1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1999 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) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 451-1450 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of common stock outstanding as of August 31, 1999 is 7,923,970 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 MEADE INSTRUMENTS CORP. TABLE OF CONTENTS PAGE ----- PART I -- FINANCIAL INFORMATION Consolidated Balance Sheets (Unaudited) -- August 31, 1999 and February 28, 1999..................................... 3 Consolidated Statements of Income (Unaudited) -- Three Months and Six Months Ended August 31, 1999 and 1998...... 4 Consolidated Statements of Cash Flows (Unaudited) -- Six Months Ended August 31, 1999 and 1998..................... 5 Notes to Consolidated Financial Statements (Unaudited)...... 6 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 8 - 11 PART II -- OTHER INFORMATION Other Information........................................... 11 Signatures.................................................. 13 Exhibit Index............................................... 14 2 3 ITEM 1. FINANCIAL STATEMENTS MEADE INSTRUMENTS CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS AUGUST 31, FEBRUARY 28, 1999 1999 ----------- ------------ Current assets: Cash...................................................... $ 1,385,000 $ 1,283,000 Accounts receivable, less allowance for doubtful accounts of $2,940,000 at August 31, 1999 and $2,243,000 at February 28, 1999...................................... 14,042,000 10,864,000 Inventories............................................... 30,392,000 14,191,000 Deferred income taxes..................................... 5,730,000 3,928,000 Prepaid expenses and other current assets................. 517,000 256,000 ----------- ----------- Total current assets.............................. 52,066,000 30,522,000 Other assets................................................ 5,220,000 274,000 Property and equipment, net of accumulated depreciation of $2,592,000 at August 31, 1999 and $2,071,000 at February 28, 1999.................................................. 4,894,000 3,828,000 ----------- ----------- $62,180,000 $34,624,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank line of credit....................................... $15,425,000 $ Accounts payable.......................................... 5,138,000 1,503,000 Accrued liabilities....................................... 6,433,000 5,386,000 Income taxes payable...................................... 1,991,000 Current portion of capital lease obligations.............. 324,000 254,000 ----------- ----------- Total current liabilities......................... 27,320,000 9,134,000 ----------- ----------- Long-term debt.............................................. 5,000,000 Long-term capital lease obligations, net of current portion................................................... 575,000 223,000 ----------- ----------- Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value, 20,000,000 shares authorized; 7,923,970 and 7,875,500 shares issued and outstanding at August 31, 1999 and February 28, 1999, respectively........................................... 79,000 79,000 Additional paid-in capital................................ 22,069,000 21,803,000 Retained earnings......................................... 13,862,000 10,502,000 ----------- ----------- 36,010,000 32,384,000 Unearned ESOP shares...................................... (6,725,000) (7,117,000) ----------- ----------- Total stockholders' equity........................ 29,285,000 25,267,000 ----------- ----------- $62,180,000 $34,624,000 =========== =========== See accompanying notes to consolidated financial statements. 3 4 MEADE INSTRUMENTS CORP. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED AUGUST 31, SIX MONTHS ENDED AUGUST 31, ------------------------------ ---------------------------- 1999 1998 1999 1998 ------------- ------------- ------------ ------------ Net sales............................. $24,134,000 $15,412,000 $41,235,000 $30,233,000 Cost of sales......................... 13,997,000 8,901,000 23,981,000 17,642,000 ----------- ----------- ----------- ----------- Gross profit........................ 10,137,000 6,511,000 17,254,000 12,591,000 Selling expenses...................... 2,937,000 2,895,000 5,228,000 5,768,000 General and administrative expenses... 2,968,000 2,036,000 5,572,000 3,983,000 Research and development expenses..... 275,000 228,000 540,000 473,000 ----------- ----------- ----------- ----------- Operating income.................... 3,957,000 1,352,000 5,914,000 2,367,000 Interest expense...................... 135,000 142,000 120,000 184,000 ----------- ----------- ----------- ----------- Income before income taxes.......... 3,822,000 1,210,000 5,794,000 2,183,000 Provision for income taxes............ 1,606,000 520,000 2,434,000 939,000 ----------- ----------- ----------- ----------- Net income............................ $ 2,216,000 $ 690,000 $ 3,360,000 $ 1,244,000 =========== =========== =========== =========== Basic earnings per share.............. $ 0.32 $ 0.10 $ 0.48 $ 0.18 =========== =========== =========== =========== Diluted earnings per share............ $ 0.30 $ 0.10 $ 0.46 $ 0.18 =========== =========== =========== =========== Weighted average number of shares outstanding -- basic................ 6,965,000 6,841,000 6,948,000 6,824,000 =========== =========== =========== =========== Weighted average number of shares outstanding -- diluted.............. 7,342,000 6,993,000 7,291,000 6,974,000 =========== =========== =========== =========== See accompanying notes to consolidated financial statements. 4 5 MEADE INSTRUMENTS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED AUGUST 31, ---------------------------- 1999 1998 ------------- ------------ Cash flows from operating activities: Net income................................................ $ 3,360,000 $ 1,244,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 521,000 456,000 ESOP contribution...................................... 804,000 600,000 Allowance for doubtful accounts........................ 697,000 600,000 Changes in assets and liabilities: Increase in accounts receivable...................... (3,875,000) (3,164,000) Increase in inventories.............................. (16,201,000) (8,821,000) Increase in deferred income taxes.................... (1,802,000) (867,000) (Increase) in prepaid expenses and other current assets.............................................. (261,000) (1,000) Decrease in other assets............................. 54,000 12,000 Increase in accounts payable......................... 3,635,000 1,739,000 Increase in accrued liabilities...................... 635,000 1,600,000 Decrease in income taxes payable..................... (1,890,000) (1,606,000) ------------ ----------- Net cash used in operating activities............. (14,323,000) (8,780,000) ------------ ----------- Cash flows from investing activities: Capital expenditures...................................... (997,000) (2,276,000) Increase in other assets.................................. (5,000,000) ------------ ----------- Net cash used in investing activities............. (5,997,000) (2,276,000) ------------ ----------- Cash flows from financing activities: Net borrowings under bank line of credit.................. 15,425,000 9,723,000 Proceeds from long-term loan.............................. 5,000,000 Exercise of stock options................................. 165,000 Payments under capital lease obligations.................. (168,000) (92,000) ------------ ----------- Net cash provided by financing activities......... 20,422,000 9,631,000 ------------ ----------- Net increase (decrease) in cash............................. 102,000 (1,425,000) Cash at beginning of period................................. 1,283,000 1,649,000 ------------ ----------- Cash at end of period....................................... $ 1,385,000 $ 224,000 ============ =========== Supplemental disclosures of cash flow information: Non-cash financing activities: Equipment financing.................................... $ 590,000 See accompanying notes to consolidated financial statements. 5 6 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, 1999. 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 increasing demand and delivery schedules and the timing and extent of research and development expenses, marketing expenses and product development expenses. In addition, a substantial portion of the Company's net sales and operating income typically occur in the third quarter of the Company's fiscal year primarily due to disproportionately higher customer demand for less-expensive telescopes during the Christmas holiday season. The results of operations for the quarter and six months ended August 31, 1999 and 1998, respectively, are not necessarily indicative of the operating results for the entire fiscal year. B. THE COMPOSITION OF INVENTORIES IS AS FOLLOWS: AUGUST 31, FEBRUARY 28, 1999 1999 ----------- ------------ Raw materials..................................... $ 5,700,000 $ 3,417,000 Work-in-process................................... 3,079,000 1,514,000 Finished goods.................................... 21,613,000 9,260,000 ----------- ----------- $30,392,000 $14,191,000 =========== =========== C. COMMITMENTS AND CONTINGENCIES On April 2, 1998 a complaint was filed against the Company alleging infringement of a U.S. patent by the Company. On April 29, 1999, the Company filed a motion requesting summary judgment that the Company has not infringed the patent and a motion requesting summary judgment that the patent is invalid. On June 30, 1999, the court granted the motion for summary judgment of non-infringement. On July 2, 1999, the court entered a judgment determining that the Company has not infringed the patent. On July 27, 1999 the opposing party filed a Notice of Appeal with respect to the summary judgment motion. The Company intends to vigorously defend the judgment before the appellate court. The ultimate liability of the Company under this action is not presently determinable. After discussion with counsel, and in light of the summary judgment, it is the opinion of management that such liability is not expected to have a material effect on the Company's financial position or results of operations. D. CREDIT REFINANCING On August 31, 1999 the Company entered into a new loan agreement (the "Loan Agreement") with a bank, replacing its existing credit facilities. The