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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 NOVEMBER 30, 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 December 31, 2003 is
19,985,107.
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MEADE INSTRUMENTS CORP.
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Page No.
--------
Consolidated Balance Sheets (Unaudited) -- November 30, 2003 and February 28, 2003....................... 1
Consolidated Statements of Income (Unaudited) -- Three and Nine Months Ended
November 30, 2003 and 2002............................................................................... 2
Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended November 30, 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............................................... 10
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......................................................................... 14
Signatures............................................................................................... 15
i
ITEM 1. FINANCIAL STATEMENTS.
MEADE INSTRUMENTS CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
NOVEMBER 30, FEBRUARY 28,
2003 2003
-------------- --------------
Cash ...................................................................... $ 2,167,000 $ 2,445,000
Accounts receivable, less allowance for doubtful accounts of $1,033,000
at November 30, 2003 and $714,000 at February 28, 2003 ................ 50,126,000 22,364,000
Inventories ............................................................... 47,409,000 40,050,000
Deferred income taxes ..................................................... 4,356,000 5,240,000
Prepaid income taxes ...................................................... -- 818,000
Prepaid expenses and other current assets ................................. 467,000 563,000
-------------- --------------
Total current assets ........................................ 104,525,000 71,480,000
Other assets .............................................................. 488,000 818,000
Goodwill and acquisition-related intangible assets, net ................... 5,486,000 5,657,000
Property and equipment, net of accumulated depreciation of $10,736,000
at November 30, 2003 and $9,286,000 at February 28, 2003 .............. 4,663,000 5,842,000
-------------- --------------
$ 115,162,000 $ 83,797,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ................................................... $ 31,275,000 $ 9,063,000
Accounts payable ...................................................... 9,292,000 5,464,000
Accrued liabilities ................................................... 6,983,000 6,293,000
Income taxes payable .................................................. 702,000 --
Current portion, long-term debt and capital lease obligations ......... 585,000 583,000
-------------- --------------
Total current liabilities ................................... 48,837,000 21,403,000
Long-term bank debt ....................................................... 1,818,000 2,139,000
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value, 50,000,000 shares authorized;
19,985,000 and 19,806,000 shares issued and outstanding
at November 30, 2003 and at February 28, 2003, respectively ........ 200,000 198,000
Additional paid-in capital ............................................ 40,504,000 39,979,000
Retained earnings ..................................................... 26,143,000 23,439,000
Accumulated other comprehensive income ................................ 420,000 96,000
-------------- --------------
67,267,000 63,712,000
Unearned ESOP shares .................................................. (2,760,000) (3,457,000)
-------------- --------------
Total stockholders' equity .................................. 64,507,000 60,255,000
-------------- --------------
$ 115,162,000 $ 83,797,000
============== ==============
See accompanying notes to consolidated financial statements.
1
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net sales ............................. $ 54,448,000 $ 44,519,000 $107,223,000 $ 88,607,000
Cost of sales ......................... 37,892,000 29,558,000 76,773,000 60,077,000
------------- ------------- ------------- -------------
Gross profit ........................ 16,556,000 14,961,000 30,450,000 28,530,000
Selling expenses ...................... 6,573,000 5,107,000 14,158,000 11,188,000
General and administrative expenses ... 3,275,000 3,645,000 8,970,000 9,368,000
ESOP expense .......................... 341,000 303,000 635,000 731,000
Research and development expenses ..... 462,000 730,000 1,451,000 2,210,000
------------- ------------- ------------- -------------
Operating income .................... 5,905,000 5,176,000 5,236,000 5,033,000
Interest expense ...................... 325,000 293,000 761,000 728,000
------------- ------------- ------------- -------------
Income before income taxes .......... 5,580,000 4,883,000 4,475,000 4,305,000
Provision for income taxes ............ 2,204,000 1,987,000 1,771,000 1,782,000
------------- ------------- ------------- -------------
Net income ............................ $ 3,376,000 $ 2,896,000 $ 2,704,000 $ 2,523,000
============= ============= ============= =============
Basic earnings per share .............. $ 0.18 $ 0.17 $ 0.14 $ 0.16
============= ============= ============= =============
Diluted earnings per share ............ $ 0.17 $ 0.17 $ 0.14 $ 0.16
============= ============= ============= =============
Weighted average number of shares
outstanding-- basic ................. 19,070,000 16,611,000 18,911,000 15,608,000
============= ============= ============= =============
Weighted average number of shares
outstanding-- diluted ............... 19,335,000 16,755,000 19,068,000 15,852,000
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
2
MEADE INSTRUMENTS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
NOVEMBER 30,
-----------------------------
2003 2002
------------- -------------
Cash flows from operating activities:
