ 0.01 $ (0.04) $ (0.02)
============ ============ ============ ============
Pro forma loss per share - basic and diluted............ $ (0.01) $ (0.03) $ (0.06) $ (0.08)
============ ============ ============ ============
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 AUGUST 31, 2003 COMPARED TO THREE MONTHS ENDED
AUGUST 31, 2002
Net sales for the second quarter of fiscal 2004 were $28.3 million
compared to $24.0 million for the second quarter of fiscal 2003, an increase of
17.7%. The Simmons subsidiary, acquired in October 2002, contributed
approximately $8 million to second quarter fiscal 2004 sales. Management
believes that the Mars opposition increased sales of mid-priced and
higher-priced telescopes over the prior year quarter by approximately $3
million. More than offsetting those increases was an approximately $7 million
decrease in sales of smaller-aperture telescopes. The decrease in
smaller-aperture telescopes was due, in part, to conservative purchasing
patterns by certain of the Company's domestic dealers. Management believes
that many of the Company's domestic dealers will submit firm orders during
the third quarter to substantially offset the conservatism experienced in the
second quarter.
Gross profit increased from $7.4 million (30.7% of net sales) for the
second quarter of fiscal 2003 to $8.2 million (28.9 % of net sales) for the
second quarter of fiscal 2004, an increase of 10.6%. The increase was due to
increased sales over the prior year quarter. The decrease in gross margin (gross
profit as a percent of net sales) was principally due to price reductions on our
higher-priced telescopes and general margin variations brought on by the
addition of Simmons products and the change in the sales mix from the prior
year.
Selling expenses increased from $3.1 million (12.8% of net sales) for
the second quarter of fiscal 2003 to $4.3 million (15.1% of net sales) for the
second quarter of fiscal 2004. The increase was primarily attributed to selling
expenses at Simmons. General and administrative expenses increased from $2.9
million (12.2% of net sales) for the second quarter of fiscal 2003, to $3.0
million (10.7% of net sales) for the second quarter of fiscal 2004, an increase
of 3.1%. Current quarter Simmons general and administrative expenses were
approximately $0.3 million. The prior year quarter included approximately $0.3
million incurred in connection with the Company's effort to acquire certain of
the assets of Tasco and Celestron. Those acquisition costs did not recur in the
current year quarter. The Company did not consummate the proposed acquisition of
Tasco and Celestron assets.
ESOP contribution expense decreased from $0.2 million (0.7% of net
sales) for the second quarter of fiscal 2003 to $0.1 million (0.4% of net sales)
for the second quarter of fiscal 2004, a decrease of 29.8%. The decrease in this
non-cash charge was principally due to decreases in the average market price of
the Company's stock allocated to the Employee Stock Ownership Plan during the
quarter. The non-cash ESOP contribution expense may fluctuate as the number of
shares allocated and the market value of the Company's common stock changes.
Research and development expenses decreased from $0.8 million (3.1% of
net sales) for the second quarter of fiscal 2003 to $0.5 million (1.6% of net
sales) for the second quarter of fiscal 2004, a decrease of 39.3%. This decrease
was due to a reduction in engineering personnel and outside consulting costs
principally in response to diminished demand for the Company's industrial
optical products. The Company's research and development efforts are principally
concentrated on product improvement and new product development for the
Company's core consumer products market.
Interest expense remained flat at approximately $0.2 million for each
of the quarters presented. Increases in average borrowings over the prior year
were offset by lower borrowing rates.
7
SIX MONTHS ENDED AUGUST 31, 2003 COMPARED TO SIX MONTHS ENDED AUGUST
31, 2002
Net sales for the six months ended August 31, 2003 were $52.8 million
compared to $44.1 million for the comparable prior year period, an increase of
19.7%. The increase in net sales over the prior year was principally due to
sales of over $15 million at the Simmons subsidiary (acquired in October 2002)
and an increase in sales of mid-priced and higher-priced telescopes. Offsetting
these increases was a reduction of over $2 million in net sales of the Company's
binoculars, primarily consisting of CaptureView(TM). CaptureView was brought to
market in the first quarter of fiscal 2003. 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 of a new line of completely redesigned CaptureView
binoculars that began shipping during the second quarter of fiscal 2004. Also
offsetting the sales increases was an approximately $7 million decrease in sales
of smaller-aperture telescopes. The decrease in smaller-aperture telescopes was
due, in part, to conservative purchasing patterns by certain of the Company's
domestic dealers during the current year second quarter. Management believes
that many of the Company's domestic dealers will submit firm orders during
the third quarter to substantially offset the conservatism experienced in the
second quarter.
Gross profit increased from $13.6 million (30.8% of net sales) for the
six months ended August 31, 2002 to $13.9 million (26.3% of net sales) for the
comparable current year period, an increase of 2.4%. 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 reaching the market in the second quarter, contribution
from CaptureView during the first quarter was reduced as customers awaited the
new line. Again during the first quarter, the Company responded to competition
by offering existing versions of CaptureView at prices discounted from the prior
year. Gross margins were also negatively affected by the results at Simmons,
which, while meeting the Company's expectations, produced margins lower than the
Company has historically reported.