Loan Agreement provides the Company with an aggregate $40 million credit facility consisting of a five year $35 million revolving credit facility (the "Revolving Loan") and a five year $5 million term loan (the "Term Loan). The Term Loan is subject to quarterly amortization payments of $250,000 beginning September 30, 2000. The Term Loan is also subject to mandatory prepayments upon the happening of certain events. Amounts outstanding under the Revolving Loan and Term Loan bear interest, at the Company's option, at a base rate or eurodollar rate plus an applicable margin. The Company's obligations under the Loan Agreement are guarantied by each of the Company's domestic 6 7 MEADE INSTRUMENTS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) subsidiaries and are secured by substantially all of the assets of the Company and its domestic subsidiaries. The Loan Agreement contains certain financial covenants and customary affirmative and negative covenants and events of default. In anticipation of the acquisition of Bresser Optik (see Note E.), the Company borrowed $5 million under the Term Loan on August 31, 1999. E. SUBSEQUENT EVENT On September 1, 1999 the Company acquired 100% of the stock and equity interests in Bresser Optik GmbH & Co. KG, and Bresser Optik Geschaftsfuhrung und Verwaltungs GmbH, (collectively "Bresser"), for $5 million in cash and 100,915 shares of the Company's common stock. Bresser is a German distributor of binoculars, telescopes, microscopes and other consumer optical products. To fund the cash portion of the purchase price the Company borrowed $5 million under the Term Loan on August 31, 1999. As of August 31, 1999 the cash from this borrowing has been reflected as a component of other non-current assets. The acquisition of Bresser will be accounted for using the purchase method of accounting. The purchase price allocation is preliminary pending appraisal, evaluations and other studies of fair value of the assets acquired. At this time it is impractical to provide the required financial statements related to the acquisition and the proforma financial information that are required to be furnished under cover of Form 8-K. The Company anticipates filing this information under cover of Form 8-K as soon as practicable within 75 days from the closing date. 7 8 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 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, 1999 Compared to Three Months Ended August 31, 1998 Net sales for the second quarter of fiscal 2000 were $24.1 million compared to $15.4 million for the second quarter of fiscal 1999, an increase of 56.6%. This increase was principally due to increases in sales of less-expensive telescope lines including those manufactured domestically and those manufactured in Taiwan. Also contributing significantly to this increase were continuing strong sales of telescope accessories. Gross profit increased from $6.5 million (42.2% of net sales) for the second quarter of fiscal 1999 to $10.1 million (42.0% of net sales) for the second quarter of fiscal 2000, an increase of 55.7%. Gross profit margin remained relatively flat despite strong sales of products that generally carry higher gross margins principally due to increases in freight costs from the Company's Asian suppliers. Selling expenses were $2.9 million for the second quarter of fiscal 1999 and fiscal 2000, respectively, (18.8% and 12.2% of net sales, respectively). Although selling expenses remained flat, advertising and marketing costs during the second quarter of fiscal 2000 were lower than the previous year period offset by increases in allowances for doubtful accounts and freight costs. The decrease in advertising and marketing costs during the second quarter of fiscal 2000 resulted from the Company's continuing assessment of its advertising and marketing needs and its efforts to match advertising expenditures in the general consumer market with the Company's peak selling season. General and administrative expenses increased from $2.0 million (13.2% of net sales) for the second quarter of fiscal 1999 to approximately $3.0 million (12.3% of net sales) for the second quarter of fiscal 2000, an increase of 45.8%. This increase was generally due to increases in personnel and benefit related costs and increases in consulting and professional fees. Research and development expenses increased from $228,000 (1.5% of net sales) for the second quarter of fiscal 1999 to $275,000 (1.1% of net sales) for the second quarter of fiscal 2000, an increase of 20.6%. This increase was principally due to increased engineering personnel and outside consulting costs. Interest expense decreased slightly from $142,000 for the second quarter of fiscal 1999 to $135,000 for the second quarter of fiscal 2000, a decrease of 4.9%. Six Months Ended August 31, 1999 Compared to Six Months Ended August 31, 1998 Net sales for the six months ended August 31, 1999 were $41.2 million compared to $30.2 million for the comparable prior year period, an increase of 36.4%. This increase was principally due to increases in sales of less-expensive telescope lines including those manufactured domestically and those manufactured in Taiwan. Also contributing significantly to this increase were continuing strong sales of telescope