Net income .......................................................... $ 2,704,000 $ 2,523,000
Adjustments to reconcile net income to net cash provided
by (used by) operating activities:
Depreciation and amortization ....................................... 1,541,000 1,409,000
ESOP contribution ................................................... 635,000 731,000
Changes in assets and liabilities, net of effects of acquisition:
Increase in accounts receivable .................................. (27,344,000) (27,048,000)
(Increase) decrease in inventories ............................... (6,955,000) 7,146,000
Decrease in prepaid expenses and other assets .................... 1,224,000 4,411,000
Increase in accounts payable ..................................... 3,683,000 3,957,000
Increase in accrued liabilities .................................. 783,000 2,104,000
Increase in income taxes payable ................................. 1,468,000 1,523,000
------------- -------------
Net cash used in operating activities ..................... (22,261,000) (3,244,000)
------------- -------------
Cash flows from investing activities:
Capital expenditures ................................................ (323,000) (679,000)
Acquisition of Simmons, net of cash acquired ........................ -- (16,000,000)
------------- -------------
Net cash used in investing activities ..................... (323,000) (16,679,000)
------------- -------------
Cash flows from financing activities:
Net borrowings under bank lines of credit ........................... 22,012,000 12,941,000
Payments on long-term bank notes .................................... (398,000) (407,000)
Net proceeds from the sale of common stock .......................... -- 7,344,000
Proceeds from the exercise of stock options ......................... 410,000 --
Payments under capital lease obligations ............................ (25,000) (118,000)
------------- -------------
Net cash provided by financing activities ................. 21,999,000 19,760,000
------------- -------------
Effect of exchange rate changes on cash ................................. 307,000 230,000
------------- -------------
Net increase (decrease) in cash ......................................... (278,000) 67,000
Cash at beginning of period ............................................. 2,445,000 1,249,000
------------- -------------
Cash at end of period ................................................... $ 2,167,000 $ 1,316,000
============= =============
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
certain of the Company's less-expensive products during the holiday season. The
results of operations for the quarters ended November 30, 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:
NOVEMBER 30, FEBRUARY 28,
2003 2003
-------------- --------------
Raw materials................................. $ 8,746,000 $ 7,442,000
Work-in-process............................... 5,723,000 4,972,000
Finished goods................................ 32,940,000 27,636,000
-------------- --------------
$ 47,409,000 $ 40,050,000
============== ==============
The composition of goodwill and acquisition-related intangible assets
is as follows:
NOVEMBER 30, FEBRUARY 28,
2003 2003
-------------- --------------
Goodwill...................................... $ 1,548,000 $ 1,548,000
Brand names and other......................... 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...................... (891,000) (720,000)
-------------- --------------
Total amortizing acquisition-related
intangible assets....................... 507,000 678,000
-------------- --------------
Total goodwill and acquisition-related
intangible assets....................... $ 5,486,000 $ 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. 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.
4
In September 2003, the Company and Celestron agreed to pursue
non-binding mediation of the outstanding litigation between the parties. The
mediation is currently scheduled to take place in March 2004.
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.
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 period ended November 30, 2003 follows.
Balance at February 28, 2003............................. $ 1,794,000
Warranty accrual......................................... 714,000
Labor and material usage................................. (672,000)
---------------
Balance at November 30, 2003............................. $ 1,836,000
===============
D. NET INCOME PER SHARE
Basic earnings per share amounts exclude the dilutive effect of
potential shares of common stock. Basic earnings per share are based upon the
weighted-average number of shares of common stock outstanding. Diluted earnings
per share are 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 and nine months ended
November 30, 2003 and 2002, reflects additional potential shares of common stock
for outstanding stock options.
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 November 30, 2003, includes foreign
currency translation adjustments and adjustments to the fair value of highly
effective derivative instruments. For the periods ended November 30, 2003, the
Company had other comprehensive income (loss) as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income ............................................. $ 3,376,000 $ 2,896,000 $ 2,704,000 $ 2,523,000
Currency translation adjustment ........................ 412,000 28,000 408,000 380,000
Change in fair value of foreign currency forward
contracts, net of tax ............................... 392,000 140,000 (13,000) (53,000)
Unrealized loss in marketable securities, net of tax ... -- -- (97,000) --
Change in fair value of interest rate swap ............. 9,000 -- 26,000 (21,000)
------------ ------------ ------------ ------------
Total other comprehensive income ....................... $ 4,189,000 $ 3,064,000 $ 3,028,000 $ 2,829,000
============ ============ ============ ============
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.