Selling expenses increased from $6.1 million (13.8% of net sales) for
the six months ended August 31, 2002 to $7.6 million (14.4% of net sales) for
the comparable current year period, an increase of 24.7%. This increase was
primarily due to selling expenses at Simmons (approximately $2.6 million for the
six month period) partially offset by a decrease in advertising expenses. During
the prior year period, the Company spent approximately $1.0 million in
television, radio and print advertising costs related to the introduction and
promotion of CaptureView that were not duplicated during the current year. 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 remained flat at $5.7 million for
the six month periods presented (13.0% of net sales in the prior year, 10.8% of
net sales in the current year). Simmons general and administrative expenses for
the six month period were approximately $0.6 million. The prior year period
included approximately $0.7 million incurred in connection with the Company's
effort to acquire certain of the assets of Tasco and Celestron. Those
acquisition costs did not recur in the current year period. The Company did not
consummate the proposed acquisition of Tasco and Celestron assets.
ESOP contribution expense decreased from $0.4 million (1.0% of net
sales) for the six months ended August 31, 2002 to $0.3 million (0.6% of net
sales) for the comparable current year period, a decrease of 31.3%. The decrease
in this non-cash charge was principally due to decreases 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 decreased from $1.5 million (3.4% of
net sales) for the six months ended August 31, 2002 to $1.0 million (1.9% of net
sales) for the comparable current year period, a decrease of 33.2%. This
decrease was due to a reduction in engineering personnel and outside consulting
costs principally in response to diminished demand for the Company's industrial
optical products. The Company's research and development efforts are principally
concentrated on product improvement and new product development for the
Company's core consumer products market.
Interest expense remained flat at approximately $0.4 million for each
of the periods presented. Increases in average borrowings over the prior year
were offset by lower borrowing rates.
8
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended August 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 was used by increases in accounts
receivable and inventories, partially offset by an increase in accounts payable.
Accounts receivable increased as expected with increased sales during the
quarter. Inventories increased as expected in anticipation of the third quarter
sales. Historically, sales in the third quarter have been higher than sales
achieved in each of the other three fiscal quarters of the year. Conservative
purchasing patterns by certain of the Company's domestic dealers also affected
inventory levels during the quarter. Accounts payable increased with the
increase in inventories but the increase was principally due to cash
disbursement management. Net working capital totaled approximately $50.2 million
at August 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 August 31, 2003 was approximately $13.4
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 $0.3 million and $0.4 million for the six months ended August 31,
2003 and 2002, respectively. The Company had no material capital expenditure
commitments at August 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 August 31, 2003 follows.
Balance at February 28, 2003..................... $ 1,794,000
Warranty accrual................................. 207,000
Labor and material usage......................... (441,000)
---------------
Balance at August 31, 2003....................... $ 1,560,000
===============
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 December 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.
9
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, microscopes 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
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;
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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.
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
six months ended August 31, 2003, the Company entered into cash flow forward
currency contracts with notional amounts aggregating $8.3 million. The fair
value of these contracts at August 31, 2003 was ($0.7 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 six months ended August 31, 2003 was a
gain of $17,000 which is included in other comprehensive income for the six
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
As of the end of the period covered by this report, the Company's chief
executive officer and chief financial officer have evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act). These disclosure controls
and procedures are designed 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.
The Company's chief executive officer and chief financial officer
concluded, based on their evaluation, that the Company's disclosure controls and
procedures are effective for the Company, taking into consideration the size and
nature of the Company's business and operations.
No change in the Company's internal control over financial reporting
occurred during the last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
11
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
subsequently 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. The parties dismissed their remaining claims against each other,
and Meade filed an appeal of the court's two summary judgment orders on
September 18, 2003. The appeal will be decided by the Court of Appeals for the
Federal Circuit. 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. Meade
has opposed that motion. The motion is not set to be heard until at least
December 2003. 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.
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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. Celestron had sought a
preliminary injunction in this matter, which was denied pursuant to an order
entered on December 17, 2002. 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.
On September 9, 2003, the Company, Celestron and James Feltman agreed
to pursue non-binding mediation of all outstanding litigation between the
parties. As part of the mediation process, the parties agreed to stay all the
litigation (including the discovery process) in the above four cases until
approximately December 9, 2003. The mediation process will occur before
approximately December 9, 2003.
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 AND USE OF PROCEEDS
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 10, 2003, the stockholders of the Company re-elected Steven G. Murdock
and Harry L. Casari as directors each for a three-year term expiring at the
Company's Annual Meeting to be held in 2006.
The voting results were as follows:
FOR WITHHELD
--- --------
Re-election of Steven G. Murdock to the
Company's Board of Directors.................... 15,628,115 80,292
Re-election of Harry L. Casari to the
Company's Board of Directors.................... 14,548,504 1,159,903
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 31.1 Sarbanes-Oxley Act Section 302 Certification
by Steven G. Murdock
2. Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification
by Brent W. Christensen
3. Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification
by Steven G. Murdock
4. Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification
by Brent W. Christensen
13
6(b) Reports on Form 8-K.
The Company filed the following Report with the SEC:
1. Form 8-K, filed on June 17, 2003, covering a press release
announcing the Company's financial results for the quarterly
period ended May 31, 2003.
14
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: October 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
15