accessories. Gross profit increased from $12.6 million (41.6% of net sales) for the six months ended August 31, 1998 to $17.3 million (41.8% of net sales) for the comparable current year period, an increase of 37.0%. The slight increase in gross profit as a percent of net sales was principally due to the increased sales of more profitable lines of telescopes and accessories offset by increases in freight costs from the Company's Asian suppliers. Selling expenses decreased from $5.8 million (19.1% of net sales) for the six months ended August 31, 1998 to $5.2 million (12.7% of net sales) for the comparable current year period, an decrease of 9.4%. This 8 9 decrease principally reflects a reduction of approximately $1.5 million in advertising and other marketing expenses during the six months ended August 31, 1999 against the comparable prior year period. This reduction was partially offset by increases in allowances for doubtful accounts and increased freight costs. The decrease in advertising and marketing costs during the six months ended August 31, 1999 resulted from the Company's continuing assessment of its advertising and marketing needs and its efforts to match advertising expenditures in the general consumer market with the Company's peak selling season. General and administrative expenses increased from $4.0 million (13.2% of net sales) for the six months ended August 31, 1998 to $5.6 million (13.5% of net sales) for the comparable current year period, an increase of 40.0%. This increase was generally due to increases in personnel and benefit related costs and increases in consulting and professional fees. Research and development expenses increased from $473,000 (1.6% of net sales) for the six months ended August 31, 1998 to $540,000 (1.3% of net sales) for the comparable current year period, an increase of 14.2%. This increase was due to increased engineering personnel related costs. Interest expense decreased from $184,000 for the six months ended August 31, 1998 to $120,000 for the comparable current year period, a decrease of 34.8%. The decrease reflects lower average borrowings during the six months ended August 31, 1999 as compared to the same period a year ago. LIQUIDITY AND CAPITAL RESOURCES For the six months ended August 31, 1999, the Company funded its operations with internally generated cash flow and borrowings on its bank line of credit. Internally generated cash flow from net income and increases in accounts payable was more than offset by increases in inventories and accounts receivable and payment of income taxes. The significant increase in inventories (up $16.2 million from February 28, 1999 to August 31, 1999) is due to anticipated sales for the third quarter of the Company's fiscal year 2000. Net working capital (current assets less current liabilities) totaled approximately $24.7 million at August 31, 1999, up significantly from $21.4 million at February 28, 1999. 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. On August 31, 1999 the Company entered into a new loan agreement (the "Loan Agreement") with a bank, replacing its existing credit facilities. The Loan Agreement provides the Company with an aggregate $40 million credit facility consisting of a five year $35 million revolving credit facility (the "Revolving Loan") and a five year $5 million term loan (the "Term Loan). The Term Loan is subject to quarterly amortization payments of $250,000 beginning September 30, 2000. The Term Loan is also subject to mandatory prepayments upon the happening of certain events. Amounts outstanding under the Revolving Loan and Term Loan bear interest, at the Company's option, at a base rate or eurodollar rate plus an applicable margin. The Company's obligations under the Loan Agreement are guarantied by each of the Company's domestic subsidiaries and are secured by substantially all of the assets of the Company and its domestic subsidiaries. The Loan Agreement contains certain financial covenants and customary affirmative and negative covenants and events of default. In anticipation of the acquisition of Bresser (See Note E. (Subsequent Events) to the Company's Consolidated Financial Statements), the Company borrowed $5 million under the Term Loan on August 31, 1999. Capital expenditures, including financed purchases of equipment, aggregated $1.6 million and $2.3 million for the six months ended August 31, 1999 and 1998, respectively. The Company had no material capital expenditure commitments at August 31, 1999. The Company believes that internally generated cash flow and borrowing ability will be sufficient to meet its operating, working capital and capital expenditure requirements through the next twelve months. In the event the Company's plans require more capital than is presently anticipated, the Company's remaining cash balances may be consumed and additional sources of liquidity, such as debt or equity financings, may be required to meet its capital needs. There can be no assurance that additional capital beyond the amounts the Company currently requires will be available on reasonable terms, if at all. 9 10 FORWARD-LOOKING INFORMATION The preceding "Management's Discussion and Analysis of Financial Conditions and Results of Operations" section contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, which