NOVEMBER 30, 2003 FEBRUARY 28, 2003
--------------------------------------- --------------------------------------
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
------------------ -------------------- - ------------------- ------------------
Interest rate swap agreement $ 1,190,000 $ (23,000) $ 1,505,000 $ (49,000)
Cash flow forward currency
contracts $ 1,316,000 $ (22,000) -- --
At November 30, 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 income and income per share
would have been decreased to the pro forma amounts indicated below.
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2003 2002 2003 2002
------------ -------------- -------------- --------------
Reported net income..................................... $ 3,376,000 $ 2,896,000 $ 2,704,000 $ 2,523,000
Pro forma compensation cost, net of income taxes......... (45,000) (365,000) (583,000) (1,228,000)
------------ -------------- -------------- --------------
Pro forma net income.................................... $ 3,331,000 $ 2,531,000 $ 2,121,000 $ 1,295,000
============ ============== ============== ==============
Reported income per share - basic....................... $ 0.18 $ 0.17 $ 0.14 $ 0.16
============ ============== ============== ==============
Reported income per share - diluted..................... $ 0.17 $ 0.17 $ 0.14 $ 0.16
============ ============== ============== ==============
Pro forma income per share - basic and diluted.......... $ 0.17 $ 0.15 $ 0.11 $ 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 NOVEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 2002
Net sales for the third quarter of fiscal 2004 were $54.4 million
compared to $44.5 million for the second quarter of fiscal 2003, an increase of
22.3%. The Simmons subsidiary, acquired on October 25, 2002, contributed
approximately $9.7 million to third quarter fiscal 2004 sales compared to
approximately $3.4 million in the prior year period. Sales at the Company's
European subsidiary contributed approximately $2 million to the increase over
last year with the balance coming from improved telescope sales in the U.S.
Gross profit increased from $15.0 million (33.6% of net sales) for the
third quarter of fiscal 2003 to $16.6 million (30.4 % of net sales) for the
third quarter of fiscal 2004, an increase of 10.7%. 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 due to continuing pricing pressure on many
of the Meade product lines, principally small and mid-range telescopes during
the third quarter. Also negatively affecting gross margins was the approximately
$8 million of the revenue increase over the prior year quarter attributable to
the European and Simmons subsidiaries. These subsidiaries, as distribution
companies, typically produce gross margins that are less than the historical
gross margins at Meade.
Selling expenses increased from $5.1 million (11.5% of net sales) for
the third quarter of fiscal 2003 to $6.6 million (12.1% of net sales) for the
third quarter of fiscal 2004. The increase was primarily attributed to selling
expenses at Simmons. General and administrative expenses decreased from $3.6
million (8.2% of net sales) for the third quarter of fiscal 2003, to $3.3
million (6.0% of net sales) for the third quarter of fiscal 2004, a decrease of
10.2%. The majority of this decrease was due to lower consulting and
professional fees (approximately $0.5 million less in the current quarter
compared to the prior year quarter) which was partially offset by an increase in
compensation costs.
ESOP contribution expense was flat at $0.3 million (0.7% of net sales
in the prior year compared to 0.6% of net sales in the current 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 $0.7 million (1.6% of
net sales) for the third quarter of fiscal 2003 to $0.5 million (0.8% of net
sales) for the third quarter of fiscal 2004, a decrease of 36.7%. 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 $0.3 million for each
of the quarters presented. Increases in average borrowings over the prior year
were offset by lower borrowing rates.
NINE MONTHS ENDED NOVEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
NOVEMBER 30, 2002
Net sales for the nine months ended November 30, 2003 were $107.2
million compared to $88.6 million for the comparable prior year period, an
increase of 21.0%. The increase in net sales over the prior year was due to
sales of over $25 million at the Simmons subsidiary (acquired in October 2002),
increases at Meade's European subsidiary of over $3 million and an approximately
$3 million increase in sales of mid-priced and higher-priced telescopes in the
U.S. Offsetting these increases was a reduction of approximately $4 million in
net sales of the Company's lower-priced telescopes, primarily consisting of a
model sold at a specialty mass merchant in the prior year that was not sold in
the current year. Also offsetting the sales increases was a decrease of
approximately $2 million in binocular sales, and approximately $2 million in
accessory and other related product sales.
7
Gross profit increased from $28.5 million (32.2% of net sales) for the
nine months ended November 30, 2002 to $30.5 million (28.4% of net sales) for
the comparable current year period, an increase of 6.7%. The increase was due to
increased sales over the prior year period. The decrease in gross margin (gross
profit as a percent of net sales) was due to continuing pricing pressure on many
of the Meade product lines. Also negatively affecting gross margins was the
revenue increase over the prior year attributable to the European and Simmons
subsidiaries. These subsidiaries, as distribution companies, typically produce
gross margins that are less than the historical gross margins at Meade.
Selling expenses increased from $11.2 million (12.6% of net sales) for
the nine months ended November 30, 2002 to $14.2 million (13.2% of net sales)
for the comparable current year period, an increase of 26.6%. This increase was
primarily due to selling expenses at Simmons (approximately $3.5 million for the
nine 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, the Company's binocular with an integrated digital
camera that were not duplicated during the current year. Any future promotional
expenses relating to CaptureView binoculars will be incurred as the products are
sold into the market.
General and administrative expenses decreased from $9.4 million (10.6%
of net sales) for the nine months ended November 30, 2002 to $9.0 million (8.4%
of net sales) for the comparable current year period, a decrease of 4.2%.
Simmons general and administrative expenses for the nine month period were
approximately $1.0 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. In addition to the $0.7 million previously
discussed, consulting and professional fees were approximately $0.5 million less
in the current period compared to the prior year period, partially offset by an
increase in compensation costs.
ESOP contribution expense decreased from $0.7 million (0.8% of net
sales) for the nine months ended November 30, 2002 to $0.6 million (0.6% of net
sales) for the comparable current year period, a decrease of 13.1%. 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 $2.2 million (2.5% of
net sales) for the nine months ended November 30, 2002 to $1.5 million (1.4% of
net sales) for the comparable current year period, a decrease of 34.3%. 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 relatively flat at approximately $0.8 million
for each of the periods presented. Increases in average borrowings over the
prior year were offset by lower borrowing rates.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended November 30, 2003 the Company funded its
operations with short-term bank borrowings. Internally generated cash flow from
net income 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 to support a full cycle of sales at
the Company's Simmons subsidiary. Accounts payable increased with the increase
in inventories. Net working capital totaled approximately $55.7 million at
November 30, 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 November 30, 2003 was approximately $9.0
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.
8
Capital expenditures, including financed purchases of equipment,
aggregated $0.3 million and $0.7 million for the nine months ended November 30,
2003 and 2002, respectively. The Company had no material capital expenditure
commitments at November 30, 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 period ended November 30, 2003 follows.
Balance at February 28, 2003............................. $ 1,794,000
Warranty accrual......................................... 714,000
Labor and material usage................................. (672,000)
---------------
Balance at November 30, 2003............................. $ 1,836,000
===============
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 adoption of these statements did not
have a material effect on the Company's financial position or results of
operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities. This statement is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. It amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
SFAS 149 amends SFAS 133 for decisions made as part of the Derivatives
Implementation Group process that effectively required amendments to SFAS 133,
in connection with other FASB projects dealing with financial instruments and in
connection with implementation issues raised in relation to the application of
the definition of a derivative. The application of this statement did not have
an impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. This statement
establishes standards for how a company clarifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires a
company to classify such instruments as liabilities, whereas they previously may
have been classified as equity. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective July 1, 2003. The application of this statement did not have an impact
on the Company's consolidated financial statements.
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, at
competitive prices; 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.
9
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;
o currency exchange rate fluctuations greater than the Company
has experienced which could hinder the Company's ability to
remain price competitive; 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.
10
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
nine months ended November 30, 2003, the Company entered into cash flow forward
currency contracts with notional amounts aggregating $1.3 million. The fair
value of these contracts at November 30, 2003 was ($22,000).
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 nine months ended November 30, 2003 was
a gain of $26,000 which is included in other comprehensive income for the nine
months then ended.
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.
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.
12
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. The mediation is
currently scheduled to take place in March 2004.
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
6(a) Exhibits filed with this Form 10-Q.
1. Exhibit 10.54 First amendment to amended and restated credit agreement
2. Exhibit 31.1 Sarbanes-Oxley Act Section 302 Certification by Steven G. Murdock
3. Exhibit 31.2 Sarbanes-Oxley Act Section 302 Certification by Brent W. Christensen
4. Exhibit 32.1 Sarbanes-Oxley Act Section 906 Certification by Steven G. Murdock
5. Exhibit 32.2 Sarbanes-Oxley Act Section 906 Certification by Brent W. Christensen
6(b) Reports on Form 8-K.
The Company filed the following Report with the SEC
1. Form 8-K, filed on September 18, 2003, covering a press
release announcing the Company's financial results for the
quarterly period ended August 31, 2003.
2. Form 8-K, filed on September 30, 2003, covering a press
release announcing the resignation of John C. Diebel from the
Company's Board of Directors, effective October 30, 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: January 14, 2004
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