represent the Company's reasonable judgment concerning the future and are subject to risks and uncertainties that could cause the Company's actual operating results and financial position to differ materially, including the following: the Company's ability to expand the markets for telescopes, binoculars and other optical products as a result of its increased advertising and marketing efforts; the Company's ability to continue to develop and bring to market new and innovative products; the Company expanding its distribution network; the Company experiencing fluctuations in its sales, gross margins and profitability from quarter to quarter consistent with prior periods; and the Company's expectation that it will have sufficient funds to meet any working capital requirements during the foreseeable future with internally generated cash flow and borrowing ability. In addition to other information in this report, the Company cautions that certain factors, including, without limitation, the following, should be considered carefully in evaluating the Company and its business and that such factors may cause the Company's actual operating results to differ materially from those set forth in the forward looking statements described above or to otherwise be adversely affected: any significant decline in general economic conditions or uncertainties affecting consumer spending; any general decline in demand for the Company's products; any inability to continue to design and manufacture products that will achieve and maintain commercial success; any failure of the Company to penetrate the binocular market and achieve meaningful sales; any unexpected termination or interruption of the Company's manufacturing arrangements, both internally and at the Taiwanese Factory; greater than anticipated competition; any loss of, or the failure to replace, any significant portion of the sales made to any significant customer of the Company; the inherent risks associated with international sales, including variations in local economies, fluctuating exchange rates (including conversion to Euros), increased difficulty of inventory management, greater difficulty in accounts receivable collections, costs and risks associated with localizing products for foreign countries, changes in tariffs and other trade barriers, adverse foreign tax consequences, cultural differences affecting product demand and customer service and burdens of complying with a variety of foreign laws; and the inherent risks associated with products manufactured or assembled outside of the United States, including, among other things, imposition of quotas or trade sanctions, fluctuating exchange rates, shipment delays or political instability and any material effect on the Company's business and operations by the advent of the Year 2000. YEAR 2000 The Company has evaluated its enterprise information system software and is currently evaluating its other internal software applications and operating systems and the preparedness of third parties with which the Company has material relationships against anticipated Year 2000 concerns. The Company currently believes that its business will not be materially affected by the advent of the Year 2000. The Company has upgraded its enterprise information system software to a Year 2000 compliant version. The Company has also evaluated both its products and its machinery and equipment against Year 2000 concerns. As a result of these evaluations, the Company is not currently aware of any material exposure to contingencies related to the Year 2000 issue for its enterprise information system software, its products or its machinery and equipment. The Company continues to evaluate and test other internal software applications and operating systems. The Company believes that these evaluations and tests will not reveal any material Year 2000 issues and that the results of such evaluations and tests will not require any material expenditures or other material diversion of resources or have any other material adverse effect on the Company's operations. The Company believes that its evaluations and tests of other internal software applications and operating systems will be completed by late 1999. The Company is currently working with third parties with which it has material relationships to attempt to determine their preparedness with respect to Year 2000 issues and to analyze the risk to the Company in the 10 event any such third parties experience material business interruptions as a result of Year 2000 noncompliance. The Company is currently unable to estimate reasonable likely worst-case effects of the arrival of the 11 11 Year 2000 and does not currently have a contingency plan in place for any such unanticipated negative effects. The Company is currently analyzing reasonable likely worst-case scenarios and the need for such contingency planning once the upgrade and testing of internal systems and review of third-party preparedness described above has been completed. Such contingency plans may include increased inventory levels, securing alternate sources of supply and other appropriate measures. Completion of the Year 2000 contingency plans is expected by late 1999. Once developed, Year 2000 contingency plans and related cost estimates will be tested in certain respects and continually refined as additional information becomes available. As of August 31, 1999 the Company's total incremental costs (historical plus estimated future costs) of addressing Year 2000 issues are estimated to be approximately $150,000 of which approximately $60,000 has been incurred. These costs are being funded through cash flow from operations. These amounts do not include any costs associated with implementation of the contingency plan, which, as stated above, is in the process of being developed. Consequently the estimates and completion dates discussed herein for the various components of the plan are subject to change. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Meade Instruments Corporation v. Reddwarf Starware, LLC, aka Reddwarf Instruments, LLC ("Reddwarf"), Civil No. 98-240 GLT. United States District Court for the Central District of California. Action for declaratory relief initiated by a complaint filed March 16, 1998, by the Company for declaratory judgment of non-infringement of Reddwarf's U.S. Patent No. 4,764,881, for declaratory judgment that Reddwarfs patent is invalid, void and unenforceable, and for an injunction and damages under Federal antitrust statutes and for an injunction and other relief under California unfair competition statutes. A counterclaim dated June 3, 1998 alleging infringement by the Company's LX200 series telescope system (and unspecified other products) of Reddwarf's U.S. Patent No. 4,764,881 was also filed against the Company. The counterclaim further alleges that the infringement is willful and seeks unspecified damages, an injunction and other relief against the Company. The Company contends the counterclaim is without merit and vigorously contests its allegations. On April 29, 1999, the Company filed a motion requesting summary judgment that the Company has not infringed Reddwarf's patent and a motion requesting summary judgment that the patent is invalid. On June 30, 1999, the court granted the motion for summary judgment of non-infringement. On July 2, 1999, the court entered a judgment determining that the Company has not infringed Reddwarf's patent. On July 27, 1999, Reddwarf filed a Notice of Appeal with respect to the summary judgment motion. In addition, on August 19, 1999, the Company stipulated to the dismissal, without prejudice, of its actions for injunctive relief, damages under Federal antitrust statutes and injunctive and other relief under California unfair competition statutes. The Company intends to vigorously defend the judgment before the appellate court. Due to the uncertainties of litigation, the Company is unable to provide an evaluation of the likelihood of an unfavorable outcome in the case, or an estimate of the amount of potential loss in the event of an unfavorable outcome. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. 11 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS In connection with the Company's Annual Meeting of Stockholders, held on July 8, 1999, the stockholders of the Company (1) elected Joseph A. Gordon as a director for a three year term expiring at the Company's Annual Meeting to be held in 2002 and (2) approved certain amendments to the Company's 1997 Stock incentive Plan (the "Plan") to: (i) increase the number of shares of the Company's Common Stock available for issuance thereunder and (ii) increase the maximum dollar limit available for performance-based monetary awards under the Plan. The voting results were as follows: FOR AGAINST WITHHELD --------- ------- --------- Re-election of Joseph A. Gordon to the Company's Board of Directors............................... 6,802,211 -- 122,858 Amendments to the 1997 Stock Incentive Plan........ 4,774,353 901,964 107,704 ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 6(a) Exhibits filed with this Form 10-Q Exhibit No. 27 Financial Data Schedule for the six months ended August 31, 1999. 6(b) Reports on Form 8-K. None. 13 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEADE INSTRUMENTS CORP. By: /s/ JOHN C. DIEBEL ------------------------------------ John C. Diebel Chairman of the Board and Chief Executive Officer Dated: October 12, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN C. DIEBEL Chairman of the Board and October 12, 1999 - ----------------------------------------------------- Chief Executive Officer John C. Diebel (Principal Executive Officer) /s/ STEVEN G. MURDOCK Director, President, Chief October 12, 1999 - ----------------------------------------------------- Operating Officer and Steven G. Murdock Secretary /s/ BRENT W. CHRISTENSEN Vice President, Finance October 12, 1999 - ----------------------------------------------------- and Chief Financial Brent W. Christensen Officer (Principal Financial and Accounting Officer) /s/ JOSEPH A. GORDON, JR. Director and Senior Vice October 12, 1999 - ----------------------------------------------------- President of North Joseph A. Gordon, Jr. American Sales Director - ----------------------------------------------------- Timothy C. McQuay Director - ----------------------------------------------------- Harry L. Casari 14 14 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 27 Financial Data Schedule for the six months ended August 31, 1999